Notes to the consolidated financial statements for the year ended 31 December 2018

(Stated in United States Dollars)

1.         Organization and principal activity

Kubera Cross-Border Fund Limited (the "Fund") was incorporated in the Cayman Islands on 23 November 2006 as an exempted company with limited liability.

The Fund is a closed-end investment company trading on the AIM market of the London Stock Exchange. The Fund does not have a fixed life. As per shareholder resolutions passed in early 2013, the Fund is in realisation mode, such that the Fund makes no new investments and becomes a realisation vehicle whose objective is to carry out an orderly realisation of the portfolio and distribution of the net proceeds to shareholders.

The Fund is a Limited Partner in Kubera Cross-Border Fund LP ("the Partnership"), an exempted limited partnership formed on 28 November 2006, in accordance with the laws of Cayman Islands.

Kubera Cross-Border Fund (GP) Limited, a company incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of the Fund, serves as the General Partner of the Partnership.

The Partnership holds 100% ownership in Kubera Cross-Border Fund (Mauritius) Limited ("Kubera Mauritius"), a company incorporated in Mauritius. The primary business of Kubera Mauritius is to carry on business as an investment holding company.

Kubera Partners LLC (the "former Investment Manager"), a Delaware limited liability company, managed the investments of the Fund and had full discretionary investment management authority until the expiry of the Investment Management Agreement on 22 December 2016. Following the expiry of the Investment Management Agreement, the Fund has been self-managed by the Board of Directors (the "Board").

Kubera Mauritius holds 100% ownership in New Wave Holdings Limited, a company incorporated in Mauritius. The primary business of New Wave Holdings Limited is to carry on business as an investment holding company.

FIM Capital Limited, ("the Administrator") is the administrator of the Fund and performs certain administrative and accounting services on behalf of the Fund.

2.         Basis of Preparation

The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles ("US GAAP"). The Fund is an investment company and follows the accounting and reporting guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 946.

Functional currency 

The measurement and presentation currency of the consolidated financial statements is United States Dollar reflecting the fact that subscriptions to and redemptions from the Fund are made in United States Dollars and the Fund's operations are primarily conducted in United States Dollars.

Basis of consolidation

The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiary, Kubera Cross-Border Fund (GP) Limited and its majority owned subsidiaries, the Partnership, Kubera Mauritius and New Wave Holdings Limited (together referred to as the "Group"). All material inter-company balances and transactions have been eliminated.

2.         Basis of Preparation (Continued)

Going concern

In assessing the going concern basis of preparation of the consolidated financial statements for the year ended 31 December 2018, the Directors, with the assistance of the Administrator, have prepared cash-flow forecasts, and stress-tested the assumptions in those forecasts. The conclusion reached is that while there will always remain inherent uncertainty within the cash flow forecasts, the Directors have a reasonable expectation that the Fund has adequate resources backed up by the intent to continue in operational existence for the foreseeable future, and for a period of at least 18 months from the date of signing of these financial statements. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements for the year ended 31 December 2018.

3.         Use of estimates

US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the consolidated results of operations during the reporting period and the reported amounts of increases and decreases in net assets from operations during the reporting period. Significant estimates and assumptions are used for, but not limited to, accounting for the fair values of investments in portfolio companies. The Directors believe that the estimates made in the preparation of the consolidated financial statements are prudent and reasonable. Actual results could differ from those estimates. Changes in estimates are reflected in the consolidated financial statements in the period in which the changes are made and if material, these effects are disclosed in the notes to the consolidated financial statements.

4.         Significant accounting policies

a.         Investment transactions and related investment income and expenses

Investment transactions are accounted for on a trade date basis.

Realized gains and losses and movements in unrealized gains and losses are recognized in the consolidated statement of operations and determined on a weighted average cost method basis. Movements in fair value are recorded in the consolidated statement of operations at each valuation date.

Dividend income is recognized when the right to receive dividend is established and is presented net of withholding taxes. Interest income and expense are recognized on an accruals basis except for securities in default for which interest is recognized on a cash basis.

b.         Fair value

Definition and hierarchy

Investments are recorded at estimated fair value as at year-end date. The Group follows ASC 820 "Fair Value Measurements and Disclosures" which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

4.         Significant accounting policies (Continued)

b.       Fair value (Continued)

Definition and hierarchy (Continued)

Investments measured and reported at fair value as determined by the Directors are classified and disclosed in one of the following categories:

Level I - Unadjusted quoted prices in active markets for identical assets or liabilities that the Group has the ability to access.

