IDFC Capital (USA) INC.

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1 IDFC Capital (USA) INC. DIRECTOR Mr. Ravi Lochan Pola INDEPENDENT AUDITORS Deloitte & Touche LLP PRINCIPAL BANKERS J.P. Chase Bank REGISTERED OFFICE 350 Fifth Avenue Empire State Building New York, NY 10018

2 Directors' Report TO THE MEMBERS Your directors have pleasure in presenting the Annual Report of IDFC Capital (USA), Inc. together with the audited accounts for the year ended March 31, Operational Review and Future Outlook The US business of IDFC Capital USA Inc has made progress during the fiscal year on the back of improving US economic prospects. However, the Indian markets for most part of the year were underperforming the Asian and EM markets. A significant part of the estimated 25 billion. FII investments into India could be termed as passive investments, a term used to describe flows from EM and India ETFs. Therefore, the actively managed funds did not incrementally participate in the market till November Despite these odds, the US business managed to get some good traction from the institutional clients. The Company successfully conducted a India Investment Forum') at New York in September 2012 and was attended by some of the large US based institutions. The Company has plans to expand the business by foraying into Investment banking activities including secondaries placement. It has also started increasing its coverage of institutional clients since the beginning of the calendar year FINANCIAL RESULTS (IN USD) For the year ended Particulars March 31, 2013 Total Income 881,687 Less: Total Expenses 864,080 Profit/(Loss) before Tax 17,607 Less: Income tax benefit (33,158) Profit/(Loss) after Tax 50,765 SUBSIDIARY COMPANIES IDFC Capital (USA), Inc., (the Company ) is the wholly owned subsidiary of IDFC Securities Limited (the Parent ). It was incorporated in the State of New York on August 3, IDFC Securities Limited, is in turn is a wholly owned subsidiary of IDFC Limited (the Ultimate Parent ). On September 15, 2011, the Company became a broker-dealer and as such is registered with the Securities and Exchange Commission (the SEC ) and a member of the Financial Industry Regulatory Authority. SHARE CAPITAL During the year, there was no change in the paid up equity share capital of the Company. DIRECTORS During the year, Mr. Nikhil Golani had resigned as Director & Cheif Executive Officer (CEO) of the Company w.e.f. May 31, Mr. Howard Spindal was appointed as the General Securities Principal w.e.f. May 31, He resigned from the said post from December 1, Mr. Ravi Lochan Pola was appointed as CEO of the Company w.e.f. October 17, ACKNOWLEDGEMENTS The Board wishes to thank the clients, custodians Banks and other statutory and regulatory authorities for their support to your Company. The Board also places on record its appreciation for the sincere efforts of the staff. The Board would also like to express its gratitude for the unstinted support and guidance received from IDFC Securities Limited and IDFC Limited (IDFC), the ultimate parent organization, and also other group companies. For and on behalf of the Board of Directors Ravi Lochan Pola Director Mumbai, July 1, 2013 IDFC Capital (USA) Inc. 129

3 Independent Auditors Report To the Board of Directors and Stockholder of IDFC Capital (USA), Inc. We have audited the accompanying financial statements of IDFC Capital (USA), Inc. (the Company ), which comprise the statement of financial condition as of March 31,2013, and the related statements of operations, cash flows, and changes in stockholder s equity for the year then ended, and the related notes to the financial statements, that you are filing pursuant to Rule 17a-5 under the Securities Exchange Act of Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDFC Capital (USA), Inc. as of March 31, 2013, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplemental Schedules Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The supplemental schedules g, h and i listed in the accompanying table of contents are presented for the purpose of additional analysis and are not a required part of the financial statements, but are supplementary information required by Rule 17a-5 under the Securities Exchange Act of These schedules are the responsibility of the Company's management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. Such schedules have been subjected to the auditing procedures applied in our audit of the financial statements and certain additional procedures, including comparing and reconciling such schedules directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such schedules are fairly stated in all material respects in relation to the financial statements as a whole. Deloite & Touche LLP May 10, IDFC ANNUAL REPORT

