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Edited Transcript of CENA.NS earnings conference call or presentation 22-Oct-19 10:00am GMT

Q2 2020 Central Depository Services (India) Ltd Earnings Call

MUMBAI Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Central Depository Services (India) Ltd earnings conference call or presentation Tuesday, October 22, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bharat Sheth

Central Depository Services (India) Limited - Executive VP & CFO

* Nehal Naleen Vora

Central Depository Services (India) Limited - CEO & MD and Director

* Sunil Alvares

Central Depository Services (India) Limited - EVP of New Projects

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Conference Call Participants

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* Aditya Bagul

Axis Capital Limited, Research Division - Assistant VP of Midcaps

* Amit Chandra

HDFC Securities Limited, Research Division - IT Analyst

* Anand Bhavnani

Unifi Capital Pvt. Ltd. - Analyst

* Harit Shah

Reliance Securities Limited, Research Division - Senior Research Analyst

* Hiten Jain

Invesco Asset Management (India) Private Limited - Research Analyst

* Jatin Damania

Kotak Securities Limited - Research Analyst

* Pavan Kumar;Ratna Traya Capital Partners;Analyst

* Prakash Kapadia

Anived Portfolio Managers Pvt. Ltd - Principal Officer

* Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst

* Yash Nerurkar

PPFAS Mutual Fund - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Central Depository Services (India) Limited Q2 FY '20 Investor Conference Call hosted by Axis Capital Limited. Please note that CDSL does not provide specific revenue or earnings guidance. Anything said on this call, which reflects CDSL's outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Aditya Bagul from Axis Capital. Thank you, and over to you, sir.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [2]

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Thank you, Nirav. Good afternoon, ladies and gentlemen, and a warm welcome to the Q2 FY '20 Earnings Call of CDSL Limited. From the management today, we have Mr. Nehal Vora, Managing Director and CEO; Mr. Bharat Sheth, CFO; Mr. Sunil Alvares, COO, CDSL Ventures; Mr. Gaurang Shah, Vice President; and Mr. Nilesh Kittur, Assistant Vice President. I'll hand over the call to Mr. Nehal Vora for his opening remarks, post which we will open the floor for Q&A. Over to you, sir.

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [3]

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So first of all, I'd like to welcome all of you a very good afternoon. This is Nehal Vora. I'm the MD and CEO of CDSL. I've just joined CDSL on the 24th of September. So it's been around 3 weeks since I've taken over. I welcome you all to the quarterly conference call for discussing the standalone and consolidated results for the CDSL Group for the quarter ended 30th September 2019.

So as you know that due to the overall slowdown and various uncertainties in the Indian economy, global factors like trade wars between U.S. and China, oil prices, et cetera, the Indian stock markets were in turmoil, which resulted in not many IPOs hitting the market whilst the overall sentiment has been muted. This has resulted in the CDSL topline showing a 10% downtrend quarter-on-quarter and a marginal downtrend on a year-on-year basis.

Despite the slowdown in the economy, CDSL has been able to maintain a flat bottom line. CDSL continues to have a healthy operating profit margin of 47% on a consolidated basis and 46% on a standalone basis. The price to earnings ratio is about 1-9, 19. During the Q.E. September 2019, CDSL added around 8 lakh beneficiary ownership accounts as compared to 6.37 lakhs in the previous quarter. CDSL now has an incremental market share of around 74% up to August 2019.

In the case of CDSL Ventures, CVL, the KRA performance is linked to the stock market, which has also remained muted in the quarter which has ended. However, compared to that, we have around 1.99 crores KYC records as on September 2019, whilst it was -- the corresponding number in June 2019 was 1.93 crores.

CDSL Insurance Repository has crossed 5.37 lakh e-insurance accounts, at about 2.73 lakh policies. CDSL Commodity Repository, CCRL, is also making steady progress with around 1,000-plus registered warehouse service providers, 1,000 -- about 1,200 clients as on September 30, 2019.

I request my colleague, Mr. Bharat Sheth, CFO, to give a brief on the financial performance.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [4]

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Good afternoon, everyone. The numbers stack up as follows: first, consolidated results on Q-on-Q basis quarter-on-quarter basis and then year-on-year basis. Operational income for the quarter ended September '19 was INR 53 crores against INR 58 crores for quarter ended June '19, that is down by 10%. Whereas other income is up by 11% from INR 15.02 crores to INR 16.68 crores. So total income overall down by 6% from INR 73.42 crores to INR 69.35 crores. Whereas my total expenses down 19%, that is from INR 38.44 crores to INR 31.13 crores, mainly due to employee costs down by 21%, system maintenance up by 8% and other expenses down by 27%, mainly due to lower incremental expenditure on government projects.

