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  1. 1. 1
  2. 2. SYNOPSIS Gitanjali Gems is one of the largestintegrated diamond and jewellerymanufacturers and retailers inIndia. During the quarter ended, therobust growth of Net Profit isincreased by 65.25% Rs. 1322.46million. Gitanjali Gems Ltd has acquired100% stake of Crown Aim Limited(Crown Aim). The value of four leading diamondjewellary brands of Gitanjali Gems-Gili, Nakshatra, Asmi and D’Damasrose 84 per cent i.e. Rs. 2769 crorein the last two years. Net Sales and PAT of the companyare expected to grow at a CAGR of30% and 46% over 2010 to 2013Erespectively.Years Net sales EBITDA Net Profit EPS P/EFY 11 94564.02 6303.02 3548.10 41.81 7.42FY 12E 121987.59 8315.70 5058.88 59.61 5.20
  3. 3. FY 13E 143945.35 9848.55 6197.85 73.03 4.25Stock Data:Sector: Gems & JewelleryFace Value Rs. 10.0052 wk. High/Low (Rs.) 387.40/156.35Volume (2 wk. Avg.) 527000BSE Code 532715Market Cap (Rs in mn) 26310.32Share Holding Pattern1 Year Comparative GraphGitanjali Gems BSE SENSEXC.M.P: Rs. 310.00Target Price: Rs. 347.00Date: Dec. 28th2011BUYGitanjali Gems Ltd.
  4. 4. Result Update: Q2 FY 122Peer Group ComparisonName of the company CMP(Rs.)Market Cap.( EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)Gitanjali Gems 310.00 26310.32 41.81 7.42 1.05 30.00Rajesh Exports 134.40 3968.29 11.14 12.06 2.49 60.00Asian Star Co. Ltd.1051.00 1121.54 26.18 40.15 3.05 20.00Shrenuj & Co. Ltd.58.05 441.58 4.57 12.70 0.91 30.00Investment Highlights Q2 FY12 Results UpdateGitanjali Gems Ltd has posted net profit of Rs 1322.46 million for the quarterended on September 30, 2011 as against Rs 800.29 million in the same quarterlast year, an increase of 65.25%. It has reported net sales of Rs 31676.41million for the quarter ended on September 30, 2011 as against Rs 25097.10million in the same quarter last year, a rise of 26.22%. Total income grew by
  5. 5. 26.23% to Rs.31701.31 million from Rs.25112.96 million in the same quarterlast year. During the quarter, it reported earnings of Rs 15.32 a share.Quarterly Results - Consolidated (Rs in mn)As At Sep-11 Sep-10 %changeNet sales 31676.41 25097.10 26.22%PAT 1322.46 800.29 65.25%Basic EPS 15.32 9.50 61.32%3 Net Sales & PAT growthDuring the quarter, Net sales rose by 26.22% to Rs. 31676.41 million fromRs.25097.10 in the same the quarter last year and the Total Profit for quarter endedSeptember 2011 was Rs.1322.46 million grew by 65.25% from Rs.800.29 millioncompared to same quarter last year. EPSDue to increase in equity capital the basic EPS of the company stood at Rs.15.32 forthe quarter ended Sep. 2011 from Rs.9.50 for the quarter ended Sep. 2010.
  6. 6. 4 Break up of Expenditure Segment RevenueParticulars Q2 FY12 (Rs. in mn)Diamond 17194.49Jewellery 16206.02Others 110.46Total 33510.975 Acquisition of 100% stake of Crown Aim Limited’Gitanjali Gems Ltd has acquired 100% stake of Crown Aim Limited (Crown Aim).Thus Crown Aim has become step down subsidiary of the Company. Crown Aim isa Hong Kong based Company engaged in the business of distribution of Jewelleryto China, Japan, USA, Middle East and Europe. In Addition, Crown Aim has aJewellery manufacturing unit in China and plans to setup retailing of Jewellery inChina. Crown Aim also has a 100% subsidiary with the name Alfred Terry Holding
  7. 7. Limited and a step down subsidiary named Alfred Terry Limited in London, fordistribution of Jewellery in UK. Incorporation of wholly Owned Subsidiary Leading Italian Jewels S.r.l., ItalyGitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name ofLeading Italian Jewels S.r.l in Italy with a view to expand its business in Italy andadjoining region. The main activity of the newly incorporated wholly ownedsubsidiary is trading in precious stones, diamonds jewellery, pearls, etc. Incorporation of Wholly Owned Subsidiary GGL Diamond LLC in USAGitanjali Gems Ltd has incorporated GGL Diamond, LLC in United States ofAmerica, through its wholly owned subsidiary Gitanjali USA, Inc. The main objectof GGL Diamond LLC is to source and distribute diamond and jewellery. Incorporation of Wholly Owned Subsidiary Aston Luxury Group Ltd in HongKongGitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name ofAston Luxury Group Limited in Hong Kong with a view to explore and expand theInternational business of the Company in Asia Pacific.6Company ProfileGitanjali Group is world’s largest branded jewellery retailer. The company’sheadquarter is in Mumbai. Gitanjali Gems, incorporated in 1986, is one of leading
  8. 8. players in jewellery segment. Founded in 1966, it was the first group company toengage in cutting and polishing of diamonds in Surat, Gujarat. Today this $900million multinational group is one of largest manufacturer, retailers and exporters ofdiamonds.The company is the first to produce the world’s smallest heart shaped diamond (0.03carat) and developing some 25 patented facet patterns.Gitanjali Groups operates from sourcing of rough diamond, cutting, polishing anddistributing, to jewellery manufacturing, which includes designing, mould making,wading, casting, spruce grinding, filing, polishing and setting. The company useslatest CAD and CAM processes and equipment for creating designs for jewellery. Thecompany was first to offer diamond studded jewellery at reasonable prices.The company has won over 50 awards from the Ministry of Commerce, India foroutstanding exports of diamond and jewellery, is today over $1000 millionmultinational group, and a publicly listed entity.Global presenceGitanjali Gems Ltd. has its operations throughout the globe, all the way from USA,UK, Belgium, Italy and the Middle East to Thailand, South East Asia China, & Japan.Business Divisions Diamonds-The Company is engaged in every part of diamondsourcing &processing. Diamonds are processed at the Group’s units at Surat and Borivli inIndia, Bangkok in Thailand, and Qingdao in China. Recently its unit at HyderabadSEZ it has gone also on stream. For its diamond export the company has receivedvarious awards from international organization as well as from Government ofIndia.7
  9. 9. Jewellery- The Company offers a diverse range of jewellery under gold,diamondand platinum segment. Company’s designs include Indian traditional, ethnic,classic, contemporary and casual. The company uses the latest CAD/CAMprocesses and EDP for optimal efficiency in production and deliveries to its diversemarkets. Retailing- The Company is also engaged in retailing its diamonds andjewellery.Currently the company markets over 40 brands that are owned and franchisedunder its retail chain Gitanjali Lifestyle. Infrastructure- Gitanjali plans to develop seven SEZs to beoperationalised in 7-8years and the company has already bought land in Panvel, outside Mumbai, andhas approvals for five more SEZs.Company BrandsCurrently, it has brands that includes loose diamonds, diamond and other stone-studded jewellery(natural and synthetic), in gold, silver, steel and combinations, high-end watches, jewellery-watches,luxury artifacts and accessories. The companymarkets its products through store chain namely Bezel, Giantti, World of Solitaire andGitanjali Lifestyle. Under jewellery, the company has a portfolio of brands namelyNakshatra, Lucera, D’Damas, Calgaro, Sangini, Rivaaz, Desire, Kashvi, Asmi, Maya,Diya, Ezee Diamonds and Stephan Hafner.Under watches, it retails brands like Philip,Sector, Marvin, Umbro, Miss Sixty, Roberto Cavalli, Iris, Morelaato and Just Cavalli.Under Home accessories, the company retails brand - Greggio Argento. Gitanjali Gemshas a distribution network of 112 distributors and 1250 outlets in India.
  10. 10. 8Financial Results12 Months Ended Profit & Loss Account (Consolidated)Value(Rs. in mn) FY10 FY11 FY12E FY13EDescription 12m 12m 12m 12mNet Sales 65276.34 94564.02 121987.59 143945.35Other Income 25.83 159.94 179.13 204.21Total Income 65302.17 94723.96 122166.72 144149.56Expenditure -60885.06 -88420.94 -113851.01 -134301.01Operating Profit 4417.11 6303.02 8315.70 9848.55Interest -1724.31 -2087.21 -2462.91 -2733.83Gross Profit 2692.80 4215.81 5852.80 7114.72Depreciation -445.41 -563.72 -300.00 -315.00Exceptional Items 0.00 180.67 0.00 0.00Profit before Tax 2247.39 3832.76 5552.80 6799.72Tax -231.90 -267.12 -471.99 -577.98Profit after Tax 2015.49 3565.64 5080.81 6221.75Minority Interest -13.78 -17.54 -21.93 -23.90
  11. 11. Net Profit 2001.71 3548.10 5058.88 6197.85Equity Capital 842.70 848.72 848.72 848.72Reserves 20999.64 24324.98 29405.79 35627.54Face Value 10.00 10.00 10.00 10.00EPS 23.75 41.81 59.61 73.039Quarterly Ended Profit & Loss Account (Consolidated)Value (Rs. In mn) 31-Mar-11 30-Jun-11 30-Sep-11 31-Dec-11EDescription 3m 3m 3m 3mNet Sales 24266.14 25953.27 31676.41 34210.52Other Income 65.59 49.33 24.90 29.88Total Income 24331.73 26002.60 31701.31 34240.40Expenditure -23001.13 -23950.47 -29487.67 -31850.00Operating Profit 1330.60 2052.13 2213.64 2390.41Interest -539.85 -601.77 -672.99 -740.29Gross Profit 790.75 1450.36 1540.65 1650.12Depreciation -53.85 -67.56 -80.83 -87.30Exceptional Items 180.67 0.00 0.00 0.00Profit before Tax 917.57 1382.80 1459.82 1562.82Tax 26.83 -145.99 -118.81 -125.03Profit after Tax 944.40 1236.81 1341.01 1437.80
  12. 12. Minority Interest 10.68 -4.49 -18.55 -18.92Net Profit 955.08 1232.32 1322.46 1418.87Equity Capital 848.72 848.72 863.20 863.2Face Value 10.00 10.00 10.00 10.00EPS 11.25 14.52 15.32 16.4410Key RatiosParticulars FY10 FY11 FY12E FY13ENo. of Shares(in mn) 84.27 84.87 84.87 84.872EBITDA Margin (%) 6.77% 6.67% 6.82% 6.84%PBT Margin (%) 3.44% 4.05% 4.55% 4.72%PAT Margin (%) 3.09% 3.77% 4.17% 4.32%P/E Ratio (x) 13.05 7.42 5.20 4.25ROE (%) 9.23% 14.16% 16.79% 17.06%ROCE (%) 10.17% 12.34% 13.84% 14.50%Debt Equity Ratio 1.19 1.21 1.06 0.92EV/EBITDA (x) 5.91 4.17 3.16 2.67Book Value (Rs.) 259.19 296.61 356.47 429.78P/BV(X) 1.20 1.05 0.87 0.72Charts:Net Sales & PAT
  13. 13. 11P/E Ratio(x)Debt Equity Ratio12EV/EBITDA (x)P/BV(x)13Outlook and Conclusion At the current market price of Rs.310.00, the stock is trading at 5.20 x FY12Eand 4.25 x FY13E respectively.
