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NRSM & ASSOCIATES Chartered Accountants

Metro Tower, Suite # 4C, 4 th Floor, 170, C.R. Avenue, Kolkata – 700007 E-mail – caharsha@nrsm.co.in Contact number - +91 8010915059. NRSM & ASSOCIATES Chartered Accountants. XYZLimited.

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NRSM & ASSOCIATES Chartered Accountants

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  1. Metro Tower, Suite # 4C, 4th Floor, 170, C.R. Avenue, Kolkata – 700007 E-mail – caharsha@nrsm.co.in Contact number - +91 8010915059 NRSM & ASSOCIATESChartered Accountants XYZLimited Report onFairValueMeasurementof Compulsory Convertible Debentures as perInd AS 113 as on March 31, 2018 Private & Confidential

  2. FairValueMeasurementof Compulsory Convertible Debentures for XYZ LTD ThisexerciseofvaluationofspecifiedinstrumentsofXYZ LimitedhasbeencarriedoutinaccordancewiththemandategiventousbythemanagementofXYZ LTD.Thesolepurposeoftheexerciseistoservethefairvaluemeasurementof thespecifiedinstruments (Compulsory Convertible Debentures)asperINDAS113. ThisvaluationofthespecifiedinstrumentsofthecompanyissolelybasedontheinformationgivenbythemanagementofXYZ LIMITED tous,anditshouldbeclearlyunderstoodthatwehavenotcarriedoutanyduediligencewhatsoeverofXYZ Labs Limited. ThisvaluationisrequiredbyofXYZ LTD intermsofIndAS113:FairValueMeasurement. OnthebasisoftheInformationsharedby XYZ LTD tous,theFairvaluespecifiedinstrumentsofXYZ LTD ,havingitsofficeatREGISTERED OFFICE099,Indiaason31March2018isasper‘Annexure'. Date:05thJuly2018 Place:Kolkata Confidential_MGLabs_2018

  3. Introduction and Background of the Company • Introduction and Background of the Company • XYZ Limited (hereinafter referred to as ‘the Company’) is a Limited Company registered under Companies Act, 1956 having its registered office at Bangalore. . As per the Memorandum of Association one of the objective clause includes “To carry on molecular diagnostic testing services for genetic diseases and drug metabolism subject to the rules and regulations issued by the Reserve Bank of India from time to time”. • Objective • The Company intends to determine the fair value of Compulsory Convertible Debentures as per IndAS113:FairValueMeasurement. • SCOPE OF WORK • The management would wish to determine the fair value of CCDs of XYZ as on March 31, 2018 to comply with various internal requirements. In the above context, our firm has been requested by the management to carry out valuation. The report has been prepared as of March 31, 2018. • PROCEDURES • The principal sources of information used in performing our assessment included: • Fair valuation report of the equity shares as on March 31, 2018, together with various assumptions used in fair valuation of equity shares, as provided by the management. • Weighted Average Cost of Capital (WACC) as calculated. • Amended and restated Investment Agreement dates 28th Feb’2018, as provided by the management. • Debenture certificate, as provided by the management. • Ind AS 109 – Financial Instruments, Ind AS 113 – Fair Value Measurement, Ind AS 32 – Financial Instruments: Presentation. Confidential_MGLabs_2018

  4. Profile of XYZ • Structure of the Company • XYZLimited is a Limited Company registered under the Companies Act, 1956. It is engaged in the business of molecular diagnostic testing services for genetic diseases and drug metabolism. • Capital Structure of the Company • The capital structure as on March 31, 2018 is as follows: • Authorised capital – 45,00,000 Equity shares of face value of Rs. 10 each amounting to Rs. 4,50,00,000 (as provided by the management of the company) • Paid-up Capital • 25,09,291 Equity shares of face value of Rs. 10 each amounting to Rs. 2,50,92,910. • 1,21,327 equity shares to be converted for convertible debentures issued on the date of valuation. Confidential_MGLabs_2018