So overall, profit after tax is up by 4%, that is from INR 27.91 crores to INR 29.05 crores. Now major [head] of operational income on quarter-on-quarter basis, annual issuer charges from INR 19.23 crores to INR 19.18 crores that is hardly any change, whereas transaction charges down by 7% from INR 9.86 crores to INR 9.16 crores. Consolidated account statement charges down by 14% from INR 2.37 crores to INR 2.03 crores.

IPO corporate action charges down by 9% from INR 5.32 crores to INR 4.85 crores. Online data charges, that is KYC, up by 6% from INR 7.63 crores to INR 8.11 crores. And government projects, down by 65% on quarter-on-quarter basis that is from INR 6.94 crores to INR 2.46 crores.

Whereas on consolidated basis on year-on-year basis, that is quarter ended September '19 to quarter ended September '18. Down -- operational income down by 2%, that is from INR 53.66 crores to INR 52.66 crores. Other income up by 71%, that is from INR 9.79 crores to INR 16.69 crores due to higher mark-to-market gain and IT refund of INR 2.2 crores received. So total income up by 63 -- up by 9%, that is from INR 63.46 crores to INR 69.35 crores. Whereas total expenses up by 35%, that is INR 23 crores to INR 31 crores, up 35% mainly due to increase in employee cost, salary risen by 35% to bring the salary levels to market levels and corresponding [gratuity and leave] actuarial provisions and other expenses increased by 49%, mainly due to expected credit loss provision that is provision for doubtful debts of INR 2,40,00,000. So my profit after tax down by 4%, that is from INR 30.15 crores to INR 29.06 crores.

Major head of operational income that is annual issuer charges from September -- quarter-ended September '18, INR 15.96 crores. It went up to INR 19.18 crores that is up by 20%. Whereas transaction charges down by 11% because of their market conditions, INR 10.26 crores to INR 9.16 crores.

Whereas consolidated account statement charges up by 13%, that is INR 1.8 crores to INR 2.02 crores. IPO corporate action charges because of market conditions, less number of IPOs, down by 21% that is INR 6.15 crores to INR 4.85 crores. And online data charges, down -- that is for KYC, INR 10.17 crores to INR 8.11 crores. And government projects, for quarter ended September '19, up by [INR 2.45 crores], against -- up by 100%.

Now on standalone basis, that is quarter-on-quarter, quarter ended September '19 versus quarter ended June '19. There are hardly any change in operational income, that is INR 40.53 crores in June '19 versus INR 40.59 crores in September '19.

Other income is 6% up due to mark-to-market gain, that is INR 11.31 crores to INR 11.98 crores. That is -- total income up marginally by 1%, hardly any change, that is INR 51.85 crores to INR 52.57 crores.

Whereas total expenses down 10%, mainly due to employee costs down by 23%, system maintenance up by 6%, that is INR 26.84 crores to INR 24.10 crores.

And profit after tax up by INR 20.35 crores to INR 21.95 crores.

Major head of operational income, annual issuer charges on quarter-on-quarter basis, that is INR 19.23 crores to INR 19.19 crores, hardly any change. Transaction charges down by 7%, that is INR 9.87 crores to INR 9.16 crores. Cash charges down by 14%, that is INR 2.37 crores to INR 2.02 crores.

Whereas IPO corporate action charge is INR 5.32 crores to INR 4.85 crores, that is down by 9%.

Whereas on year-on-year basis, that is quarter-ended September '19 to quarter ended September '18, operational income, hardly any difference, that is down by 1%, that is INR 40.98 crores to INR 40.59 crores. Whereas other income up 66% due to interest on IT refund and higher mark-to-market gain that is from INR 7.22 crores to INR 11.98 crores.

And total income up by 9%, that is INR 48.2 crores to INR 52.5 crores. Whereas my total expenses up 30% mainly due to increase in employee costs by 32% and other expenses, 51% increase in expected credit loss, there is a provision for doubtful debts, it was not there last time that is INR 2.43 crores, that is from INR 18.16 crores to INR 24.10 crores.

So profit after tax down by 1%, that is INR 22.09 crores to INR 21.95 crores. Major head of operational income, that is annual charges -- annual issuer charges INR 15.95 crores to INR 19.18 crores, that is up by 20%.

Transaction charges down 11% due to market conditions, that is INR 10.26 crores to INR 9.16 crores.

Consolidated account statement charges from INR 1.80 crores to INR 2.02 crores, up by 13%. And IPO corporate action down by 21%, that is INR 6.15 crores to INR 4.85 crores.