Level II - Observable inputs other than quoted prices included in Level 1 that are not observable for the asset or liability either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and similar data.

Level III - Unobservable inputs for the asset or liability to the extent that relevant observable inputs are not available, representing the Group's own assumptions about the assumptions that a market participant would use in valuing the asset or liability, and that would be based on the best information available.

In determining fair value, the Group uses various valuation approaches. Inputs, including price information, may be provided by independent pricing services or derived from market data. Inputs can be either observable or unobservable.

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level III. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The valuations of those investments subject to sales and purchase agreements are based on the net sales proceeds contracted to be received.

Valuation

Private company

Investment in a private company consists of a direct ownership of common and/or preferred stock of a privately held company. The transaction price, excluding transaction costs, is typically the Board's best estimate of fair value at inception. When evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values in the investment's principal market under current market conditions.

The Board, with assistance from the Administrator and advisers, performs ongoing valuation reviews to ensure the investments are carried at the appropriate estimated fair values.

4.         Significant accounting policies (Continued)

b.         Fair value (Continued)

Definition and hierarchy (Continued)

            Valuation process

The Board, with assistance from the Administrator and advisers, establishes valuation processes and procedures to ensure that the valuation techniques for investments that are categorized within Level III of the fair value hierarchy are fair, consistent, and verifiable.

The Board, with assistance from the Administrator and advisers, is responsible for reviewing the Group's written valuation processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of the valuation policies.

Valuations are required to be supported by market data, third-party pricing sources; industry accepted pricing models, or other methods the Board deems to be appropriate, including the use of internal proprietary pricing models.

In completing the valuations of investments in equity shares, preferred shares, compulsorily convertible preference shares, compulsorily convertible cumulative preference shares and loans having a fair value of USD 36,146,337 (previous year: USD 41,230,029), the Board considers the following:

§ The value of the Fund's interest in Planetcast Media Services Limited ("PMSL") and Synergies Castings Limited ("SCL") as reported in these financial statements is based on the selling price determined in the SPA at exchange rates prevailing at the year-end date.

§ The value of the NeoPath Limited tax refund receivable is based on the expected realisation value discounted to reflect the time value of money, lack of liquidity and credit risks. The timing of the finalization and receipt of the tax refund remains uncertain though recent legal opinion has confirmed that the formal hearing of the matter should take place in the near future, with a final decision on the case by late 2021

There are significant uncertainties surrounding these assumptions and the impact of such uncertainty cannot be quantified.

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The following table summarizes the valuation of the Group's investments based on ASC 820 fair value hierarchy levels as of 31 December 2018.

The changes in the investments classified as Level III are as follows:

Proceeds of sale of USD 3,595,000 included consideration of USD 2,920,938 for SCL shares which were originally acquired at a cost of USD 5,916,820 resulting in realized loss of USD 2,995,882.

In addition, a USD 1,000,000 advance was received in 2017 as part of the sale consideration for first tranche of shares of SCL which will be set off against the final tranche consideration and is included in the USD 1,099,616 accounts payable balance.

4.   Significant accounting policies (Continued)

b.    Fair value (Continued)

During the year ended 31 December 2018 and 31 December 2017, the Group did not have any transfers between any of the levels of the fair value hierarchy.

c.   Foreign currency translation

Assets and liabilities denominated in a currency other than United States Dollar are translated into United States Dollars at the exchange rate as at the reporting date. Purchases and sales of investments and income and expenses denominated in currencies other than United States Dollars are translated at the exchange rate on the respective dates of such transactions.

The Group does not generally isolate that portion of the results of operations arising as a result of changes in the foreign currency exchange rates from the fluctuations arising from changes in the market prices of securities. Accordingly, such foreign currency gain (loss) is included in net realized and unrealized gain (loss) on investments.

d.   Buy back

The Fund repurchases its shares by allocating the excess of repurchase price over par value against additional paid-in capital and reserves on a pro rata basis.

e.   Cash and cash equivalents

Cash and cash equivalents are Company assets in cash form or in a form that can be easily converted to cash. All cash balances are held at major banking institutions.

f.    Related parties

Related parties include parties that are defined as such under FASB Accounting Standards Codification Topic 850-10-20 whereby amongst other criteria, parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions.

g.   Income taxes

The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to the Group. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between carrying amount of existing assets and liabilities in the consolidated financial statements and their respective tax bases and operating losses carried forward. Deferred tax assets and liabilities are measured using prevailing tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits of which future realization is not more likely than not.