  5. Background of the CCDs (1/2) Details of CCDs issued in FY 2017-18: Maturity period: Unless converted earlier in accordance with the terms of the agreement, the investor CCDs will have term of 10 years from the closing date. Coupon rate: 0.0001% per annum. Interest will be payable on quarterly basis, within 15 days from the end of the quarter. Conversion: Each investor CCD shall be converted into Equity Share at anytime during the 10 years from the date of issuance, provided that investor shall exercise its option to convert the investor CCDs only with the prior written consent of the Parent Company. It is accordingly clarified that no investor CCD shall be converted unless approved in writing by the Parent Company. The Parent Company, may at its discretion, and by written notice, require the investor to convert any or all of the investor CCDs at any time during the conversion period. Confidential_MGLabs_2018

  6. Background of the CCDs (2/2) Conversion ratio: The investor CCD shall convert into such number of equity shares arrived at in accordance with the following formula: Number of equity shares = Face value of each CCD being convertedX Number of CCDs being converted 2,592 (India conversion price) Equivalent equity shares: On applying the above conversion ratio on CCDs, the investors are eligible to get following number of equity shares on conversion: Confidential_MGLabs_2018

  7. FairValueMeasurement Definitionoffairvalue–(INDAS113) ThisIndASdefinesfairvalueasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate. IndianAccountingStandard(IndAS)109:FinancialInstruments Objective:-TheobjectiveofthisStandardistoestablishprinciplesforthefinancialreportingoffinancialassetsandfinancialliabilitiesthatwillpresentrelevantandusefulinformationtousersoffinancialstatementsfortheirassessmentoftheamounts,timinganduncertaintyofanentity’s futurecashflows. IndianAccountingStandard(IndAS)32:FinancialInstruments:Presentation Objective–TheobjectiveofthisStandardistoestablishprinciplesforpresentingfinancialinstrumentsasliabilitiesorequityandforoffsettingfinancialassetsandfinancialliabilities.Itappliestotheclassificationoffinancialinstruments,fromtheperspectiveoftheissuer,intofinancialassets,financialliabilitiesandequityinstruments;theclassificationofrelatedinterest,dividends,lossesandgains;andthecircumstancesinwhichfinancialassetsandfinancialliabilitiesshouldbeoffset. Definitions– Afinancialinstrumentisanycontractthatgivesrisetoafinancialassetofoneentityandafinancialliabilityorequityinstrumentofanotherentity. Afinancialassetisanyassetthatis: cash anequityinstrumentofanotherentity; acontractualright:(i)toreceivecashoranotherfinancialassetfromanotherentity;or (ii)toexchangefinancialassetsorfinancialliabilitieswithanotherentityunderconditionsthatarepotentiallyfavourabletotheentity;or Confidential_MGLabs_2018

  8. FairValueMeasurement • (d)acontractthatwillormaybesettledintheentity’s ownequityinstrumentsandis: • anon-derivativeforwhichtheentityisormaybeobligedtoreceiveavariablenumberoftheentity’sownequityinstruments;or • aderivativethatwillormaybesettledotherthanbytheexchangeofafixedamountofcashoranotherfinancialassetforafixednumberoftheentity’sownequityinstruments. • Afinancialliabilityisanyliabilitythatis: • acontractualobligation: • todelivercashoranotherfinancialassettoanotherentity;or • toexchangefinancialassetsorfinancialliabilitieswithanotherentityunderconditionsthatarepotentiallyunfavourabletotheentity;or • acontractthatwillormaybesettledintheentity’sownequityinstrumentsandis: • anon-derivativeforwhichtheentityisormaybeobligedtodeliveravariablenumberoftheentity’sownequityinstruments;or • (ii)aderivativethatwillormaybesettledotherthanbytheexchangeofafixedamountofcashoranotherfinancialassetforafixednumberoftheentity’sownequityinstruments Confidential_MGLabs_2018