With this, I leave the floor open for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Prakash Kapadia from Anived Portfolio Management Service.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [2]

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I had 2 questions. If I look at the first half employee costs, they are up 56%. So is there -- I think last quarter, you had mentioned some impact of gratuity and annuity. So is that continuing in the current quarter also? And for H2 basis, what is the trend in employee cost? How should we read this? Will it be more like a INR 12 crores, INR 13 crores kind of run rate? Do we annualize it? So it'll be more like INR 40 crores, INR 42 crores? Or it will be more like INR 50 crores on the employee cost front?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [3]

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Yes. Hello, Mr. Prakash. If you see, last quarter also, I told that impact of 32% increase, that is 25% plus 7% annual increment would be on first quarter more because of actuarial gain -- actuarial liability as well as leave encashment and all. So major impact would come on that quarter only. So if you see my INR 8.37 crores means, it was therefore INR 14.27 crores in quarter ended June '19. It went down to 11.33%. That is down by 21% because of this actuarial liability as well as this. So it won't be there on what we call on quarter-on-quarter basis because whatever impact was there is on 31st March '19 on which we have provided on first quarter only. So incremental only would be there in quarter-on-quarter basis.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [4]

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So this will be more like this run rate rather than what we were...

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [5]

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Yes.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [6]

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Yes.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [7]

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And if I look at CDSL Ventures in the revenue reported in the segment revenue. Revenues have degrown for us on a year-on-year basis. How do I look at this because at a time when SIP accounts are growing, flows are steady, so is there some change in pricing? Is there some market share change or the segment revenue includes other income and other income is lesser in this segment because on a year-on-year basis, if I look at that segment, revenues have actually degrown from INR 138 million to INR 130 million.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [8]

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Yes. See this is because -- mainly because of other projects, that government project, what we took it. If you see quarter 4 '19, means March '19 quarter, there other income -- other project income was around INR 2.5 crores. In June '19, it was around INR 9 crores. And in this quarter, INR 2.45 crores, mainly due to debt. That is a one-off project is there.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [9]

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Okay, okay. Q1, you said, it was around 90 -- INR 9-odd crores.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [10]

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Yes.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [11]

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Last year, what was it?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [12]

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INR 2.5 crores around. On -- last quarter only -- quarter ended March '19.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [13]

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Yes, I was looking Bharat-bhai...

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Operator [14]

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Mr. Kapadia, sorry to interrupt you, you are not audible. Can you please speak a bit louder?

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [15]

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I was looking, Bharat-bhai, on a year-on-year basis, where I'm comparing September last year versus September this year where it says INR 138 million to INR 130 million.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [16]

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Yes.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [17]

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Where data entry and storage has decreased from INR 138 million to INR 130 million. So I was trying to understand that. Not on a sequential basis where you mentioned the government project and that contribution to revenues has fallen. So revenues are down sequentially from [INR 17] crores to INR [19] crores.

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [18]

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The number of KYCs processed by [CDL] as compared to last half year has gone up, but the number of fetches, okay, where we also get some revenue, has gone down. That is primarily because last year, SEBI had mandated that all AMCs who have not fetched certain KYCs, they had to fetch the KYCs otherwise the distributor commissions would not be paid. So because of that many of the AMCs had a onetime fetch. So that had boosted up the numbers last year.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [19]

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Okay, okay. So Sunil, the way to understand this is that is more of a onetime this thing, which was there in the base last year, and there is no change in market share or pricing in terms of our KYC business?

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [20]

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Yes, but there are 2 things. First, as compared to last year, we have processed more KYCs this year. That is new KYCs into the system.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [21]

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But that new KYC has to give us better pricing, right?

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [22]

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No, but what has happened is correspondingly the fetches have gone down. So that has reduced the income so.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [23]

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Fine. Understood. And the last question from my side is, is there clarity on the academic depository pricing because government was to revert, and we were to start billing. So any update on that?

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [24]

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We are in discussion with the MHRD. They have formed a committee, and they would be deciding on the pricing. That is the latest what we have.

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Operator [25]

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The next question is from the line of Anand Bhavnani from Unifi Capital Pvt. Ltd.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [26]

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I have 3 questions. The first question is on the coupons of growth provision for doubtful debts. So can you elaborate on it? Like, is it some kind of investments that have gone bad?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [27]

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Yes. Then?

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [28]

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So if you can -- I mean the questions are unrelated. So I want to go one by one.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [29]

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No, no. Okay. About doubtful debts, that is on annual issuer charges. Generally we will be able to recover around 92% to 93%, 7% to 8% we have to provide for doubtful debts or bad debts. So generally, we were doing in third or fourth quarter, but this year, auditor told us that you have to prorate it for all 4 quarters. So because of that in -- if you compare with 6 months ended September '18 versus September '19, major cost of that INR 4 crores total what we have provided.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [30]

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Okay. And similar INR 4 crores can be expected in the H2?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [31]

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That would be around INR 7.5 crores to INR 8 crores.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [32]

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Sure. And sir, if I were to look at segment assets and liabilities. For repository, there has been a fall in segment assets and for depository activity, there has been rise in segment liabilities. So if you can help us understand why is it sir?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [33]

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No. Segment assets and liabilities -- 1 minute.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [34]

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Sir, if you have to see for repository activity, it has fallen from INR 55.67 crores to INR 32 crores.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [35]

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No that is because -- no that is because of -- if you see that is segment assets -- that is because of new assets what we bought it, and there is -- not major changes are there accordingly?