The Group is required to determine whether its tax positions are "more likely than not" to be sustained upon examination by applicable taxing authority, based on technical merits of the position. Tax positions not deemed to meet a "more likely than not" threshold would be recorded as a tax expense in the current year. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits in income tax expense. There were no interest and penalties for the year ended 31 December 2018.
 

4.   Significant accounting policies (Continued)

h.   Fair value of financial instruments other than investment in securities

The Group's investments are accounted as described in Note 4(a). The Group's financial instruments include other current assets and accounts payable, which are realizable or to be settled within a short period of time. The carrying amounts of these financial instruments approximate their fair values.

i.    Comprehensive income

The Group has no comprehensive income other than the net loss disclosed in the consolidated statement of operations. Therefore, a statement of comprehensive income has not been prepared.

j.    Carried interest

Under the terms of the Partnership Agreement, Kubera Cross-Border Incentives SPC - Carried Interest SP, the Special Limited Partner of the Partnership is entitled to receive a carried interest from the Partnership equivalent to 20 per cent, of the aggregate return over investment received by the Partnership following the full or partial cash realization of an investment. The payment of the carried interest is conditional upon the last announced net asset value (as adjusted to add back the value of any income or capital shareholder distributions to date) at the date of payment of such carried interest, being equal to or greater than the value of the gross proceeds of the original placing of the Fund's shares. In addition, the carried interest payment will be adjusted, up or down, by such amount as is required to achieve the position that, following such distribution, the aggregate cumulative amount of carried interest paid at the date of such distribution will equal 20 per cent, of the eligible carried interest proceeds (being the net realized gains of the Partnership to the date of such distribution reduced by the net unrealized losses). Eligible carried interest proceeds may not be less than zero.

k.   Recent accounting pronouncements

There are no recent relevant standards and interpretations that will have a material impact on the Group's consolidated financial condition or results of operations.

l.    Net asset value per share

The net asset value per share is computed by dividing the net assets attributable to the shareholders by the number of shares at the end of the reporting period.

5.         Directors' fees and expenses

The Fund pays each of its Directors an annual fee of £20,000 and the Chairman is paid an annual fee of £25,000, plus reimbursement for out-of-pocket expenses incurred in the performance of their duties. Mr. Raghavendran has waived his Director's fees as he has interest in the former Investment Manager.

The Fund does not remunerate its Directors by way of share options and other long term incentives or by way of contribution to a pension scheme.

6.         Cash and cash equivalents

7.         Share capital and additional paid-in capital

Share capital consists of a single class of ordinary shares.

8.         Income taxes

Under the laws of the Cayman Islands, the Fund, the General Partner and the Partnership are not required to pay any tax on profits, income and gains or appreciations. In addition, no tax is to be levied on profits, income, gains, or appreciations or which is in the nature of estate duty or inheritance tax on the shares, debentures or other obligations of the Fund and its Cayman based entities, or by way of withholding in whole or part of a payment of dividend or other distribution of income or capital by the Fund and its Cayman based entities, to its members or a payment of principal or interest or other sums due under a debenture or other obligation of the Fund and its Cayman based entities.

Under laws and regulations in Mauritius, the Fund's majority owned subsidiaries, Kubera Mauritius and New Wave Holdings Limited, are liable to pay income tax on their net income at a rate of 15%.  They are however entitled to a tax credit equivalent to the higher of actual foreign tax suffered or 80% of Mauritius tax payable in respect of their foreign source income tax thus reducing their maximum effective tax rate to 3%. With effect from 1 January 2019, the Income Tax (Foreign Tax Credit) has been amended to remove the deemed foreign tax credit and allow companies holding Category 1 Global Business License ("GBC 1") incorporated on or before 16 October 2017 to claim the deemed foreign tax credit on foreign source income up to 30 June 2021. Companies may continue to claim actual foreign tax suffered as a credit risk against tax payable in Mauritius. Both subsidiaries have received a tax residence certificate from the Mauritian authorities certifying that they are residents of Mauritius, which is renewable on an

8.         Income taxes (Continued)

annual basis subject to meeting certain conditions and which make them eligible to obtain benefits under the Double Tax Avoidance Treaty between Mauritius and India.

No Mauritian capital gains tax is payable on profits arising from sale of securities, and any dividends and redemption proceeds paid by Kubera Mauritius and New Wave Holdings Limited to its shareholders are not subject withholding tax in Mauritius.

With the assistance of the Administrator and advisers, the Board monitors proposed and issued tax law, regulations and cases to determine the potential impact to uncertain income tax positions.  As at 31 December 2018, there are no potential subsequent events that would have a material impact on unrecognized income tax benefits within the next 12 months.