  9. FairValueMeasurement CompoundfinancialInstrument– Thetermsofafinancialinstrumentmaybestructuredsuchthatitcontainsboththeequityandliabilitycomponents(theinstrumentisneitherentirelyaliabilitynorentirelyanequityinstrument).Suchitemsaredefinedascompoundinstruments. Acompoundinstrumenttakesthelegalformofasingleinstrument,whilethesubstanceisthatbothaliabilityandaequity instrumentexists. Separatingtheliabilityandequitycomponent–Separationoftheinstrumentintoitsliabilityandequitycomponentsismadeuponinitialrecognitionoftheinstrumentandisnotsubsequentlyrevised.Themethodusedisasfollows: • Anentityrecognisesseparatelythecomponentsofafinancialinstrumentthat createsafinancialliabilityoftheentityand grantsanoptiontotheholderoftheinstrumenttoconvertitintoanequityinstrumentoftheentity. Forexample,abondorsimilarinstrumentconvertiblebytheholderintoafixednumberofordinarysharesofentityisacompoundfinancialinstrument.Fromtheperspectiveoftheentity,suchaninstrumentcomprisestwocomponents:afinancialliability(acontractualarrangementtodelivercashoranotherfinancialasset)andanequityinstrument(acalloptiongrantingtheholdertheright,foraspecifiedperiodoftime,toconvertitintoafixednumberofordinarysharesoftheentity).Theeconomiceffectofissuingsuchaninstrumentissubstantiallythesameasissuingsimultaneouslyadebtinstrumentwithanearlysettlementprovisionandwarrantstopurchaseordinaryshares,orissuingadebtinstrumentwithdetachablesharepurchasewarrants.Accordingly,inallcases,theentitypresentstheliabilityandequitycomponentsseparatelyinitsbalancesheet. Confidential_MGLabs_2018

  10. FairValueMeasurement • IndAS109dealswiththemeasurementoffinancialassetsandfinancialliabilities.Equityinstrumentsareinstrumentsthatevidencearesidualinterestintheassetsofanentityafterdeductingallofitsliabilities.Therefore,whentheinitialcarryingamountofacompoundfinancialinstrumentisallocatedtoitsequityandliabilitycomponents,theequitycomponentisassignedtheresidualamountafterdeductingfromthefairvalueoftheinstrumentasawholetheamountseparatelydeterminedfortheliabilitycomponent.Thevalueofanyderivativefeatures(suchasacalloption)embeddedinthecompoundfinancialinstrumentotherthantheequitycomponent(suchasanequityconversionoption)isincludedintheliabilitycomponent.Thesumofthecarryingamountsassignedtotheliabilityandequitycomponentsoninitialrecognitionisalwaysequaltothefairvaluethatwouldbeascribedtotheinstrumentasawhole.Nogainorlossarisesfrominitiallyrecognisingthecomponentsoftheinstrumentseparately. UndertheapproachdescribedinIndAS109,theissuerofabondconvertibleintoordinarysharesfirstdeterminesthecarryingamountoftheliabilitycomponentbymeasuringthefairvalueofasimilarliability(includinganyembeddednon-equityderivativefeatures)thatdoesnothaveanassociatedequitycomponent.Thecarryingamountoftheequityinstrumentrepresentedbytheoptiontoconverttheinstrumentintoordinarysharesisthendeterminedbydeductingthefairvalueofthefinancialliabilityfromthefairvalueofthecompoundfinancialinstrumentasawhole. • ConversionofaCompoundInstrument- • Onconversionofaconvertibleinstrumentatmaturity,theentityderecognisestheliabilitycomponentandrecognisesitasequity.Theoriginalequitycomponentremainsasequity(althoughitmaybetransferredfromonelineitemwithinequitytoanother).Thereisnogainorlossonconversionatmaturity. Confidential_MGLabs_2018 10

  11. FairValueMeasurement Fair Valuation Hierarchy- To increase consistency and comparability in fair value measurements and related disclosures, this Ind AS establishes a fair value hierarchy that categorizes into three levels (see paragraphs 76-90), the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). • Level 1: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. • Level 2: • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: • (a)  quoted prices for similar assets or liabilities in active markets. • (b)  quoted prices for identical or similar assets or liabilities in markets that are not active. • (c)  inputs other than quoted prices that are observable for the asset or liability, for example: • (i)  interest rates and yield curves observable at commonly quoted intervals; • (ii)  implied volatilities; and (iii)  credit spreads. • (d)  market-corroborated inputs. • Level 3: • Level 3 inputs are unobservable inputs for the asset or liability. • Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. Confidential_MGLabs_2018 11

  12. Annexures Confidential_MGLabs_2018 12

  13. Weighted Average Cost of Capital (WACC) • Unlevered Beta is assumed to be 1.50 to showcase and capture the market risk in the absence of direct peer company data.