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [36]

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No, but it has fallen by INR 23 crores. So why would it fall by INR 23 crores in 6 months, repository assets?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [37]

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Okay, I will get back to you on this question.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [38]

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And similarly, if you were to see depository liabilities, they have risen by close to INR 46 crores. So why would -- again, why would they rise by INR 46 crores in a span of 6 months?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [39]

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No, no. It is -- see for annual income, we are transferring -- we are allocating on a pro rata basis. So annual income is -- suppose my INR 80 crores is there, then I can book it INR 40 crores and income received in advance will come to INR 40 crores. So it will come under liability, like that.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [40]

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Okay. Okay. So it is unearned revenue and hence the liability.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [41]

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Right, like that. On that level.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [42]

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Yes. And sir, you gave out certain details in terms of numbers for our revenues. I just wanted to check if you release a presentation or the numbers given are only on the con call? Have you received a presentation in general to the shareholder?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [43]

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Not yet, not yet. So on con-call basis also we can give you.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [44]

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Sir, just a modest and humble request from us. That the numbers that you give are very important in terms of understanding the business. If you were to give us in the presentation beforehand, the discussion would be a lot more detailed around the numbers. Otherwise, the numbers that you throw up initially and then we have follow-up questions, we have to email you so...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [45]

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Definitely, we will consider [part of this].

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [46]

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I think we will -- so we will surely take this as a feedback. And from next quarter call onwards we will do that.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [47]

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Sure. And lastly, you spoke about environment being subdued. So is it fair to assume that the environment continues to be subdued and in terms of next 6 months as well, we might not see any deviation upside or downside in our revenues and profitability?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [48]

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That's a very difficult question to predict. It's like predicting if the market is going to go up or down tomorrow. It's a function of market. We are a market infrastructure institution. Our core business is to provide the requisite infrastructure for the securities market. And we are a function of ensuring that the services are really available. And we have as many depository participants, which have grown and have been steadily growing. Whether that will lead to further transactions is a function of market, which is a collective response of the entire market and difficult to predict.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [49]

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Sir -- but my question was more of like, do we have any specific revenue stream? For example, the repository business for MHRD. Anything similar, which can be commercialized this year and you might see any revenue inflow from there? Any potential growth from those kind of newer ventures?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [50]

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So I think SEBI has been giving out a lot of proposals for new products, new kind of asset classes. And there is a general push on the digital side. So obviously, the importance of the depository services is going to grow as and when as we move forward. But it will be difficult to categorize quarter wise in terms of revenue, but the overall trend is moving towards more assets, moving from the physical more to the digital world. And therefore, the importance of the depository services are going to grow as time passes.

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Operator [51]

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The next question is from the line of Harit Shah from Reliance Securities Limited.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [52]

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I just wanted to get a sense of free education, an idea of the number of unlisted companies that are there in your fold? I think last quarter, it was about 2,000, 2,000 odd, somewhere in that range and the revenue that you have essentially earned from that incremental unlisted companies.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [53]

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So as on that -- as on 30th September, there are 2,530 unlisted companies under our fold.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [54]

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Okay, so you added almost 500 in this quarter?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [55]

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Yes. 463 is what we had added.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [56]

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Right. And what was the revenue that you earned in this quarter?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [57]

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Yes, that is -- it would be around INR 57,32,000.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [58]

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Okay. It is INR 57 lakhs in this quarter. Okay. Great. And any update on the NAD, National Academic Depository. So I think from now on, you can charge from this quarter onwards, right? So if you could give any updates on that front? How is that progressing?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [59]

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Yes. We have been discussing with the MHRD with regard to the charges because we need the approval before we start charging. And the latest is that they have formed a committee and based on what is going to be our charges, they would be most likely giving a grant to both the depositors.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [60]

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Okay, fair enough. And how many are now in [panel] with you? And I think last quarter it was about 520 or something. Is that right? Those universities and all.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [61]

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We have 541 universities signing agreement with us.

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Operator [62]

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Your next question is from the line of Yash Nerurkar from PPFAS Mutual Fund.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [63]

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So I have 3 questions, basically, and these are on different topics. So I'll just go one by one. The first thing is, in your financial statements for this quarter, I read something about Ind AS 116 being implemented. So what is it regarding?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [64]

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That is about the lease rental, what we are saying on that basis. That is -- we are having a lease agreement with Reliance that is a major one.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [65]

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So what is this regarding, lease rental?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [66]

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That is for our DR site.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [67]

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Okay.