4 Statement of Financial Condition AS OF MARCH 31, 2013 ASSETS Cash 549,697 Due from parent 266,746 Fixed assets - net of depreciation depreciation of $12,909 66,909 Deferred tax asset 80,181 Other assets 30,235 Total Assets 993,768 LiabiLiIties And StockhOlder s Equity Liabilities: Compensation payable 92,000 Accrued expenses and other liabilities 35,925 Income taxes payable 5,107 Total liabilities 133,032 Commitments (note 7) Stockholder s Equity: Common stock ($.01 par value; 100,000,000 shares authorized, issued and outstanding) 1,000,000 Share option reserve 31,760 Accumulated deficit (171,024) Total stockholder s equity 860,736 Total liabilities and stockholder s equity 993,768 The accompanying notes are an integral part of these financial statements. IDFC Capital (USA) Inc. 131

5 Statement of Operations For the Year Ended March 31, 2013 Revenues Advisory fees 881,687 Total revenue 881,687 Expenses Employee compensation and benefits 585,217 Consulting and professional fees 91,793 Rent,utilities and other office expenses 73,402 Market data and communications 56,443 Regulatory fees and expenses 5,206 Travel,entertainment and promotional expenses 22,942 Other 29,077 Total expenses 864,080 Net income before income taxes 17,607 Income tax benefit (33,158) Net income 50,765 The accompanying notes are an integral part of these financial statements. 132 IDFC ANNUAL REPORT

6 Statement of Changes in Stockholder's Equity For the Year Ended March 31, 2013 Shares Common Stock Share Option Reserve Accumulated Deficit Balance, April 1, ,000,000 1,000,000 - (221,789) 778,211 Net income ,765 50,765 Share based compensation ,760-31,760 Balance, March 31, ,000,000 1,000,000 31,760 (171,024) 860,736 The accompanying notes are an integral part of these financial statements. Total IDFC Capital (USA) Inc. 133

7 Statement of Cash Flows For the Year Ended March 31, 2013 Cash flows from operating activities Net income 50,765 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 12,909 Deferred tax benefit (42,056) Share based compensation 31,760 Decrease (increase) in operating assets Due from parent (6,548) Employee loans and advances 100,771 Other assets 8,013 Increase (decrease) in operating liabilities Compensation payable (8,000) Accrued expenses and other liabilities 12,156 Income taxes payable (2,905) Net cashprovided by operating activities 156,865 Cash used in investing activities Purchases of fixed assets (79,818) Net cash used in investing activities (79,818) Net increase in cash 77,047 Cash and cash equivalents Beginning of year 472,650 End of year 549,697 Supplemental disclosures of cash flow information Cash paid during the year for income taxes 11,805 Non cash financing activity Share based compensation 31,760 The accompanying notes are an integral part of these financial statements. 134 IDFC ANNUAL REPORT

8 Notes to Statement of Financial Condition For the Year Ended March 31, Organization IDFC Capital (USA), Inc. (the Company ), a wholly owned subsidiary of IDFC Securities Limited ( the Parent ) was incorporated in the State of New York on August 9, The Parent is a wholly owned subsidiary of IDFC Limited ( the Ultimate Parent ). The Company is a broker-dealer registered with the Securities and Exchange Commission (the SEC ) and is a member of the Financial Industry Regulatory Authority ( FINRA ). The Company s principal business activity is distributing research and market commentary and brokering transactions in Indian equities for U.S. institutional clients. During the year, the Company did not undertake brokering transactions. 02 Significant accounting policies Basis of Presentation The Company s statement of financial condition was prepared in conformity with accounting principles generally accepted in the United States of America ( GAAP ). Use of Estimates In preparing the statement of financial condition, management makes estimates and assumptions that may affect the reported amounts. Such estimates include assumptions used in determining the provision for income taxes. Actual results could differ from these estimates. Fixed Assets Fixed assets represent furniture, equipment and leasehold improvements and are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight line basis over the assets estimated useful lives of 3 to 10 years. Advisory Fees The Company receives fee from the Parent for performing sales and marketing functions on behalf of the Parent in order to attract institutional customers. The fees are based on expenses incurred by the Company in relation to the marketing activities such as compensation and benefits, professional services, occupancy, travel and other operating costs, plus a transfer pricing agreement profit factor of6%. Income Taxes Deferred tax assets and liabilities are recognized for the future tax effect of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. In the event it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is recorded. The Company applies a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The Company evaluates uncertain tax positions by reviewing against applicable tax law all positions taken by the Company with respect to tax years for which the statute of limitations remains open. A tax benefit from an uncertain tax position will be recognized when it is considered to be more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Share-Based Compensation The Ultimate Parent grants employee stock options to certain employees of the Company under various Employee Stock Option Plans of the Ultimate Parent. The compensation expense associated with this is generally accrued when earned by the employees and are allocated to the Company by the Ultimate Parent and are recorded through the Share Option Reserve. Delivery of the underlying shares of the Ultimate Parent is conditioned on the grantees satisfying requirements outlined in the award agreements. 03 Income Taxes The components of the provision for income tax benefit for the year ended March 3 I, 20 I 3 are as follows: Tax Provision Current Deferred Total Federal 3,811 (17,992) (14,181) State and local 5,087 (24,064) (18,977) 8,898 (42,056) (33,158) Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Statement of Financial Condition. As of March 31, 2013, the Company has a deferred tax asset of $80,181, recorded in the accompanying Statement of Financial Condition, and is a result of temporary differences primarily relating to amortization of start-up costs. The Company has determined that it is more likely than not that the deferred tax asset will be realized and therefore there is no valuation allowance against the deferred tax asset. Based upon the Company s review of its federal, state, local income tax returns and tax filing positions, the Company determined no unrecognized tax benefits for uncertain tax positions were required to be recorded. In addition, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months. IDFC Capital (USA) Inc. 135