  14. InitialRecognitionofCompoundInstrument (Issuer’s perspective) Ind AS 109 have specific guidance on Compound financial instruments. Not all financial instruments are equity or liability. Some, known as compound financial instruments have element of both in a single contract. A bond that is convertible into a fixed number of equity shares at the holder’s option. From the issuer’s perspective, such an instrument comprises 2 components – (i) a financial liability (issuer’s contractual obligation to deliver cash or other financial asset for payment of principal and interest, if not converted) and (ii) an equity instrument (a written call option granting the holder the right, for a specified period of time, to convert it into a fixed number of the entity’s equity shares) The issuer of a non-derivative financial instrument should first evaluate the financial instrument’s terms and determine whether it contains both a liability and an equity component. This evaluation should be done in accordance with the contractual arrangement’s substance and the definitions of financial liability, financial assets and an equity component. If such components are identified, the issuer should account for the components separately as financial liability, financial assets and an equity component. The liability and equity component are presented separately on the balance sheet. The above concept is often described as split accounting. To the extent that the mandatorily convertible bond can be settled by the issue of a fixed number of ordinary shares, that part of the instrument is an equity component. Some mandatory convertible instruments pay no interest or pay interest only if an ordinary dividend is paid (discretionary). This type of instrument has no liability component. Others pay interest until the bond is converted, in which case the issuer allocates part of the consideration received equal to the liability component. Conclusion: Under the given scenario of XYZ LTD, whereby CCD is issued carrying coupon rate of 0.0001% which is negligible, and can be considered as issued without interest. The said instrument does not have any financial liability component as the issuer does not have any contractual obligation to pay any cash for payment of principal or interest if not converted. This is because the instrument is mandatorily convertible at maturity, if conversion option not availed by the holder before maturity. Hence the entire instrument will be classified as an equity instrument as per Ind AS. However, since XYZ is currently preparing its financial statement as per Indian GAAP, hence above accounting is not applicable on XYZ. In future if Ind AS is applicable on XYZ , the Company should look at the said guidance of Ind AS from accounting and disclosure perspective.

  15. Investors’ Perspective Fair value of CCDs:

  16. Investors’ Perspective – Present Value of Interest 16

  17. Investors’ Perspective – assumptions Assumptions used in fair valuation: Fair value of Equity share i.e. Rs. 2,981, based on the fair valuation report as provided by the management. WACC of 18.64% as provided by the management. Fair valuation hierarchy: Level 3 Valuation technique: Income approach - The valuation of CCDs are derived based on the fair valuation of equity shares as on March 31, 2018. The equity shares were valued based on income approach whereby the discounted cash flow method was used to capture the present value of the expected future economic benefit to be derived from the ownership of these investees. Significant unobservable inputs: 1. Long term revenue growth rates, taking into account management experience and knowledge of market conditions of the specific industries. The terminal value of growth rate is 7.5%. 2. Weighted average cost of capital (WACC) determined using a capital asset pricing model is 18.64%. Comment on fair valuation of CCDs: Based on the details and explanations on the CCDs as provided to us, though the term of the CCDs are for 10 years, however the investors have the option to convert them into equity anytime before maturity based on request made by them to the Parent Company and subject to approval of the Parent Company. Further, the conversion ratio of CCDs are fixed at the time of issuance based on conversion factor. Even though the intention of the management may be to hold CCD for a longer period, however considering the right given to investor for conversion at anytime, and considering the coupon rate is negligible (i.e. 0.0001%), the fair value of the CCDs would be approximately closer to the fair value of the equity shares.