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [68]

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Different data servers are hosted.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [69]

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So how much are these expenses, the rentals which are being paid?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [70]

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But it is not material because they are providing services to us. So we are evaluating it.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [71]

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Okay. All right.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [72]

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That is why we were mentioning notes to accounts that we are evaluating it. It will come under lease as such because bundle services they are providing.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [73]

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All right. The second question which I had was on the recent notification which came out about the corporate taxes. So what impact would it have for your company? And sort of if you could provide a effective tax rate. If you all are going to utilize this benefit?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [74]

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Correct. See at present we are -- at present, we are in 25% bracket because less than INR 250 crores turnover is there. So for this quarter and next quarter, we are going to continue with it because as of 31st March '19, MAT credit is available to us. If we shift to 22%, then it won't be available. So we are evaluating it. And later on, by March, we are going to decide whether to go for 22% bracket or this bracket. So overall, effective tax rate comes to 22% to us on consolidated basis.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [75]

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So as of now, you're talking about utilizing the MAT credit.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [76]

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Yes, yes, as of September...

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [77]

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So even -- so you all are currently indifferent as to whether to go for the current corporate tax rates or continue with the same?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [78]

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Correct, correct, but MAT credit, if I want to avail, then I can't go to 22% actually.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [79]

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Okay. And just last question. So you all had for the previous 2 quarters, the government project. So last quarter, you all booked somewhere around INR 9 crores. This quarter, you all booked around INR 2.5 crores. So excluding that, what is the operating revenue?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [80]

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Excluding that?

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [81]

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Yes.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [82]

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[We're still] Venture, [what you Venture]?

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [83]

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No, no. Not CDSL Ventures. Overall, I'm talking about the consolidated, excluding the government project.

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [84]

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INR 11 crores exclude (inaudible).

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [85]

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You have to remove INR 11 crores and the total INR 6.5 crores you have to remove. So overall, my profit down by INR 4 crores on a consolidated basis.

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Yash Nerurkar, PPFAS Mutual Fund - Research Analyst [86]

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The profit is down by INR 4 crores, you are saying.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [87]

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Yes. On this government project, my net profit is around -- means gross profit would be around INR 4 crores. So my -- on consolidated basis, my profit down by that is I'm talking of profit before tax down by INR 4 crores.

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Operator [88]

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The next question is from the line of Jatin Damania from Kotak Securities.

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Jatin Damania, Kotak Securities Limited - Research Analyst [89]

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Sir, just going back to what you said that in this financial year, though we have added a number of more KRAs, the fetch on -- I mean the realization of the fetch was much lesser compared to the previous year, right?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [90]

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Yes, right.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [91]

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Yes.

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Jatin Damania, Kotak Securities Limited - Research Analyst [92]

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Sir, but if -- yes, but if I'm looking at the previous quarter, where we had INR 1.93 crores of KYC records, revenue was from data online and storage was to the tune of 171 -- INR 17 crores, which has declined to almost INR 13 crores. So what was the reason for this sequential decline despite 6 lakhs increase in the records?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [93]

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That is mainly due to government projects. If you see in quarter 1, 2019, means this June '19, see -- by -- income from this government project is around INR 6 crores. It went down to INR 2.5 crores. So that is a major difference of INR 4 crores.

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Jatin Damania, Kotak Securities Limited - Research Analyst [94]

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Okay. So sir, do you think that our government project will still continue or the project is almost over?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [95]

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We got an extension for 1 more year.

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Jatin Damania, Kotak Securities Limited - Research Analyst [96]

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So you got an extension for 1 more year?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [97]

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That's right.

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Jatin Damania, Kotak Securities Limited - Research Analyst [98]

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And sir, what is the cost pertaining to this project because last quarter, we had a significant cost due to this. And because of (inaudible), their expenses has also gone up?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [99]

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Correct.

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Jatin Damania, Kotak Securities Limited - Research Analyst [100]

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So how was the situation in the second quarter?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [101]

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See, first phase got over, income we have booked, and expenses also we have booked. So now nothing left for first phase of the project. Second phase once starts, then income and expenses will come into picture.

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Jatin Damania, Kotak Securities Limited - Research Analyst [102]

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Okay, sir. And second, if you -- can you help us with the e-Voting revenue for the second quarter?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [103]

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E-Voting is INR 2,48,00,000 for the second quarter.

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Jatin Damania, Kotak Securities Limited - Research Analyst [104]

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INR 2,48,00,0000.

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Operator [105]

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Next question is from the line of Amit Chandra from HDFC Securities.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [106]

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Sir, I would like to understand on the annual issuer charges. So now we have been seeing that the companies that has been added has been slowing down the last 2 quarters. And now we are at a rate of 100, 150 companies per month. So how do you see this panning out? Whether it is another opportunity that was there initially and now, it is eventually, like fading away and all you see like more and more companies approaching because if I see in terms of the competition, I know they have been adding on a steady basis. So your views on it.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [107]

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See there also decline is there, but unlisted company that is -- but overall, if you see from 1st October '18 to 30 September, around 2,530 companies what we have added, it comes to, on an average basis, 210 companies. But as you say rightly, that in quarter, it has come down from 200 to 154. But our endeavor is to -- because it is not yet compulsory. Whenever transaction takes place, then only. So it is not mandatory. So unless and until it becomes mandatory then -- but our marketing efforts are going on.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [108]

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Yes. So my next question was on that. That last quarter, you mentioned that you are providing some kind of commission to the RTA for the new (inaudible) compared to CDSL. So what's the progress on that? Are you spending aggressively on that or...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [109]

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No, we have started from 1st August, 1st September, we've already started that referral fee, what we have increased.