9 Notes to Statement of Financial Condition For the Year Ended March 31, 2013 The Company is not currently under examination by any taxing jurisdiction. The earliest tax year which is subject to examination by state and local tax authorities and the internal Revenue Service is Concentration of Credit Risk In the normal course of business, the Company s activities involve transactions with the Parent. These activities may expose the Company to risk in the event the Parent is unable to fulfill its contractual obligations. The Company maintains substantially all of its cash balance at one major financial institution. However, the Company does not believe that these amounts are exposed to significant risk. 05 Net Capital Requirements The Company is subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC Rule15c3-1) ( the Rule ) under the Securities Exchange Act of The Company has elected to use the alternative method permitted by the Rule, which requires the Company maintain minimum net capital, as defined, shall not be less than $250,000 or 2% of aggregate debit balances arising from customer transactions. At March 31, 2013, the Company had net capital of approximately $416,000 which is approximately $166,000 in excess of required minimum net capital of $250,000. The Company is exempt from the provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 as the Company s activities are limited to those set forth in the condition for exemption appearing in paragraph (k)(2)(i). 06 Related Party Transaction The Company entered into a service level agreement with the Parent on December 26, 2011 whereby the Company will distribute research on behalf of the Parent. The Company earned $881,687 in advisory fees from the Parent for the year ended March 31, 2013, of remained unpaid. The Ultimate Parent has granted Employee Stock Options to employees of the Company. The value of options granted during the year ended March 31, 2013 is $31,760 and is included in employee compensation and benefits in the accopanying statement of operations and allocated to equity; however, it is not a part of the service level agreement. 07 Commitments and Contingencies The Company has entered into a non-cancelable sublease for its office premises, which expires August 31, The future minimum annual base rent payments required under this operating lease are as follows: Year Ending March 31, Total Commitments Amount In us $ , ,607 70,064 Total rental expense for the year ended March 31, 2013, was $49,069 and is included in occupancy expense on the Statement of Operations 08 Furniture, Equipment and Leasehold Improvements Furniture, equipment and leasehold improvements consisted of the following at March 31, 2012: Amount In us $ Equipment 44,373 Furniture 28,000 Leasehold Improvements 7,445 79,818 Less: Accumulated Depreciation (12,909) 66,909 Depreciation expense for the year ended March 31, 2013 amounted to $12, Fair Value of Financial Instruments Substantially all of the Company s assets are carried at fair value or contracted amounts which approximate fair value. The Company s liabilities, such as payables, are recorded at amounts approximating fair value. 10 Subsequent Events The Company has evaluated subsequent events up to the date on which the statement of financial statements are issued. As a result of the Company s evaluation, the Company noted no subsequent events that require adjustment to, or disclosure in these financial statements. 136 IDFC ANNUAL REPORT

08 IDFC CAPITAL (USA) INC. CHIEF EXECUTIVE OFFICER

08 IDFC CAPITAL (USA) INC. CHIEF EXECUTIVE OFFICER nn Mr. Ravi Lochan Pola INDEPENDENT AUDITORS nn Deloitte & Touche LLP PRINCIPAL BANKER nn J. P. Morgan Chase Bank N.A. REGISTERED OFFICE 350 Fifth Avenue,