  18. Investors’ Perspective – Sensitivity analysis Relationship of unobservable inputs to fair value and sensitivity: 1. If the long term growth rate used were 1% higher / lower (i.e. 8.5% / 6.5%) while all other variables were held constant, the carrying amount of equity shares would increase by Rs. 203 / decrease by Rs. 169, thereby impacting fair value of CCDs of investors as follows: Relationship of unobservable inputs to fair value and sensitivity: A 1% increase / decrease in the WACC used (i.e. 19.64% / 17.64%) while holding all other variables constant decrease / increase the carrying amount of the unquoted equity investments by Rs. 263 and by Rs. 313 respectively, thereby impacting fair value of CCDs of investors as follows:

  19. Caveat As you are aware, by its very nature, valuation work cannot be regarded as an exact science and that estimating values necessarily involves selecting a method or approach that is suitable for the purpose. The valuation conclusions arrived at in many cases is by their very nature subjective and dependent on the exercise of individual judgment. Given the same set of facts and using the same assumptions, expert opinions may differ due to the number of separate judgment decisions, which have to be made. There can therefore be no standard formulae to establish an indisputable value, although certain formulae are helpful in assessing reasonableness. It may be pointed out that valuations are based on certain information as provided by the management (i.e. equity shares fair valuation, WACC, etc.) which are further dependent upon various other estimates such as future financial performance or opinions that represent reasonable expectations at a particular point in time, but such information, estimates or opinions are not offered as predictions or as assurances that a particular level of income or profit will be achieved, that events will occur, or that a particular price will be offered or accepted. Actual results achieved during the period covered by the prospective financial analysis would vary from these estimates, and the variations may be material. Considering the dynamic environment and pace of technological developments, the market value of the business engaged in the area of high technology such as simulation and training and resources optimization, etc. may change significantly in a short period of time.

  20. Distribution of report DISCLAIMER: ThisreporthasbeenpreparedbyusforarrivingatthefairvalueofthespecifiedinstrumentsofXYZ Limited.Thereportshouldnotbecopiedordistributedtothethirdpartiesexceptasmayberequiredfortheprescribedlegalpurposesandthemandateunderwhichtheexercisehasbeencarriedout. By using this report, management hereby confirms the accuracy and reliability of the projections mentioned in this report and accepts all responsibility related to valuation. In case the company proposes to make available our Report to any other third party, it shall seek our written consent. While this consent would not be unreasonably withheld, we will require to hold harmless letter in a form expressly agreed by us from each party to whom the report on Equity Valuation is proposed to be given. In such case, we will not accept any liability / responsibility to such parties to whom the Report is shown. The contents of this report will not be disclosed to any other party. While due care has been exercised in carrying out the engagement, we shall not accept any responsibility or liability to third parties to whom our Report may have been shown or into whose hands it may come. Such parties are advised to carry out their own independent assessment or to obtain professional advice before taking relevant decisions.

  21. Thank You Head Office: At Cuttack MERIA BAZAR, OLD USHA CO. GODOWN CAMPUS, PO: BUXI BAZAR, CUTTACK, ODISHA : 753001 Ph : 0671 : 2430605 / 9338464856 FAX : 91-671-2430605 Branch Offices: Bhubneshwar Plot No. 392, 1ST Floor, Lewis Road, BJB Nagar,Bhubaneswar : 751014 Dist : Khurda, Odisha Ph : 09437170570 Kolkata Metro Tower, 4th Floor, 170, Central Avenue, Near M G Road Metro, Kolkata : 700007, West Bengal Ph : 08010915059 Balugaon Indumati Market Complex, 1st Floor, I. B. Road, Balugaon : 752030, Dt: Khurda, Odisha Ph: 09437185094 Cuttack Shree Vihar Colony, Tulasipur, Cuttack : 753 008 Ph: 9437020195 Secundarabad Plot No. 22, Public Sector Colony, House of B. Bhaskar Rao, Bowenpally, Secunderabad – 500011 Ph: 9438124555 / 9861233555 New Delhi 6202/1, III Floor, Shiv Shakti Mansion, Dev Nagar, Block I, Karol Bagh, New Delhi – 110005 Ph: 8961077745

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