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Unidentified Company Representative, [110]

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We are also trying to enhance the system, so that digitization takes place, and we get online applications, and we hope that because of this initiative, there will be more inflow of companies in the period. We are planning to implement that.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [111]

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Okay. And sir, on the revenues earned from the unlisted companies. Last quarter, it was around INR 15,000, but in this quarter, it's coming to around INR 11,500. There has been a drop. So has there been a change in the fees that you're charging?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [112]

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No, nothing. Not changed, but on quarterly basis only.

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Unidentified Company Representative, [113]

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Yes. But when the admission of companies takes place, we charge them on pro rata basis, the annual issuer fees for that particular year. And then as the quarters progress, fees will get released even though companies want to...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [114]

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On a pro rata basis we are charging.

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Unidentified Company Representative, [115]

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Here onwards, it will be charged on same rate.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [116]

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Understood, understood. And sir, my last question would be around -- on the government project. Like you mentioned that you have issued the extension, but you mentioned that there were around 4 crore accounts that has to be verified. So how we are placed there? And how can we project the revenues from it because it's very lumpy in nature?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [117]

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See, there are 4.5 crore investors. But when the scheme was opened for refund, about 1.5 crore investors have applied. So that is the status right now. And the scheme was supposed to have 2 phases, phase A and phase B, okay? And we have completed phase A. And the regulators have to take a call on phase B whether they want to implement it or not. So that's the status as of now.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [118]

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Okay, sir. And sir, lastly, on the opportunities in terms of the National Academy Depository and the e-warehouse receipts opportunity. So the progress on that has been pretty slow. So are we seeing any kind of pickup there in terms of NAD and e-warehouse receipts? If you can elaborate that, how we are approaching that?

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [119]

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If you see in terms of number of records on the NAD, we have crossed about 2 crores -- 2,30,00,000 of government projects and even the number of students registered is going up by the day. So it is just a function for MHRD to make it mandatory for all universities and students, and then you can really see this taking off.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [120]

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Okay. So as of now, you're not charging anything. So you said that -- earlier said that charging can start by September end. So any update on that?

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Sunil Alvares, Central Depository Services (India) Limited - EVP of New Projects [121]

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Yes. We have -- as per the agreement, we were supposed to charge post-September 2019. But after discussion with MHRD and the UGC, they are not very keen that the universities and students be charged and at best, they are thinking of giving us a grant so that the project continues in its current form.

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Operator [122]

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Next question is from the line of Pavan Kumar from Ratna Traya Capital Partners.

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Pavan Kumar;Ratna Traya Capital Partners;Analyst, [123]

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Sir, you mentioned about around INR 2.5 crores of revenues from the government for this particular quarter. So what are the expense pertaining to that? And number two, since you have -- you are also mentioning about an extension in this project. So how would the revenues play out, I mean from this particular project over next 1 year?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [124]

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See, expenses pertains to government project for this quarter, around INR 27 lakhs is there.

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Pavan Kumar;Ratna Traya Capital Partners;Analyst, [125]

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INR 27 lakhs?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [126]

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Yes.

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Pavan Kumar;Ratna Traya Capital Partners;Analyst, [127]

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Okay. Okay. And do you expect this run rate to continue going forward every quarter from now on?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [128]

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See phase 1 is already completed. So for which we have already booked the income as well as expenses. Now once phase 2 will start, then further income and expenses will come into picture.

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Pavan Kumar;Ratna Traya Capital Partners;Analyst, [129]

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Okay. But overall, what would be the potential of this -- revenue potential of this project for the next 1 year?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [130]

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See, difficult to predict actually because we do not know whether the window will be open again for investors to apply for a refund. So it all depends on that.

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Pavan Kumar;Ratna Traya Capital Partners;Analyst, [131]

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Okay, sir, if given the window didn't open again, then what would be the potential?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [132]

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No, we cannot -- we cannot really predict anything on that.

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Pavan Kumar;Ratna Traya Capital Partners;Analyst, [133]

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Okay, okay. On the other expenses part of it, I'm taking the employee expenses off, but should the Q2 other expenses part of it, will you deduct the employee expenses, whatever. Is there going to be a steady run rate from now on, Q3 and Q4?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [134]

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Yes, it will be on a --

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [135]

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Steady.