  14. 14. Earning per share (EPS) of the company for the earnings for FY12E and FY13Eis seen at Rs.59.61 and Rs.73.03 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 30% and46% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 3.16 x for FY12E and 2.67 x forFY13E. Price to Book Value of the stock is expected to be at 0.87 x and 0.72 xrespectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quartersalso. We recommend ‘BUY’ in this particular scrip with a target price ofRs.347.00 for Medium to Long term investment.Industry OverviewIndia possesses worlds most competitive gems and jewellery market owing to its lowcost of production and availability of skilled labor. Gems and jewellery form anessential part of the Indian tradition. The components of jewellery include traditionalgold, diamond and platinum, accompanied by a variety of other precious and semi-precious stones.The Indian gems and jewellery sector is expected to grow at a compound annualgrowth rate (CAGR) of approximately 13 per cent during 2011–2013, on the back ofincreasing Government efforts and incentives together with private sector initiatives,according to a report Indian Gems and Jewellery Market Forecast to 2013, byresearch firm RNCOS. As per the research report, with Indias consumption pegged atnearly 24 per cent in 2008, the country remains worlds largest gold consumer andthis share is expected to grow further. Moreover, India also forms the largest cuttingand polishing Industry for diamond in the world. The Government policies and the
  15. 15. 14banking sector have provided a lot of assistance to this sector with around 50 banksproviding nearly US$ 3 billion of credit to the Indian diamond industry.India will soon overtake the US to become the third-largest mens luxury jewellerymarket in the world, according to Euromonitor International. The study estimated thatthe countrys mens jewellery market stood at around Rs 954 crore (US$ 194.4million), in sales and it is projected to grow by 36.4 per cent in 2012. "Although its aniche market, it is growing. Nobody can ignore it now," as per GR Radhakrishnan,Managing Director, GRT Jewelers, who pegs the share of mens jewellery in its totalsales at 20-25 per cent.Indian sellers on eBay, a leading online marketplace, export an item internationallyevery 32 seconds, according to the companys Asian exporters index. 44 pieces ofjewellery are sold every hour by Indian sellers on eBay.Ratings agency CRISIL has launched a Gold Index to track the performance of goldprices in the Indian market. This is the first index launched by CRISIL in thecommodities space. The purpose of the CRISIL Gold index is to provide anindependent, relevant and common benchmark for performance evaluation ofinvestment products with gold as underlying investment, according to a release fromCRISIL.Swiss watchmaker Rado, a part of the worlds largest watch conglomerate The SwatchGroup, recently unveiled its luxury jewellery collection at the Rado boutique inBanjara Hills in Hyderabad. This range features beautiful diamond studded watches.The Rado jewellery collection brings together an exquisite selection of the brands mostcelebrated products. The Swiss watch brand has been a pioneer in the use ofinnovative materials such as hard metal, high-tech ceramic, lanthanum and ceramos.
  16. 16. It also features convex, dome-shaped sapphire crystals, affording innovative watchdesigns and shapes. The jewellery range is priced from Rs 30,000 (US$ 574.66) to Rs4,000,000 (US$ 76,626.75)."In the last 3- 4 years, a lot of Indians are investing in gold which is in the paperformat. People should take a long-term perspective while investing in gold. ETFs as a15concept is picking up," as per Jiju Vidyadharan, Head, Funds and Fixed IncomeResearch, CRISIL Research.Industry StructureThe gems and jewellery industry in India is greatly dominated by the unorganizedplayers, but with the growing economy and increasing income levels, the organizedsegment and retailing of branded jewellery is fast catching up in the currentlyfragmented market which is worth US$ 16 billion and shows huge potential for growthin the future. The centre of trade in Indias Gems and Jewellery industry is Mumbai.Most imports of gold and rough diamond arrives in Mumbai. However, most of theprocessing of diamonds takes place in Gujarat.Key Industry ComponentsDiamonds: Currently India is the major polishing and cutting hub for diamonds. Indiais also the third largest consumer of polished diamonds. The surge of urbanizationand rapidly growing middle class in India has led Indian consumerism to new heights,particularly in the diamond jewellery sector. Every 11 out of 12 diamonds sold aroundthe world are processed in India regardless of the place they are mined.Gold: The country became a leader in the table of most gold consuming nations withthe consumption amounting to about 16,000 tonnes. The other key markets includeJapan, China, Turkey, Italy, USA and UK. It is also estimated that about 600 tonnes of
  17. 17. gold is used to make jewellery.Costume jewellery: The Indian costume jewellery market is also witnessing growth inthe international market, as per the Export Promotion Council for Handicrafts. Theindustry body further stated that the Government is also working towards formulatingan international compliance code for manufacturing costume jewellery.The current global costume jewellery and accessories market is estimated at US$ 16.3billion, of which India only exports around US$ 53 million, thereby, providing a hugeopportunity area for the Indian costume manufacturers.16ExportsIndia is the largest market for gold jewellery in the world, representing an amazing 746tonnes of gold in 2010. The net exports of gem and jewellery grew from US$ 22,616.35in April-October 2010 to US$ 26,160.04 in April-October 2011.Gems and Jewellery Industry in India: Road AheadThe enormous growth of the Indian gems and jewellery industry has seen the arrival ofmany new branded jewellery shops in various metros of this country. Brands such as,Damas Jewellery, Reliance Retail, Swarovski, and Joy Alukkas are either opening orhave already opened their new branches. The availability of cheap labour and presenceof well skilled people in various states of India is helping in the growth of diamondpolishing and gold jewellery markets. According to experts in the jewellery industry thegrowing demand for expensive jewellery in India is a result of the strengthening Indianeconomy. India will soon overtake the US in the not so distant future, as per astatement given by Rapaport Group, the well known keeper of global diamond relateddata.
  18. 18. ______________ ____ _________________________Disclaimer:This document prepared by our research analysts does not constitute an offer or solicitationfor the purchase or sale of any financial instrument or as an official confirmation of anytransaction. The information contained herein is from publicly available data or othersources believed to be reliable but do not represent that it is accurate or complete and itshould not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’saffiliates shall not be in any way responsible for any loss or damage that may arise to anyperson from any inadvertent error in the information contained in this report. This documentis provide for assistance only and is not intended to be and must not alone be taken as thebasis for an investment decision.17Firstcall India Equity Research: Email –
  19. 19. C.V.S.L.Kameswari PharmaU. Janaki Rao Capital GoodsD. Ashakirankumar AutomobileA. Rajesh Babu FMCGH.Lavanya Oil & GasDheeraj Bhatia DiversifiedManoj kotian DiversifiedNimesh Gada DiversifiedFirstcall India also providesFirstcall India Equity Advisors Pvt.Ltd focuses on, IPO’s, QIP’s, F.P.O’s,TakeoverOffers, Offer for Sale and Buy Back Offerings.Corporate Finance Offerings include Foreign Currency Loan Syndications,Placement of Equity / Debt with multilateral organizations, Short Term FundsManagement Debt & Equity, Working Capital Limits, Equity & DebtSyndications and Structured Deals.Corporate Advisory Offerings include Mergers & Acquisitions(domestic andcross-border), divestitures, spin-offs, valuation of business, corporaterestructuring-Capital and Debt, Turnkey Corporate Revival – Planning &Execution, Project Financing, Venture capital, Private Equity and FinancialJoint VenturesFirstcall India also provides Financial Advisory services with respect to raisingof capital through FCCBs, GDRs, ADRs and listing of the same on International
  20. 20. Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges andother international stock exchanges.For Further Details Contact:3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071Tel. : 022-2527 2510/2527 6077/25276089 Telefax : 022-25276089E-mail: info@firstcallindiaequity.comwww.firstcallindiaequity.comGITANJALI GEMS LIMITED(The Company was incorporated on August 21, 1986 as a private limited company under the CompaniesAct. For details of changes in name,please refer to “History and Certain Corporate Matters” beginning on page 70 of this Draft Red HerringProspectus)Registered Office: 801/802 Prasad Chambers, Opera House, Mumbai 400 004Tel: (91) (22) 2363 0272; Fax: (91) (22) 23630363Contact Person: Kishor Baxi; Tel: (91) (22) 2363 5344 E-mail:; Website:www.gitanjaligroup.comPUBLIC ISSUE OF 17,000,000 EQUITY SHARES OF RS.10 EACH OF GITANJALI GEMS LIMITED (“GITANJALIGEMS” OR THE “COMPANY” OR THE“ISSUER”) FOR CASH AT A PRICE OF RS.* + PER EQUITY SHARE, AGGREGATING RS.* + MILLION (THE“ISSUE”). 150,000 EQUITY SHARES OF RS.10EACH WILL BE RESERVED IN THE ISSUE FOR SUBSCRIPTION BY PERMANENT EMPLOYEES AND DIRECTORSOF THE COMPANY WHO ARE INDIAN
  21. 21. NATIONALS AND ARE BASED IN INDIA (THE “EMPLOYEE RESERVATION PORTION”, AND THE ISSUE OFEQUITY SHARES OTHER THAN THEEMPLOYEE RESERVATION PORTION, THE “NET ISSUE”).THE FACE VALUE OF THE EQUITY SHARES IS RS.10. THE ISSUE WILL CONSTITUTE 28.81% OF THE FULLYDILUTED POST-ISSUE CAPITAL OF THECOMPANY.PRICE BAND: RS.[ ] TO RS.[] PER EQUITY SHARE OF FACE VALUE RS.10 EACH.THE ISSUE PRICE IS [ ] TIMES THE FACE VALUE AT THE LOWER END OF THE PRICE BAND AND [ ] TIMESTHE FACE VALUE AT THE HIGHEREND OF THE PRICE BAND.In case of revision in the Price Band, the Bidding/Issue Period shall be extended for three additionalworking days after such revision, subject to the Bidding/Issue Periodnot exceeding 10 working days. Any revision in the Price Band, and the revised Bidding/Issue Period, ifapplicable, shall be wi dely disseminated by notification to theBombay Stock Exchange Limited (“BSE”) and the National Stock Exchange of India Limited (“NSE”) and byissuing a press release and also by indicating the changeon the websites of the Book Running Lead Managers and the terminals of the Syndicate.The Issue is being made through the 100% Book Building Process where up to 50% of the Net Issue tothe public shall be allocated on a proportionate basis to QualifiedInstitutional Buyers (“QIBs”). 5% of the QIB Portion shall be available for allocation on a proportionatebasis to Mutual Funds only and the remainder of the QIB Portionshall be available for allocation on a proportionate basis to all QIBs, including Mutual Funds, subject tovalid Bids being rec eived at or above the Issue Price. Further,at least 15% of the Net Issue to the public shall be available for allocation on a proportionate basis toNon-Institutional Bid ders and at least 35% of the Net Issue to thepublic shall be available for allocation on a proportionate basis to Retail Individual Bidders, subject tovalid Bids being rec eived at or above the Issue Price. Further,150,000 Equity Shares shall be available for allocation on a proportionate basis to the permanentEmployees and Directors of th e Company, subject to valid Bids beingreceived at or above the Issue Price.