The deferred tax balances as at 31 December 2018 is nil (2017: nil).

9.         Non-controlling interest

Non-controlling interest is primarily composed of the partnership interests of Kubera Cross-Border Incentives SPC - Co-Investment Segregated Portfolio, a Cayman Islands company and an affiliate of the former Investment Manager, in the consolidated financial statements.

10.       Transactions with related parties

A.        The following table lists the related parties of the Fund:

Transactions during the year with related parties and amounts outstanding as at 31 December 2018 are as disclosed below:

i.   Transactions during the year ended 31 December 2018

ii.  Closing balance as at 31 December 2018

11.       Financial instruments and associated risks

The Group's investment activities expose it to various types of risks, which are associated with the financial instruments and markets in which it invests. The financial instruments expose the Group in varying degrees to elements of liquidity, market and credit risk. Risk management is carried out by the Board, with assistance from the Administrator to the extent possible and as appropriate.

The following summary is not intended to be a comprehensive summary of all risks inherent in investing in the Group and reference should be made to the Fund's admission document for a more detailed discussion of risks.

Considering the unlisted nature of investments, each of the risks viz. market risk, industry risk, credit risk, currency risk, liquidity risk and political, economic and social risk are considered by management while undertaking the fair value of investments on a quarterly basis and appropriately factored in wherever necessary to ensure that they are within the risk appetite.

a)         Market risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market variables such as interest, foreign exchange rates and equity prices, whether those changes are caused by factors specific to the particular security or factors that affect all securities in the markets. Investments are typically made with a specific focus on India and thus are concentrated in that region. Political or economic conditions and the possible imposition of adverse governmental laws or currency exchange restrictions in that region could cause the Group's investments and their markets to be less liquid and prices more volatile. The Group is exposed to market risk on all of its investments.

b)         Industry risk

The Group's investments may have concentration in a particular industry or sector and performance of that particular industry or sector may have a significant impact on the Group. The Group's investments may also be subject to the risk associated with investing in private equity securities. Investments in private equity securities may be illiquid and subject to various restrictions on resale and there can be no assurance that the Group will be able to realize the value of such investments in a timely manner.

c)         Credit risk

Credit risk is the risk that an issuer/counterparty will be unable or unwilling to meet its commitments to the Group. Financial assets that are potentially subject to significant credit risk consist of cash and cash equivalents. The maximum credit risk exposure of these items is their carrying value.

d)         Currency risk

The Group has assets denominated in currencies other than the US Dollar, the functional currency. The Group is therefore exposed to currency risk as the value of assets denominated in other currencies will fluctuate due to changes in exchange rates. The Group's cash and cash equivalents are held in US Dollars. The Group does not hedge against foreign exchange movement.

e)         Liquidity risk

The Group is exposed to liquidity risk as a majority of the Group's investments are largely illiquid. Illiquid investments include any securities or instruments which are not actively traded on any major securities market or for which no established secondary market exists where the investments can be readily converted into cash. Reduced liquidity resulting from the absence of an established secondary market may have an adverse effect on the prices of the Group's investments and the Group's ability to dispose of them where necessary to meet liquidity requirements. However, the Group maintains sufficient cash, and aims to maintain flexibility in funding.

f)          Political, economic and social risk

Political, economic and social factors, mainly changes in Indian laws or regulations and the status of India's relations with other countries may adversely affect the value of the Group's investments.

12. Financial highlights

The financial highlights presented below consist of the Group's operating expenses and net operating loss ratios for the years ended 31 December 2018 and 31 December 2017, and the internal rate of return ("IRR") since the Fund's admission to trading on AIM, net of all expenses, including carried interest to the former Investment Manager:

The net operating loss and operating expenses ratios are computed as a percentage of the Group's average net asset value during the period. Both ratios are presented on an annualized basis. The IRR is computed based on the Fund's actual dates of the cash inflows (capital contributions), outflows (cash and stock distributions) and the ending net asset value at the end of the period / year (residual value) as of each measurement date.

13. Subsequent events

Kubera Cross-Border Fund (Mauritius) Limited ("Kubera Mauritius") entered into a share purchase agreement with a leading global private equity firm on 17 March 2017 to sell its investment in PMSL.

The Fund's investment in PMSL was sold on 14 June 2019 for a consideration, net of transaction costs of INR 1,419 million. This is equivalent to USD 20.00 million at current exchange rates. The fair value of the investment at 31 December 2018 was USD 21.20 million.

There were no other significant subsequent events.