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Operator [136]

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Next question is from the line of Rohit Balakrishnan from VRDDHI Capital Investment Advisors.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [137]

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I had 3 or 4 questions. So sir, in terms of our annual issuer charges if I get the number right, so it's around INR 19 crores, and it has grown at a very good rate this quarter, on a Y-o-Y basis. So what is driving this growth? Even last year, the growth was quite good. So if you can just speak a bit about that sir.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [138]

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See, our annual issuer charge is based on either on a slab basis, that is capital basis or number of folios, whichever is higher. So if you compare with last year with this year, number of folios -- income from number of folios are more compared to last year because of that. And more number of IPOs incorporate because of that new -- issuer admitted in the system.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [139]

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Got it. And sir in this, we usually have a price revision as per SEBI, so is that due anytime soon?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [140]

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In 2015, they've increased the tariff. So now it is due, means every 4 to 5 years both the deposit rates will grow. And so now it is due. Next year, definitely we'll go to SEBI and we'll ask for the increases.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [141]

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Okay, got it. Sir, the second question also in our -- the IPO and corporate action charges. So what could be the mix between IPO and corporate action -- I mean how to split between these 2, what would be the mix, revenue mix broadly?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [142]

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It won't be possible to give us those figures. It's confidential, so I can't give those figures.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [143]

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Actually, sir, what I wanted to understand is that in an environment like what we've been seeing in the last 2, 3 quarters or even more, where IPOs are sort of not coming forth. Some of these are not coming forth with their IPOs. So what would be the steady state revenue for this kind of a business because corporate action would still be happening and buybacks and splits and all those things will continue to...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [144]

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If you see...

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [145]

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You can give you me a very broad...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [146]

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I can give you overall picture. In March '18, IPO corporate action charges, total income was around INR 29 crores. It went down from March '19 to INR 19 crores or INR 20 crores. Now it is in similar line only, if you see 6 monthly results, it is down by INR 1 crore. So it is -- depends on number of IPO. If you see that prime directory that last year, it was INR 92,000 crores worth IPOs there. It is down to INR 46,000 crores. So that depends on the market.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [147]

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Right? So actually, that was the question, sir. So this INR 18 crores, INR 20 crores of run rate on this IPO and corporate -- in an environment like today where hardly any IPOs that are coming. Do you think that is broadly sustainable?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [148]

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That is -- IPO and corporate action charges are intermingled, so it becomes very difficult to give towards IPO how much and towards corporate action how much. Because on application also we are charging and allotment also are charging, so that is comingled as such.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [149]

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But sir, if there are no -- I mean, if there are no IPOs, then there would be no applications also for you to charge, right? So in that case, whatever revenue that you've been earning in the last couple of quarters that would be hardly any IPO, right? Because there have been any hardly -- 2 IPOs in the last 2 quarters.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [150]

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Yes, yes. Theoretically, yes. That's one way of looking at it, yes.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [151]

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Got it. Sir, the other question was on -- so our KYC -- so on the CDSL Ventures. So a couple of quarters back, SEBI had come out with a regulation where we could not sort of -- where except telecom and I think one more entity, you could not sort of use the Aadhar to directly do the KYC. So I mean -- and since then also we've been able to sort of grow that part of business. It's not at a very good rate, but it is steady. So do you see any impact further like, I mean just wanted to hear your views on that. I mean what -- how is the ecosystem coping with that?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [152]

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See currently, we are not allowed to do eKYC using Aadhar post the Supreme Court verdict. But we have been -- subsequent to that, there has been a circular from the Ministry of Finance that in case we want to do eKYC, we have to approach UIDAI through our regulator SEBI. And then once UIDAI gives its approval, then they will notify the government and permit us as capital market intermediaries to do eKYC. We have done all of that. We have approached our regulator and our regulator has approached UIDAI to permit us to do eKYC.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [153]

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So are we allowed at this point of time to do...

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [154]

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As of now, we have not yet received the approval.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [155]

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So in the absence of that, so that was the question, sir. So in the absence of -- so we'll still be able to maintain the revenues and some of it is, I think is because of the government project also. But if you ex that, how would -- I mean how has that business shaped up for us? While we maintain our market share but has that overall pie has degrown in the overall market?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [156]

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See eKYC -- for all players in the market, eKYC is a problem because they are not allowed to use it right now, post the Supreme Court verdict. UIDAI has introduced something called an off-line eKYC, which we have introduced for some of our clients. Where I do not require specific UIDAI approval to go live [on that].