  22. 22. RISK IN RELATION TO FIRST ISSUEThis being the first issue of Equity Shares of the Company, there has been no formal market for theEquity Shares of the Company. The face value of the Equity Sharesis Rs.10 per Equity Share and the Issue Price is [ ] times of face value. The Issue Price (as determined bythe Company, in consultation with the Book Running LeadManagers, on the basis of assessment of market demand for the Equity Shares Issued by way of bookbuilding) should not be taken to be indicative of the market priceof the Equity Shares after the Equity Shares are listed. No assurance can be given regarding an activeand/or sustained trading in the Equity Shares of the Company orregarding the price at which the Equity Shares will be traded after listing.GENERAL RISKSInvestments in equity and equity-related securities involve a degree of risk and investors should notinvest any funds in this Issue unless they can afford to take the riskof losing their investment. Investors are advised to read the risk factors carefully before taking aninvestment decision in this Issue. For taking an investment decision,investors must rely on their own examination of the Company and the Issue including the risks involved.The Equity Shares issue d in the Issue have not beenrecommended or approved by the Securities and Exchange Board of India (“SEBI”), nor does SEBIguarantee the accuracy or adequacy of the contents of this Draft RedHerring Prospectus. Specific attention of the investors is invited to the summarized and detailedstatements in Risk Factors beginning on page ix of this Draft Red HerringProspectus.COMPANY’S ABSOLUTE RESPONSIBILITYThe Company, having made all reasonable inquiries, accepts responsibility for and confirms that thisDraft Red Herring Prospect us contains all information with regardto the Company and the Issue, which is material in the context of the Issue, that the informationcontained in this Draft Red H erring Prospectus is true and correct in allmaterial aspects and is not misleading in any material respect, that the opinions and intentionsexpressed herein are honestly held and that there are no other facts, theomission of which makes this Draft Red Herring Prospectus as a whole or any of such information or theexpression of any such opinions or intentions misleading in any
  23. 23. material respect.LISTINGThe Equity Shares issued through this Draft Red Herring Prospectus are proposed to be listed on the BSEand NSE. We have received in-principle approvals from theseStock Exchanges for the listing of the Company’s Equity Shares pursuant to letters dated * + and * +,respectively. For the purposes of the Issue, the Designated StockExchange is BSE.ISSUE PROGRAMBID/ISSUE OPENS ON : ________________, 2006 BID/ISSUE CLOSES ON : ________________, 2006BOOK RUNNING LEAD MANAGERS (BRLMs) REGISTRAR TO THE ISSUEICICI SECURITIES LIMITEDICICI Centre, H.T. Parekh Marg,Churchgate, Mumbai 400 020, India.Tel: + 91 22 2288 2460Fax: + 91 22 2282 6580E-mail: gitanjali_ipo@isecltd.comWebsite: www.isecsecurities.comKARVY COMPUTERSHARE PRIVATE LIMITEDKarvy House, 46, Avenue 4, Street no.1, Banjara Hills,Hyderabad 500 034, India.Tel: +91 040 2343 1546Fax: +91 040 2343 1551E-mail: gitanjali.ipo@karvy.comWebsite: www.karvy.comDRAFT RED HERRING PROSPECTUSPlease read Section 60B of the Companies Act, 1956
  24. 24. (The Draft Red Herring Prospectus will be updated upon RoC filing)100% Book Built IssueKEYNOTE CORPORATE SERVICES LIMITED307, Regent ChambersNariman PointMumbai 400 021Tel : +91 22 2202 5230Fax: +91 22 2283 5467Email: gitanjali_ipo@keynoteindia.netWebsite: www.keynoteindia.netCKCKiTABLE OF CONTENTSSection PageDefinitions and Abbreviations iiPresentation and Financial and Market Data viiForward Looking Statements viiiRisk Factors ixSummary 1The Issue 7Summary Financial Information 8General Information 11Capital Structure 18
  25. 25. Objects of the Issue 23Basis for Issue Price 35Statement of Tax Benefits 38Industry 44Business 52Regulations and Policies in India 68History and Certain Corporate Matters 70Management 81Promoter and Promoter Group 89Related Party Transactions 106Dividend Policy 107Financial Statements 108Summary of Significant Differences Be tween Indian GAAP and U.S. GAAP 179Management’s Discussions and Analysis of Financial Condition and Results of Operations 186Outstanding Litigation 202Material Developments 208Government and Other Approvals 209Other Regulatory and Statutory Disclosures 212Issue Structure 220Terms of the Issue 222Issue Procedure 225Main Provisions of Articles of Association of the Company 225Material Contracts and Documents for Inspection 270Declaration 272
  26. 26. iiDEFINITIONS AND ABBREVIATIONSGeneral TermsTerm Description“GGL” or “the Company”or the “Issuer” or“Gitanjali Gems Limited”Gitanjali Gems Limted, a public limite d company incorporated under theCompanies Act.“we” or “us” or “our” Unless the context othe rwise requires, Gitanjali Gems Limited and itsSubsidiaries, Joint Ventures and Associate Companies, on a consolidatedbasis as described in this Draft Red Herring Prospectus.Associate Companies Brightest Circle Jewellery Private Limited and Gili India Limited(Formerly Gitanjali Jewels Limited).Joint Venture D’Damas Jewellery (India) Private Limited.Subsidiaries CRIA Jewellery Private Limited, Fantasy Diamond Cuts Private Limited,Gitanjali Exports Corporation Limi ted, Hyderabad Gems SEZ Limitedand Mehul Impex Limited.
  27. 27. Issue Related TermsTerm DescriptionAllotment Unless the context otherwise requires, the allotment of Equity Sharespursuant to the Issue.Allottee The successful Bidder to whom Equity Shares are/ have been allotted.Articles/Articles ofAssociationArticles of Association of the Company.Auditors Ford, Rhodes, Parks & Co.Banker(s) to the Issue[●]Bid An indication to make an Issue during the Bidding/Issue Period by aprospective investor to subscribe to the Company’s Equity Shares at aprice within the Price Band, including all revisions and modificationsthereto.Bid Amount The highest value of the optional Bids indicated in the Bid cumApplication Form and payable by the Bidder on submission of the Bid inthe Issue.Bid/Issue Closing Date The date after which the Syndicate will not accept any Bids for the Issue,which shall be notified in a widely circulated English national newspaperand Hindi national newspaper.Bid cum Application Form The form in terms of wh ich the Bidder shall make an Issue to subscribeto/purchase the Equity Shares and which will be considered as the
  28. 28. application for issue of the Equity Sh ares pursuant to the terms of thisDraft Red Herring Prospectus.Bidder Any prospective investor who makes a Bid pursuant to the terms of thisDraft Red Herring Prospectus and the Bid cum Application Form.Bidding/Issue Period The period between th e Bid/Issue Opening Date and the Bid/IssueClosing Date inclusive of both days and during which prospectiveBidders can submit their Bids.Bid/Issue Opening Date The date on which the Syndicate Members shall start accepting Bids forthe Issue, which shall be the date notified in a widely circulated Englishnational newspaper and Hindi national newspaper.Board of Directors/ Board The board of directors of the Company or a committee constitutedthereof.Book Building Process The book building process as provided in Chapter XI of the SEBIGuidelines, in terms of which the Issue is being made.BRLMs/ Book RunningLead ManagersBook Running Lead Managers to the Issue, in this case being ICICISecurities Limited and Keynote Corporate Services Limited.iiiTerm DescriptionCAN/ Confirmation ofAllocation NoteThe note or advice or intimation of allo cation of Equity Shares sent to theBidders who have been allocated Equity Shares after discovery of the
  29. 29. Issue Price in accordance with the Book Building Process.Cap Price The higher end of the Price Band, above which the Issu e Price will not befinalized and above which no Bids will be accepted.Companies Act The Companies Act, 1956, as amended.Cut-off Price Any price within the Price Band finalized by the Company in consultationwith the BRLMs. A Bid submitted at Cut-off Price is a valid Bid at allprice levels within the Price Band.Depository A depository registered with SEBI under the SEBI (Depositories andParticipants) Regulations, 1996, as amended.Depositories Act The Depositories Act, 1996, as amended.Depository Participant A depository participant as defined under the Depositories Act.Designated Date The date on which the Escrow Collection Banks transfer the funds fromthe Escrow Account of the Company to the Issue Account, after theProspectus is filed with the RoC, following which the Board allots EquityShares to successful Bidders.Designated StockExchangeBSE.Director(s) The director(s) of GGL, unless otherwise specified.Draft Red HerringProspectusThis Draft Red Herring Prospectus issued in accordance with Section 60Bof the Companies Act, which does no t have complete particulars of theprice at which the Equity Shares are Issued and the size of the Issue.
  30. 30. Upon filing with the RoC at least thr ee days before the Bid/Issue OpeningDate it will be termed as the Red Herring Prospectus. It will be termed theProspectus upon filing with RoC after the Pricing Date.Eligible NRI NRIs from such jurisdiction outside India where it is not unlawful tomake an Issue or invitation under th e Issue and in relation to whom theRed Herring Prospectus constitutes an Issue to sell and an invitation tosubscribe to the Equity Shares Issued thereby.Equity Shares Equity shares of the Comp any of face value of Rs.10 each, unlessotherwise specified in the context thereof.Escrow Account An account opened with an Escrow Collection Bank(s) and in whosefavor the Bidder will issue cheques or drafts in respect of the Bid Amountwhen submitting a Bid.Escrow Agreement Agreement to be entered into among the Company, the Registrar, theEscrow Collection Bank(s), and the BRLMs and the Syndicate Membersfor collection of the Bid Amounts and for remitting refunds, if any, of theamounts collected, to the Bidders.Escrow Collection Bank(s) The banks, which are clearing members and registered with SEBI asBankers to the Issue at which the Escrow Account will be opened, in thisIssue comprising [●].Fiscal Period of twelve months ended March 31 of that particular year, unlessotherwise stated.First Bidder The Bidder whose name appears first in the Bid cum Application Form orRevision Form.Floor Price The lower end of the Price Band , below which the Issue Price will not befinalized and below which no Bids will be accepted.
  31. 31. FVCIs Foreign Venture Capital Investors, as defined and registered with SEBIunder the SEBI (Foreign Venture Cap ital Investor) Regulations, 2000, asamended.GIR Number General Index Registry Number.Indian National As used in the context of the Employee Reservation Portion, a citizen ofIndia as defined under the Indian Citizenship Act, 1955, as amended, whois not an NRI.Industrial Policy The industrial policy and guidel ines issued thereunder by the Ministry ofIndustry, Government of India, from time to time.ivTerm DescriptionIssue Issue of 17,000,000 Equity Shares at the Issue Price by the Company.Issue Price The final price at which Equity Shares will be allotted in the Issue, asdetermined by the Company in co nsultation with the BRLMs, on thePricing Date.Issue Account Account opened with the Banker(s) to the Issue to receive monies fromthe Escrow Account for the I ssue on the Designated Date.Margin Amount The amount paid by the Bidder at the time of submission of the Bid,which may be 10% or 100% of the Bid Amount, as applicable.Memorandum/Memorandum ofAssociationThe memorandum of association of the Company, as amended from timeto time.Mutual Funds Mutual funds registered with SEBI under the SEBI (Mutual Funds)
  32. 32. Regulations, 1996.Non Institutional Bidders All Bidders that are not Qualified Institutional Buyers or Retail IndividualBidders and who have bid for an amount more than Rs.100,000.Non Institutional Portion The portion of the Issue being up to 4,212,500 Equity Shares available forallocation to Non Institutional Bidders.Non-Residents All eligible Bidders, including Eligible NRIs, FIIs registered with SEBIand FVCIs registered with SEBI, who are not persons resident in India.NRI/ Non-Resident Indian A person resident outside India, as defined under FEMA and who is acitizen of India or a person of Indi an origin, each such term as definedunder the Foreign Exchange Management (Transfer or Issue of Securityby a Person Resident Outside Indi a) Regulations, 2000, as amended.OCB/ Overseas CorporateBodyA company, partnership, society or other corporate body owned directlyor indirectly to the extent of at least 60% by NRIs including overseastrusts, in which not less than 60% of be neficial interest is irrevocably heldby NRIs directly or indirectly as defined under Foreign ExchangeManagement (Transfer or Issue of Security by a Person Resident OutsideIndia) Regulations, 2000, as amended. OCBs are not permitted to investin this Issue.Pay-in Date The Bid/Issue Closing Date or the last date specified in the CAN sent tothe Bidders, as applicable.Pay-in Period (1) With respect to Bidders whose Margin Amount is 100% of the BidAmount, the period commencing on the Bid/Issue Opening Dateand extending until the Bid Closing Date, and
  33. 33. (2) With respect to QIBs, the pe riod commencing on the Bid/IssueOpening Date and extending until the closure of the Pay-in Date, asspecified in the CAN.Price Band The price band with a minimum price (Floor Price) of Rs.[ ● ] per EquityShare and the maximum price of Rs.[ ● ] per Equity Share (Cap Price).Pricing Date The date on which the Company in consultation with the BRLMs finalizethe Issue Price.Promoter Mr. Mehul C. Choksi.Prospectus The prospectus, filed with the RoC after pricing containing, inter alia, theIssue Price that is determined at the end of the Book Building Process, thesize of the Issue and certain other information.Public Issue Account Account opened with the Bankers to the Issue to receive money from theEscrow Account for the Issue on the Designated Date.Qualified InstitutionalBuyers or QIBsPublic financial institutions as specified in Section 4A of the CompaniesAct, FIIs, scheduled commercial banks, mutual funds registered withSEBI, multilateral and bilateral deve lopment financial institutions,venture capital funds registered with SEBI, foreign venture capitalinvestors registered with SEBI, state industrial development corporations,insurance companies registered with the Insurance Regulatory andDevelopment Authority, provident funds with minimum corpus of Rs.250million and pension funds with a minimum corpus of Rs.250 million.QIB Margin An amount representing 10% of the Bid Amount that Q IBs are re quired tov
  34. 34. Term Descriptionpay at the time of submitting their Bid.QIB Portion The portion of the Issue being up to 8,425,000 Equity Shares available forallocation to QIBs.Refund Account Account opened with an Escrow Collection Bank from which refunds ofthe whole or part of the Bid Am ount, if any, shall be made.Registrar /Registrar to theIssueRegistrar to the Issue, in this case being Karvy Computershare PrivateLimited.Retail Individual Bidders Bidders who have bid for Equity Shares of an amount less than or equalto Rs.100,000.Retail Portion The portion of the Issue being up to 5,897,500 Equity Shares available forallocation to Retail Individual Bidder(s).Revision Form The form used by the Bidders to modify the quantity of Equity Shares orthe Bid Price in any of their Bid cu m Application Forms or any previousRevision Form(s).RHP or Red HerringProspectusThe Red Herring Prospectus dated [ ● ] issued in accordance with Section60B of the Companies Act, which does not have complete particulars ofthe price at which the Equity Shares are Issued and the size of the Issue.The Red Herring Prospectus will be filed with the RoC at least three daysbefore the Bid/Issue Opening Date and will become a Prospectus uponfiling with the RoC after the Pricing Date.
  35. 35. RoC Registrar of Companies, Maha rashtra, located at Mumbai.SCRR The Securities Contracts (Regulation) Rules, 1957, as amended.SEBI The Securities and Exchange Boar d of India constituted under the SEBIAct.SEBI Act Securities and Exchange Boar d of India Act, 1992, as amended.SEBI Guidelines The SEBI (Disclosure and In vestor Protection) Guidelines, 2000 issuedby SEBI on January 27, 2000, as am ended, including instructions andclarifications issued by SEBI from time to time.SEBI MAPIN Regulations The SEBI (Central Databa se of Market Participants) Regulations, 2003,as amended from time to time.Stock Exchanges BSE and NSE.Syndicate or members ofthe SyndicateThe BRLMs and the Syndicate Members.Syndicate Agreement The agreement to be entere d into among the Company and the Syndicate,in relation to the collection of Bids in this Issue.Syndicate Members ICICI Brokerage Services Limited and Keynote Capitals Limited.TRS or TransactionRegistration SlipThe slip or document issued by any of the members of the Syndicate to aBidder as proof of registration of the Bid.U.S. GAAP Generally accepted accounting prin ciples in the United States of America.Underwriters The BRLMs and the Syndicate Members.Underwriting Agreement The agreement among the Underwriters and the Company to be enteredinto on or after the Pricing Date.
  36. 36. VCFs Venture Capital Fund as defined an d registered with SEBI under the SEBI(Venture Capital Fund) Regulations, 1996, as amended from time to time.viIndustry/Company Related TermsTerm DescriptionGJEPC Gem & Jewellery Export Promotion CouncilSEEPZ Santacruz Electronic & Export Processing ZoneSEZ Special Economic ZoneDTC The Diamond Trading Company LimitedDTA Domestic Tariff AreaITAT Income Tax Appelate TribunalCIT(A) Commissioner of Income Tax (Appeal)DGFT Director General of Foreign TradeMIDC Maharashtra Industrial Development CorporationAbbreviationsAbbreviation Full FormAS Accounting Standards as issued by the Institute of Chartered Accountantsof India.BSE The Bombay Stock Exchange Limited.CAGR Compound Annual Growth Rate.CDSL Central Depository Services (India) Limited.
  37. 37. EEFC Exchange Earners Foreign CurrencyEGM Extraordinary general meeting.EOU Export Oriented UnitEPS Earnings per share.EPZ Export Processing ZoneEXIM Policy Export Import Policy of IndiaFCNR Account Foreign Currency Non-Resident Account.FEMA The Foreign Exchange Management Act, 1999, as amended, and theregulations framed thereunder.FII Foreign Institutional Investor (as defined under the Securities andExchange Board of India (Foreign In stitutional Investors) Regulations,1995, as amended) registered with SEBI under applicable laws in India.FIPB Foreign Investment Promotion Board.FOB Free on boardFSI Floor Space IndexHUF Hindu Undivided Family.IEC Importer Exporter CodeI-SEC ICICI Securities Limited.LIBOR London Interbank Issued Rate.NAV Net Asset Value.NRE Account Non-Resident External Account.NRO Account Non-Resident Ordinary Account.NSDL National Securities Depository Limited.NSE The National Stock Exchange of India Limited.p.a. per annum.