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [157]

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Okay, okay. And this approval, you are expecting anytime soon? Or I mean any comments on that from UIDAI?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [158]

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All I can say, it is in a very advanced stage with the UIDAI.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [159]

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And sir, the last question from my side is on the utilization of cash. So while we have a good payout ratio, but I think if you look at some of the other similar kind of businesses, the payout ratios, there is a room for payout ratios to go even higher. So I mean any comments on that? If you can maybe lay out what you are thinking and what is the thinking at the Board level?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [160]

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See, we are a market infrastructure institution. It is the licenses which we get for various products and financial resiliency in terms of cash balances becomes an important component when that license is granted. So whilst we ensure that there is a high payout ratio so that whatever is earned as the operating income gets paid out to the shareholders. There is also a need to keep a sufficient amount of optimum cash balances to show the overall financial health of the company, which is necessary for future growth of the business.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [161]

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Right. So I think if I get the numbers right. We have about INR 700 crores, INR 720 crores of cash on the books at this point of time. But -- and we have, I think around INR 300 crores of regulatory cash requirement. So in that sense, we have excess of INR 500 crores as cash, which can be used as this -- for this -- for overall shoring up of our financial resilience. But anything incrementally that we are earning because there is no incremental requirement in terms of CapEx or anything. Just on that, I mean I think you are close to 40%, 45% on a consolidated -- 40% on a consolidated basis. So on that, can you -- do you think that this is optimum or you think -- I mean is there a possibility of this inching up?

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [162]

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No. So you look at subsidiaries. You should not only look at the requirement that regulatory capital of CDSL as a parent. But also a subsidiary like CVL, et cetera, would require a sufficient amount of regulatory capital, be it [NAG], or be it the CVL venture...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [163]

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Government project.

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [164]

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And then government projects, which we are getting. This becomes a very important component when government projects, which are large in size, which would get awarded to us. So I think it is what we have stated earlier that the operating income we will be having -- we'll be maintaining a high amount of payout ratio. But I think the current cash levels are necessary keeping in mind some of the future ventures which are expected to come.

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Rohit Balakrishnan;VRDDHI Capital Investment Advisors;Analyst, [165]

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And sir, what is the...

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Operator [166]

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Mr. Balakrishnan, sorry to interrupt you. I request you to come back in the question queue for a follow-up question.

The next question is from the line of Hiten Jain from Invesco Mutual Fund.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [167]

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So this quarter, what was -- I think you gave that number. So what was provisions for doubtful debt this quarter?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [168]

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This quarter, INR 2.45 crores, INR 2.24 crores.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [169]

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Okay. So if I add, so previous quarter, it was INR 1.6 crores and now...

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [170]

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So total INR 4 crores. Total, INR 4 crores.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [171]

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Yes. Total INR 4 crores, but last few years as I see the data, we used to have provisions for doubtful debt in the range of INR 2 crores to INR 3 crores for the full year.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [172]

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No, no. Even last year, provision for doubtful debt was INR 4.95 crores, right? But the impact -- there you have to see bad debts as well as provision for doubtful debts. So overall impact would be around INR 3 crores.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [173]

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Yes. So this line item, impairment loss allowance on trade receivables in FY '19, we had INR 2.93 crores.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [174]

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Correct. But here, if you see, last year my income was INR 66 crores from annual issuer charges. It went up to INR 80 crores. So similarly, doubtful debts also increases no, with that.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [175]

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But -- so you're saying for the first half, it is INR 4 crores. And for second half, also we should annualize it. So for the full year, we should expect INR 8 crores.

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [176]

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No, that is not -- see, that is around 75% to 80% I'm getting in first 2 quarters, whatever, 84% already we've recovered. Now only 16% we have to recover. So it depends on our recovery that it depends. But as -- now what expected credit loss policy, we have to do it under Ind AS.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [177]

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So you're saying the second half would have a lower provision for doubtful debt compared to first half, as per the Ind AS policy?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [178]

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Possibly, probably. Not -- otherwise it is INR 8 crores what you mean to say.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [179]

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Okay, okay. So that means whenever your annual issuer charges goes up meaningfully, you would also have provisions for doubtful debt?

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Bharat Sheth, Central Depository Services (India) Limited - Executive VP & CFO [180]

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Yes, that is true. That is true.

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Operator [181]

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Thank you very much. As there are no further questions, I will now hand the conference over to the management for closing comments.

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Nehal Naleen Vora, Central Depository Services (India) Limited - CEO & MD and Director [182]

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So I think as I stated earlier, I have just joined around 3 weeks ago. We are in the business of a market infrastructure institution. And whilst we are -- a part of our revenue is dependent on the movement of the markets. But very -- overall, it is the technology spend as well as the quality of our service, which is going to ensure and also the distribution network which is critical to our business. So we have around 606 depository participants vis-à-vis our competition at around 280. And I think that will become a critical portion as we move forward. The general government's push to move physical into a digital mode is also going to become an important impetus to our business. But having said that, we need to continuously reinvest in our technology, in our systems and in our people to ensure that this module keeps on consistently going on.

I would like to wish all of you a very happy Diwali and a prosperous new year and thank you all for joining the call.

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Operator [183]

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Thank you very much. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.