  38. 38. P/E Ratio Price/Earnings Ratio.PAN Permanent Account Number.PAT Profit after Tax.PBT Profit before Tax.PLR Prime Lending Rate.RBI The Reserve Bank of India.RoNW Return on Net Worth.SICA Sick Industrial Companies (Special Provisions) Act, 1985.UIN Unique Identification Number.viiPRESENTATION OF FINANCIAL AND MARKET DATAFinancial DataUnless indicated otherwise, the financial data in this Draft Red Herring Prospectus is derived from theconsolidated financial statements as of and for the years ended March 31, 2001, 2002, 2003, 2004 and2005and the six months ended September 30, 2005 prep ared in accordance with Indian GAAP and theCompanies Act, restated in accordance with applicable SEBI Guidelines and included in this Draft RedHerring Prospectus. Unless indi cated otherwise, the operational data in this Draft Red HerringProspectus ispresented on a consolidated basis. In accordance with SEBI requirem ents, we have also presented inthisDraft Red Herring Prospectus unconsolidated financial statements of the Company as of and for theyears
  39. 39. ended March 31, 2001, 2002, 2003, 20 04 and 2005 and the six months en ded September 30, 2005,preparedin accordance with Indian GAAP and the Companies Act and restated in accordance with applicableSEBIGuidelines.The Company’s fiscal year commences on April 1 and en ds on March 31, so all references to a particularfiscal year are to the twelve-month period ended March 31 of that year. In this Draft Red HerringProspectus, any discrepancies in any table between the total and the sums of the amounts listed aredue torounding off.There are significant differences between Indian GAAP and U.S. GAAP; accordingly, the degree to whichthe Indian GAAP financial statements (consolidated or unconsolidated) included in this Draft RedHerringProspectus will provide meaningful information is entir ely dependent on the reader’s level of familiaritywith Indian accounting practices, Indian GAAP, the Companies Act and SEBI Guidelines. Any reliance bypersons not familiar with Indian accounting practices, Indian GAAP, the Companies Act and SEBIGuidelines on the financial disclosures presented in this Draft Red Herring Pros pectus shouldaccordinglybe limited. The Company has not attempted to quantify those differences or their impact on thefinancialdata included herein, and the Company urges you to co nsult your own advisors regarding suchdifferencesand their impact on our financia l data. For more information on these differences, see “Summary ofSignificant Differences between Indi an GAAP and U.S. GAAP”, which ap pears on page 179 of this DraftRed Herring Prospectus.
  40. 40. Currency of PresentationAll references to “Rupees” or “Rs.” or “INR” are to Indian Rupees, the official currency of the Republic ofIndia. All references to “U.S.$” or “U.S. Dollar(s)” ar e to United States Dollars, the official currency oftheUnited States of America, “JPY” Japanese Yen the official currency of Japan, “BHAT” official currency ofThailand, “RENIMBI” official currency of Republic of China, “Dhirams” official currency of UnitedArabic Emirates.This Draft Red Herring Prospectus contains translations of certain U.S. Dollar, Japanese Yen, Thai Bahtand other currency amounts into Indian Rupees (and ce rtain Indian Rupee amounts into U.S. Dollars)thathave been presented solely to comply with the requirements of Clause of the SEBI Guidelines.These convenience translations should not be construed as a representation that those Indian Rupee orU.S.Dollar or other amounts could have been, or could be, converted into Indian Rupees, as the case maybe, atany particular rate, the rate stated below or at all.Except as otherwise stated in this Draft Red Herring Prospectus, all translations from Rupees to U.S.Dollars and from U.S. Dollars to Rupees contained in this Draft Red Herring Pros pectus is as per the RBIReference Rate on September 30, 2005, which was Rs.43.99 per U.S.$1.00.Market DataUnless stated otherwise, industry data used throughout this Draft Red Herring Pr ospectus has beenobtained
  41. 41. from industry publications. Industry publications gene rally state that the information contained in thosepublications has been obtained from sources believed to be reliable but that their accuracy andcompletenessare not guaranteed and their reliability cannot be assured. Although we be lieve industry data used inthisDraft Red Herring Prospectus is reliable, it has not been verified by any independent source.viiiFORWARD-LOOKING STATEMENTSThis Draft Red Herring Prospectus contains certain “forward looking statements ”. These forward lookingstatements can generally be identified by words or phrases such as “will”, “aim”, “will likely result”,“believe”, “expect”, “will continue”, “anticipate”, “estimate”, “intend”, “plan”, “contemplate”, “seekto”,“future”, “objective”, “goal”, “project”, “should”, “will pursue” and similar expressions or variations ofsuch expressions.Similarly, statements that describe the Company’s objectives, strategies, plans or goals are also forward-looking statements. All forward lookin g statements are subject to risks, uncertainties and assumptionsaboutus that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement.Important factors that could cause actual results to di ffer materially from our expectations include,amongothers:
  42. 42. • General economic and busine ss conditions in India;• A decrease in the availability and an increase in the price of diamonds and other materials;• The ability to successfully implement our expansion strategy and manage our expanded operations;• The ability to manage our growth and integrate our operations;• Increasing competition in the diamonds and jewe llery manufacturing and retail businesses;• The ability to successfully expand our product offerings and integrate our existing product offerings;• Demand for our diamonds and jewellery products;• The ability to retain existing customers or encourage repeat purchases;• Consumer tastes and preferences for diamonds and fine jewellery;• Changes in the value of the Indian Rupee and other curre ncy changes; and• Changes in the Indian and international interest rates.For further discussion of factors that could cause our actual results to differ, see the sections “RiskFactors”,“Business” and “Management’s Discussion of Financial Condition and Results of Operations” beginningonpages ix, 52 and 186, respectively, of this Draft Red Herring Prospectus.Neither the Company or its directors and officers or any Underwriter, nor any of their respectiveaffiliateshas any obligation to update or otherwise revise any statements reflecting circumstances arising afterthedate hereof or to reflect the occurrence of underlying events, even if the underlying assumptions do notcome to fruition. In accordance with SEBI requirements, the Company and the BRLMs will ensure thatinvestors in India are informed of material developments until such time as the grant of li sting andtradingpermission by the Stock Exchanges for the Equity Shares allotted pursuant to the Issue.
  43. 43. ixRISK FACTORSAn investment in the Equity Shares involves a high degree of risk. You should carefully consider allinformation in this Draft Red Herring Prospectus, in cluding the risks and uncertainties described below,before making an investment in the Equity Shares. To obtain a complete understanding of the Company,you should read this section in conjunction with the sections entitled “Bus iness” and “Management’sDiscussion and Analysis of Financial Conditions and Results of Oper ations” beginning on pages 52 and186 of this Draft Red Herring Prospectus as well as ot her financial information contained in this DraftRedHerring Prospectus. If any of the following risks or any of the other risks and uncertainties discussed inthisDraft Red Herring Prospectus actually occur, our business, financial condition an d results of operationscould suffer, the trading price of our Equity Shares co uld decline, and you may lo se all or part of yourinvestment.Internal Risk FactorsA decrease in the availability or an increase in the price of diam onds may make it difficult for us toprocure enough diamonds at competitive prices to supply our customers.The supply and price of rough (uncut and unpolished) diamonds in th e global market have been andcontinue to be significantly infl uenced by a small number of diam ond mining firms, including TheDiamond Trading Company Limited (“DTC”), the rough diamond marketing arm of the De Beers group.
  44. 44. We currently source a significant percentage of our supply of rough diamonds th rough one of ourPromotergroup companies, Digico Holdings Limited (“Digico”), wh ich enjoys a “sightholder” status with the DTC.In fiscal 2005 and the six months ended September 30, 2005, rough diamonds sourced from DTCconstituted approximately 25.00% and 20.00% of our total ro ugh diamond procurement cost. As aresult,any decisions made to restrict the supply of roug h diamonds by the DTC could substantially impair ourability to procure diamonds at reasonable prices. We source our remaining rough diamondrequirementsthrough secondary market purchases. The availability and price of diamonds may fluctuate dependingonthe political situation in diamond-pr oducing countries. Sustained interruption in the supply of roughdiamonds, an overabundance of supply or a substantial change in our relationship with the DTC andotherdiamond mining and wholesale trading firms, including the loss of Digico’s sightholder status, couldadversely affect us. A failure to secure diamonds at reasonable commercial prices and in sufficientquantities would lower our revenues and adversely impact our results of operations. In addition,increasesin the price of diamonds may advers ely affect consumer demand, which could cause a decline in oursales.There may be conflicts of interest between us and certain of our Promoter group companies.The business and operations of certain of our Promoter group companies th at belong to the ChetanChoksigroup of companies described on page 98 of this Draft Red Herring Prospectus are controlled by Mr.Chetan Choksi, brother of our Promoter Mr. Mehul C. Choksi. Mr. Mehul C. Choksi does not exercise anycontrol over the business and opera tions of these companies. These Chetan Choksi group companiesare
  45. 45. also engaged in the diamond and jewellery business, although their operations and markets have untilnowbeen outside India. There can be no assurance that any of these Chetan Chok si group companies willnotcompete with us in the Indian or international market s or that the business interests of thesecompanies willnot conflict with ours.In addition, both our operations and the operations of the Chetan Chok si group companies aresignificantlydependent on the rough diamonds procured from DTC through Digico as a sightholder with DTC. OurPromoter Mr. Mehul C. Choksi does not have any direct control over the operations of Digico, althoughheis a director of Digico. Both the Company and Diminco N.V. (“Diminco”) were sightholders with DTCuntil 2002, when, pursuant to DTC initiatives for the consolidation of its a llocation structure tosightholdersand to capitalize on potential operational benefits from a consolidated sightholder status, thesightholderstatus of the Company and Diminco we re consolidated into Digico as th e single sightholder for both ouroperations as well as the operations of the Chetan Choksi group companies. However, operationally wecontinue to place our rough diamond orders directly with DTC, and receive consignments directly fromandpay for such consignments di rectly to, DTC. As a result, any decreas e in DTC allocation to Digico as theconsolidated sightholder may adversely affect the allocation of rough diamonds between our operationsandthe operations of the Chetan Chok si group companies. The alloca tion of the DTC diamonds sourcedthrough Digico between our operations and the operations of the Chetan Choksi group companies variesfrom period to period, depending on th e requirements of the respective oper ations. In fiscal 2003,2004 and
  46. 46. x2005 and in the six months ended September 30, 2005, approximately 50 .95%, 51.52%, 52.37% and43.13%, respectively, of the total DTC rough diamonds sourced through the Digico sight was used in ouroperations. There can be no assu rance that the allocation of rough diamonds in such proportion willcontinue in the future or that ther e will be no conflicts of interest in such allocation between us andtheChetan Choksi group companies.An inability to manage our growth and integrate our operations pursuant to our recent corporaterestructuring could disrupt our busi ness and reduce our profitability.We have experienced significant growth in recent years and expect our busine ss to grow significantlyespecially in view of our proposed expansion plans for retail operations. We expect this growth and theexpansion of our retail operations as well as the recent amalgamation of certain of our Promoter groupcompanies, Gemplus Jewellery India Limited (“Gemplu s”), Prism Jewellery Private Limited (“Prism”) andGiantti Jewels Private Limited (“Giantti”) into the Co mpany with effect from April 1, 2005, to placesignificant demands on us. To effectively manage the integration of our operatio ns pursuant to therecentmerger and our future expansion plans, we will need to further strengthen and integrate our existingoperational and financial systems and managerial controls and procedures, which include inventorymanagement, customer support, operational, financia l and managerial controls, reporting proceduresandtraining, supervision, retention and management of our employees. In particular, continued expansionincreases the challenges involved in:• maintaining high levels of customer satisfaction;• recruiting, training and retaining sufficien t skilled management and marketing personnel;
  47. 47. • adhering to quality and process execution st andards that meet customer expectations;• developing and preserving a uniform culture, values and work envi ronment in our operations; and• developing and improving our internal administrative infrastructure, particularly our financial,operational, communications and other internal systems.An inability to manage our expanded operations or maintain and integrate our operations pursuant toourrecent corporate restructuring could adversely affect our business, financial condition and results ofoperations.Our business and future results of operations may be adversely affected if we are unable to implementour expansion strategy or successfully manage our expanded retail operations.As part of our growth strategy, we intend to set up additional diamond and jewellery manufacturingfacilities at Mumbai and at the pr oposed Gems and Jewellery Special Economic Zone in Hyderabad andalso continue to expand our retail operations. Our expansion plans ar e subject to various potentialproblemsand uncertainties, including changes in economic conditions, delays in completion, cost overruns, thepossibility of unanticipated future regulatory restrict ions and diversion of mana gement resources.Therecan be no assurance that we will comp lete any or all of our proposed expansion plans. There can alsobe noassurance that the proposed facilities will achieve the production levels that we expect or that we willbeable to achieve our targeted return on investment on these projects. We anticipate that we will incurcapitalexpenditure of approximately Rs.999.70 million for the development of our proposed diamond andjewellery manufacturing facilities and for the proposed expansion of our retail operations.
  48. 48. In addition to the net proceeds of this Issue and our internally genera ted cash flow, we may need othersources of financing to meet our capital expenditure and working capital requirements, which mayincludeentering into new debt facilities with lending institutions or raising additional debt in the capitalmarkets. Ifwe decide to raise additional funds through the incurrence of debt, our interest obligations will increase,andwe may be subject to additional covenants, which could further limit our ability to access cash flowsfromour operations. Such financings could cause our debt to equity ratio to increase or require us to createcharges or liens on our assets in favor of lenders. We cannot assure you that we will be able to secureadequate financing in the fu ture on acceptable terms, in time, or at all. Our fa ilure to obtain sufficientfinancing could result in the delay or abandonment of these projects. Our business and future resultsofoperations may be adversely affected if we are unable to implement our expansion strategy orsuccessfullymanage our expanded retail operations.Our proposed expansion plans for our re tail operations may not be successful.xiThe growth of our retail operations , whether directly or through the op erations of our subsidiaries,jointventures and associate companies, will continue to be dependent principally upon, the opening of newstores and capitalizing on our existing marketing and distribution network, increased sales volume andprofitability from our existing and new stores, franchises and other distribution and sellingarrangements.The ability to operate our existing and new stores profitably is subject to various contingencies, many of
  49. 49. which are beyond our control. These contingencies include our ability to secure suitable locations forouroutlets on a timely basis and on satisfactory terms, our ability to hire, train and retain qualifiedpersonneland the successful integration of our new outlets wi th our existing marketing and distribution network.There can be no assurance that suitable locations will be available for our proposed outlets or that ourproposed expanded retail operations will be successfully implemented or inte grated with our existingoperations. There is no assurance that we will be able to achieve the targeted sales levels andprofitabilitymargins for our newly opened stores and outlets or that we will be able to achieve our targeted returnoninvestment from our proposed retail operations. The costs associated with acquiring, assimilating andopening new stores may adversely affect our profitability. In addition, an inability to continue ourexistingarrangements with host stores such as shopping ma lls and department stores where we currently haveoutlets could adversely affect our retail operations and our business. Furthermore, lease arrangementswithour host stores are typically medium term leases and there can be no assurance that such leases willcontinue to be renewed, or, if renewed, will be on existing or comparable terms. Certain of these leasearrangements also give our host stores termination righ ts based on certain performan ce and otherfactors.Our business is dependent on a continuing relationship with our customers.Our business is dependent on certain market segmen ts, including wholesalers, distributors and retailjewelers. Our top 10 customers pr ovided 41.85% and 39.07% of our in come from sales of products infiscal 2005 and the six months en ded September 30, 2005, respectively. Furthermore, our customerspurchase our diamonds and diamond jewellery under specific purchase orders raised from time to timeand
  50. 50. we do not have any long-term co ntracts with our customers, nor are our customers subject to anycontractual provisions or other restrictions that preclude them from purchasing products from ourcompetitors. Our business and results of operations will be adversely affected if we are unable tomaintainand or further develop a continuing relationship with our customers. The loss of a significant customeror anumber of significant customers may have a material adverse effect on our results of operations.Our substantial indebtedness and the conditions and restrictions impos ed by our financing agreementscould adversely affect our ability to co nduct our business and operations.As of September 30, 2005, we had tota l debt of approximately Rs.8,350 mi llion. In addition, we mayincuradditional indebtedness in the future. Our indebt edness could have several important consequences,including but not limi ted to the following:• a portion of our cash flow may be used towards repayment of our existing debt, which will reducethe availability of our cash flow to fund working capital, capita l expenditures, acquisitions andother general corporate requirements;• our ability to obtain additional financing in the future at reasonable terms may be restricted;• fluctuations in market interest rates may affect the cost of our borrowings, as most of ourindebtedness are at variable interest rates;• there could be a material adverse effect on our business, financial condition and results ofoperations if we are unable to service our inde btedness or otherwise comply with financial and
  51. 51. other covenants specified in the financing agreements; and• we may be more vulnerable to economic downturns, may be limited in our ability to withstandcompetitive pressures and may have reduced flexibility in responding to changing business,regulatory and economic conditions.Our financing arrangements are secured by a pari passu charge on our fixed assets and current assetswhichinclude inventory and receivables. Many of our financing agreements also include conditions andxiicovenants that require us to obtain lender consents pr ior to carrying out certain ac tivities and enteringintocertain transactions. Failure to obtain these consents could have significant cons equences on ourbusinessand operations. Specifically, under certain circumstance s, we require, and may be unable to obtain,lenderconsents to incur additional debt, issue equity, change our capital structure, increase or modify ourcapitalexpenditure plans, undertake any expansion, make any corporate investments or in vestment by way ofsharecapital or debentures, lend or advance funds, pr ovide additional guarantees, change our managementstructure, or merge with or acquire other companies, whether or not there is any failure by us tocomplywith the other terms of such agreements. Under certain of these agreements , in an event of default,we arealso required to obtain the consent of the relevant lender to pay dividends and the relevant lender alsohasthe right to appoint a director on the Company’s Board. In additio n, under certain of our financingarrangements, our lenders are entitled to appoint nominee directors on our Board.
  52. 52. We believe that our relationships with our lenders are good, and we have in the past obtained consentsfromthem to undertake various actions and have informed them of our activities from time to time.Compliancewith the various terms is, however, subject to interpretation and we cannot assure you that we haverequested or received all consents from our lenders th at are required by our financing documents. As aresult, it is possible that a lender could assert that we have not complied with all terms under ourexistingfinancing documents. Any failure to comply with the requirement to obtain a consent, or othercondition orcovenant under our financing agreements that is not waived by our lenders or is not otherwise cured byus,may lead to a termination of our credit facilities, acceleration of all am ounts due under such facilitiesandtrigger cross default provisions under certain of our other financing agreements, and may adverselyaffectour ability to conduct our business and operations or implement our business plans.There are various regulatory and othe r procedures that are required to be completed with respect totherecent amalgamation of certain of our gr oup companies with the Company.Pursuant to the scheme of amalgamation sanctioned by the High Court of Judicature at Bombay by itsorderdated September 30, 2005, three of our group co mpanies, Gemplus Jewellery India Limited, PrismJewellery Private Limited and Giantti Jewels Private Li mited were merged into the Company with effectfrom April 1, 2005. The order of the High Court of Judicature at Bombay dated September 30, 2005sanctioning the scheme of amalgama tion was filed with the Registrar of Companies, Maharashtra, on
  53. 53. November 7, 2005. Pursuant to such order, an aggregate of 9,988,495 Equity Shares of the Companywereissued to the existing shareholders of Gemplus, Pris m and Giantti on October 14, 2005 and all rights,dutiesand obligations of Gemplus, Prism and Giantti stood transferred to the Company wi th effect from April1,2005. There are, however, various regulatory and other procedures that are required to be completedwithrespect to such scheme of amalgamation and the transfer of the assets, properties, regulatory approvalsandlicenses, employees and employee benefit schemes and contractual arrangements of Gemplus, PrismandGiantti to the Company pursuant to such scheme of amalgamation. There can be no assurance that wewillcomplete any or all of such procedur es and proceedings prior to the completion of this Issue or at all.We have high working capital requirements. If we experience insufficient cash flows to meet requiredpayments on our debt and working ca pital requirements, there may be an adverse effect on our resultsofoperations.Our business requires a significant amount of working capital. In many cases, significant amounts of ourworking capital are required to finance the purchase of raw materials in the form of rough diamondsandgold and for maintaining our distribution and retail ou tlets. Moreover, we may need to incur additionalindebtedness in the future to satisfy our working cap ital needs. Our working cap ital requirements arealsoaffected by the significant credit lines that we typically extend to our customers in line with industrypractice. All of these factors have resulted, or may result, in increases in the amount of our receivablesand
  54. 54. short-term borrowings. There can be no assurance that we will continue to be successful in arrangingadequate working capital for our existing or expanded operations, which may adversely affect ourfinancialcondition and results of operations.We may not succeed in continuing to establish our brands and branded products, which would preventus from acquiring additional cust omers and increasing our sales.A significant component of our business strategy is the continued establishment and promotion of ourexisting brands. In addition, while we are the owners of most of the brands under which we sell ourbranded jewellery lines, we also sell our jewellery products under the Nakshatra and Asmi brands thatarexiiicurrently owned by DTC. There can be no assurance that we will be permitted to continue to sell ourjewellery products under these or any other brands ow ned by DTC. Due to the competitive nature ofthediamonds and fine jewellery industry, if we do not co ntinue to sustain and furthe r develop our brandequityand branded product lines, we may fail to build the cr itical mass of customers required to substantiallyincrease our sales. Promoting and positioning our brands will depend largel y on the success of ourmarketing and merchandising efforts and our ability to provide a consistent, high quality customerexperience. To promote our brands and branded products, we have in curred and will continue to incursubstantial expense related to advertising and other marketing effort s as well as in relation to ourdistribution channels and retail outlets. Our failure to provide our customers with high qualityproducts andexperiences for any reason could substantially harm our reputation. The failur e of our brand promotionactivities could adversely affect our ability to attract new customers and maintain customerrelationships,
  55. 55. and, as a result, substantially harm our business and results of operations.We face significant competition in our business from Indian and internationa l diamond and jewellerymanufacturing and retailing companies.We sell our diamonds and jewellery products in highly competitive markets, and competition in thesemarkets is based primarily on the quality, design, availability and pricing of such products. To remaincompetitive in our markets, we must continuously strive to reduce our proc urement, production anddistribution costs and improve our operating efficiencies . If we fail to do so, ot her producers ofdiamondsand jewellery may be able to sell their products at prices lower than our prices, which would have anadverse affect on our market share and results of operations.We compete with various diamond and jewellery manufacturing companies including companies thataresightholders with DTC. Current and potential competitors include independent jewellery stores, retailjewellery store chains, online retailers that sell jewelle ry, department stores, chain stores and massretailers,and discounters and wholesale diamond traders that may enter th e retail markets in the future.Because ofthe continued focus on branding and retail sales un der DTC’s Supplier of Choice program and the highermargins associated with branded jewellery sales as compared to the sale of processed diamonds, otherDTCsightholders may enter the business of retailing of branded jewellery. In addition, any deregulation inrestrictions on foreign ownership in the retail sector by the Government of India could bring newcompetition to the Indian market. Some of our current and potential competitors have advantagesover us,including longer operating histories, greater bran d recognition, existing cust omer relationships, and
  56. 56. significantly greater financial, marketing and other resources, all of which could have a material adverseeffect on our results of operations and financial condition. They may also benefit from greatereconomiesof scale and operating efficiencies. There can be no assurance that we can contin ue to effectivelycompetewith such competitors in the future, and failure to co mpete effectively may have an adverse effect onourbusiness, financial condition and results of operations.The success of our business may de pend on our ability to successfully expand our product offerings andintegrate our existing product offerings.Our ability to significantly increase our sales and main tain and increase our profit ability may depend onourability to successfully expand our product lines beyond our current offe rings as well as to successfullyintegrate existing product lines from our subsidiaries, jo int ventures and associate companies. If weoffer anew product category that is not accepted by consumer s or fail to successfully integrate productofferingsfrom our subsidiaries, joint ventures and associate companies, our brand equity and reputation couldbeadversely affected, our sales may fall short of expecta tions and we may incur subs tantial expenses thatarenot offset by increased net sales.If our manufacturing facilities are interrupted for any significant period of time, our business andresults of operations would be adversely affected.Our success depends on our ability to successfully manufacture and de liver our products to meet our
  57. 57. customer demand. Our diamond cutting and polishing facilities and our jewellery manufacturingfacilitiesare susceptible to damage or interrup tion from human error, fire, flood, power loss, terrorist attacks,acts ofwar, break-ins, earthquake and similar events. Any interruptions in our manufacturing operations foranysignificant period of time could damage our reputation and brand and adversely affect our business andresults of operations.xivIf we are unable to accurately ma nage our inventory of fine jewellery, our reputation and results ofoperations could suffer.Substantially all of the fine jewellery we sell is from our physical inventory. Changes in consumer tastesfor these products subject us to significant inventory risks. The demand for specific products canchangebetween the time we manufacture an item and the date it is shipped to our retail outlets. If we under-stockone or more of our products, we may not be able to obtain additional units in a timely manner, whichcouldadversely affect our reputation, business and results of operations. In addition, if demand for ourproductsincreases over time, we may be forced to increase invent ory levels. If one or more of our productsdoes notachieve widespread consumer acceptance, we may be required to take significant inventorymarkdowns, ormay not be able to sell the product at all, which would substantially harm our results of operations.Our results of operations could be adversely affected by strikes, work stoppages or increased wage
  58. 58. demands by our employees or our inability to attract and retain skilled personnel.As of September 30, 2005, we had more than 2,300 employees including contract employees, of whichmore than 1,800 employees were employed at our manufacturing facilities and more than 250employeeswere employed in our retail operations. Currently, the Company’s employees are not represented byanylabor unions. While we consider our current labor relations to be good, there can be no assurance thatwewill not experience future disruptions to our operations due to disputes or other problems with ourworkforce, which may adversely affect our business and results of operations.We typically enter into contracts with independent contractors for our contract employees. All contractemployees engaged at our manufactur ing facilities and retail operations are assured minimum wagesthatare fixed by the respective state governments. Any upward revision of wages required by such stategovernments to be paid to such contract employees, or offer of permanent employment or theunavailabilityof the required number of contract employees, may adversely affect our business and results ofoperations.Our ability to meet future business challenges depends on our ability to attract and recruit skilledpersonnelfor our diamond cutting and polishing operations and for our retail marketing effort s, and we facestrongcompetition to recruit and retain skilled and professionally qualified staff, especially for our retailoperations. The loss of key personnel or any inability to manage the attr ition levels in differentemployee
  59. 59. categories may materially and adversely impact our business, our ability to grow and our control overvarious business functions.We may undertake strategic acquisitions or investments, which may pro ve to be difficult to integrateandmanage or may not be successful.In the future, we may consider maki ng strategic acquisitions of other diamond or jewellerymanufacturingcompanies whose resources, capabilities, brand equity and strategies are complementary to and arelikely toenhance our business operations. It is possible that we may not identify suitable acquisition orinvestmentcandidates, or that if we do identify suitable candida tes, we may not complete th ose transactions ontermscommercially acceptable to us or at all. The inability to identify suitable acquis ition targets orinvestmentsor the inability to complete such transactions may adversely affect our competitiveness or our growthprospects.In addition, our ability to complete acquisitions will depend on the availability of both suitable targetbusinesses and acceptable financing. Any future acquisitio ns may result in a potentially dilutive issuanceofadditional equity securities, the incurrence of additional debt or in creased working capitalrequirements.Any such acquisition may also result in earnings dilution, the amortization of good will and otherintangibleassets or other charges to operations, any of which could have a material adverse effect on ourbusiness,
  60. 60. financial condition or results of op erations. Such acquisitions could involve numerous additional risks,including, without limitation, difficult ies in the assimilation of the operations, products, services andpersonnel of any acquired company and could disrupt our ongoing business, distract our managementandemployees and increase our expenses. There can be no assurance that we will be able to achieve thestrategic purpose of such acquisition or operational integration or our targeted return on investment.xvIf we are not able to renew or maintain our statutory and regulatory permits and approvals required tooperate our business, it may have a mate rial adverse effect on our business.We require certain statutory and regulatory permits and approval s to operate our business. In thefuture, wewill be required to renew such permits and approv als and obtain new permits and approvals for anyproposed operations. While we believe that we will be able to renew or obtain such permits andapprovalsas and when required, there can be no assurance that the relevant authorities will issue any of suchpermitsor approvals in the time-frame anticipated by us or at all. For exam ple, letter of permission from SEZauthority. Failure by us to renew, ma intain or obtain the required permits or approvals may result in theinterruption of our operations and ma y have a material adverse effect on our business, financialconditionand results of operations. For further information, please refer to the section “Government and OtherApprovals” on page 209 of this Draft Red Herring Prospectus.The loss of the services of our Chairman or other key management personnel could adversely affect ourbusiness.
  61. 61. Our success depends in part on the continued services of our Chairman, Mr. Mehul C. Choksi and otherkeymembers of senior management. Our future success is also dependent upon our ability to attract andretainqualified senior and mid-level managers for our management team. If we lose the services of key seniormanagement personnel, it may be difficult to find replacement personnel in a timely manner. Mr.Mehul C.Choksi, in particular, is closely involved in the overall strategy, directio n and management of ourbusiness.The loss of the services of Mr. Mehul C. Choksi or any other members of senior management couldimpairour ability to implement our strategy and may have an adverse effect on our business and results ofoperations. In addition, if any of these key executives or employees joins a competitor, we could incuradditional expenses to recruit and train personnel. Our inability to retain and attract qualifiedpersonnel inthe future, or delays in hiring additional personnel, could make it difficult to meet key objectives, suchascurrent and future expansion of our business.Members of our Promoter and Promoter Group will continue to retain majority control in the Companyafter the Issue, which will enable them to influence the outcome of matters submitted to shareholdersforapproval. We may continue to enter in to transactions with related parties.Upon completion of the Issue, members of the Pr omoter and Promoter group will beneficially ownapproximately 65.00% of the Company’ s post-Issue equity share capital. As a result, the Promoter andPromoter Group will have the ability to control our business including matters relating to any sale of allor
  62. 62. substantially all of our assets, the timing and distribution of dividends and the election or termination ofappointment of our officers and directors. This control could delay, defer or prevent a change incontrol ofthe Company, impede a merger, consolidation, takeover or other business combination involving theCompany, or discourage a potential acquirer from making a tender offer or otherwise attempting toobtaincontrol of the Company even if it is in the Company’s best interest. In addition, for so long as thePromoterand the Promoter Group continues to exercise significant control over th e Company, they may influencethematerial policies of the Company in a manner that could conflict with the interests of our othershareholders. The Promoter and Prom oter Group may have interests that are adverse to the interestsof ourother shareholders and may take positions with which we or our other shareholders do not agree.Certain transactions take place be tween the Company and other Promoter Group companies, on anarm’slength basis, during the ordinary course of our bu siness activities. During fiscal 2005, the Companypurchased goods and services of an aggregate va lue of Rs.611.58 million from other Promoter groupcompanies. In addition, as of March 31, 2005, Rs.352.22 million was due to the Company from certainPromoter group companies shown under sundry debtors and the Company owed approximatelyRs.24.23million to other Promoter group companies shown under sundry creditors. The Company also hasinvestments in other Promoter group companies amount ing to Rs.30.65 million. We cannot be surethat theCompany will be able to collect any amounts due to the Company from other members of thePromotergroup on time or at all or that the Company may not be required to pay amounts due from it without
  63. 63. adequate notice or on demand. The Co mpany may enter into additional transactions with its affiliatesin thefuture. There can be no assurance th at the terms of such transactions with its affiliates will benefit theCompany.There can be no assurance that the Company will pay dividends to its shareholders in the near future.xviThe Company has not paid any dividends in the last five fiscal years an d there can be no assurance thatdividends will be paid in the near future. The declaration and payment of any dividends in the futurewillbe recommended by the Company’s Board of Directors, in its discretion, and will depend on a number offactors, including Indian legal requirements, its earnings, cash generated from operations, capitalrequirements and overall financial condition.Our insurance may not be adequate to protect us against all potential losses to which we may besubject.We maintain insurance for standard fire and special perils policy an d jewellers’ block insurance policy,which provides insurance cover against loss or damage by fire, explosion, lightning, riot and strikes,malicious damage, terrorism, burglary, theft, robbery and hold up risks, which we believe is inaccordancewith customary industry practices. Our policies also insure against loss or damage suffered duringtransit ofour stock and stock in trade except cash and currency notes under certain circumstances. However, theamount of our insurance coverage ma y be less than the replacement cost of all covered property andmay
  64. 64. not be sufficient to cover all financial losses that we ma y suffer should a risk materialize. Further, therearemany events that could significantly impact our operations, or expose us to third-party liabilities, forwhichwe may not be adequately insured. If we were to incur a significant liability for which we were not fullyinsured, it could have a material adverse effect on our results of operations and financial position.Failure to adequately protect our in tellectual property could substantia lly harm our business andresultsof operations.We have registered or have applied for registration of 24 trademarks in India in connection with ourbranded jewellery lines. Certain of these trademarks and brand names are currently used by us inconnection with our jewellery business. For furthe r information, see “Business – Our BrandedJewellery;Intellectual Property” and “Government and Other Appr ovals” on pages 68 and 209 of this Draft RedHerring Prospectus, respectively. Our results of operations may be adversely affected in the event thatwedo not have continued access to the use of these brands. In addition, two of the significant brands thatwesell our jewellery products under, Nakshatra and Asmi, are owned by DTC and we currently sell ourjewellery products under these brands under permission from DTC. There can be no assurance that wewillbe permitted to continue to sell our jewellery products under these or any other brands owned by DTC.The Company is involved in certai n legal and regulatory proceedings that, if determined against theCompany, could have a material adverse impact on the Company.
  65. 65. The Company is party to various legal proceedings, including recovery su its, customs duty cases, salestaxcases and income tax proceedings. The income tax liability in dispute aggregates to approximatelyRs.30.03 million. These proceedings are pending at different levels of adjudication before variouscourts,tribunals, enquiry officers, and appellate tribunals an d if determined against us, could have a materialadverse impact on our business, financial condition and results of operations. For further details ontheseproceedings, see the section “Outstanding Litigation” on page 202 of this Draf t Red Herring Prospectus.There are certain legal proceedings against the Comp any’s Directors, Promoters and group companies.The Company’s Directors, Promoters and group companies are parties to certain legal proceedingsinitiatedby or against such parties. These proceedings are pending at different levels of adjudication beforevariouscourts, tribunals, enquiry officers, and appellate tribunals. For more in formation regarding legalproceedings against the Directors, Pr omoters and group companies, see th e section “OutstandingLitigation”beginning on page 202 of this Draft Red Herring Prospectus.We have certain contingent liabilities which may adversely affect our financial condition.As on September 30, 2005, contingent liabilities not provided for aggregated to Rs.491.87 million. Theseincluded liabilities on account of guarantees provided by us to banks and financial institutions ofRs.220.00million, outstanding letters of credit of Rs.139.35 million, bills discounted with banks and financialinstitutions (supported by export related letters of credit) of Rs .100.45 million and income tax liabilityof
  66. 66. Rs.32.07 million. In the event that any of these contingent liabilities materialize, our financial conditionmay be adversely affected. For further information, please see note 3.2 of th e consolidated financialstatements of the Company beginning on page 108 of this Draft Red Herring Prospectus.xviiCertain of the Company’s subsidiaries, joint ventures and associat e companies and Promoter groupcompanies have incurred losse s in recent periods.Certain of the Company’s subsidiaries, joint ventures and associate compan ies and Promoter groupcompanies have incurred losses in recent periods. The table sets forth information relating to suchlosses inthe periods indicated: Year ended March 31,Subsidiaries, Joint Ventures and Associate Companies 200320042005 (Rupees in Millions)Fantasy Diamond Cuts Private Limited (0.01) (0.03) (0.02)CRIA Jewellery Private Limited (1.47) (2.47) (3.38)D’Damas Jewellery (India) Private Limited - (9.77) (72.91)Brightest Circle Jewellery Private Limited - - (1.16)
  67. 67. Fantasy Diamond Cuts Pvt. Ltd., did not have any subs tantial business operatio n till September 30,2005and the losses are attributed to it s fixed overheads. CRIA Jewellery Private Limited operates through ajewellery boutique at Mumbai. CR IA Jewellery Private Limited incurred losses in the financial perioidsspecified above due to significant fi xed overhead costs although sales of its products are on theincrease.The losses in case of D’Damas Jewellery (India) Private Limited and Brightest Circle Jewellery PrivateLimited are mainly on account of heavy advertisement expenditure incurred during the initial years ofbrandpromotion. Till date the company has spent an amount of approximately Rs,80.00 million towardsadvertisement and brand promotion. Initally these expenses were amortis ed over a period of time butdueto change in accounting standards the company had to debit the entire amount spent to profit and lossaccount.Year ended March 31,Promoter Group Companies200320042005 (Rupees in Millions)
  68. 68. Audarya Investments Private Li mited (0.53) (0.04) (1.03)Gitanjali Gold and Precious Limited (0.26) - -Gitanjali Realty Private Limited (0.01) (0.02) (0.02)Maitreyi Impex Private Limited (0.24) (0.04)Mozart Investments Private Limited - (0.54) -Naviraj Estates Private Limited (0.51) (0.07) (0.08)Prism Bullion Private Li mited - (0.03) (0.05)Rohan Mercantile Private Limited (0.03) (0.01)Rohan Diamonds Private Limited (0.02) - (0.01)Trans Expo Trade Private Limited (0.02) (0.04) (0.06)The Promoter group companies specifi ed above do not have any substantial operations and areprimarilyinvestment companies with investments in other grou p companies. The losses incurred by thesecompaniesare primarily on account of fixed expenses relating to its operations. Year ended December 31,In millionsPromoter Group Companies belonging to Chetan Choksi Group ofCompanies200220032004
  69. 69. D’Damas Japan KK - - (6.09) JPYQingdao Diminco Pacific (Manufacturing) Company Limited - (0.11) USD (0.40) USDQingdao Diminco Jinghua Company Limited (0.03) USDD’Damas Japan KK is engaged in the manufacture, import and sales of branded jewellery. The lossesincurred by D’Damas Japan KK is primarily on account of advertisemen t expenditure and the fixednatureof manufacturing overheads which are greater than the current sales volume.xviiiQingdao Diminco Pacific (Manufacturing) Company Limited and Qingdao Diminco Jinghua CompanyLimited operate diamond cutting and polishing facilities. These companies commenced operations intherecent past and are yet to become profitable.For more information, please see “History and Certain Corporate Matters” and “Promoters andPromotersGroup” beginning on pages 70 and 89 of this Draft Red Herring Prospectus.We have in the last 12 months issued Equity Shares at a price which could be lower than the Issue Price.We have in the last 12 months made the following issuances of Equity Shares at a price which could belower than the Issue Price:Date of allotment anddate on which fully
  70. 70. paid upNumber ofEquity SharesIssue priceConsiderationReasons for allotmentOctober 14, 2005 99,88,495 10.00 Consideration otherthan cashIssued and allotted forconsideration other thancash to the shareholdersof Gemplus JewelleryIndia Limited, PrismJewellery Private
  71. 71. Limited and GianttiJewels Private Limitedpursuant to the schemeof amalgamationsanctioned by the HighCourt of Judicature atBombay by its orderdated September 30,2005.October 25, 2005 20,00,000 300.00 NIL Conversion of fullyconvertible debenturespursuant to agreementdated September 22,2005.We have not entered into any definitive agreements to utilize a substan tial portion of the net proceedsofthe Issue.We intend to use the net proceeds of the Issue, among others, for investment in certain of ourSubsidiaries,Joint Ventures and Associate Companies, for capital ex penditure for expansion of our retail operations,forsetting up of additional diamond and jewellery manufacturing facilities and for future acquisitions. See“Objects of the Issue” beginning on page 23 of this Draft Red Herring Prospectus. We have not enteredinto any definitive agreements to ut ilize the net proceeds for such inves tments, and our capitalexpenditure