SECTION II : RISK FACTORS...1 SECTION III : INTRODUCTION...20

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2 TABLE OF CONTENTS SECTION I : GENERAL...i Definitions / Abbreviations...i Forward Looking Statements... viii SECTION II : RISK FACTORS...1 SECTION III : INTRODUCTION...20 General Information...20 Summary of Business, Strength & Strategy...30 The Issue...35 Summary Financial Information...37 Capital Structure...49 Objects of the Issue...60 Statement of Tax Benefits...61 SECTION IV : ABOUT THE ISSUER COMPANY AND THE INDUSTRY...65 Industry...65 Our Business...84 History, Main Objects And Key Agreements Our Management Our Promoter Our Subsidiary SECTION V : FINANCIAL INFORMATION Financial Statements Disclosures on Existing Financial Indebtedness Material Developments SECTION VI : ISSUE RELATED INFORMATION Terms of the Issue Issue Structure Issue Procedure SECTION VII : LEGAL AND OTHER INFORMATION Pending Proceedings and Statutory Defaults Regulations and Policies Summary of Key Provisions of Articles Of Association Material Contracts and Documents For Inspection DECLARATION...194

3 SECTION I : GENERAL DEFINITIONS / ABBREVIATIONS Company related terms Term "SCUFL", "Issuer", the Company and our Company AOA/Articles / Articles of Association Board / Board of Directors DIN ESOP 2006 ESOP 2008 Equity Shares Fitch Loan Assets Memorandum / MOA Net Interest Margins/NIM Net Loan Assets NAV NBFC NPA Promoter(s) ` / Rs./ INR/ Rupees SCL Description Shriram City Union Finance Limited, a company incorporated under the Companies Act, 1956, registered as a Non-Banking Financial Company with the Reserve Bank of India under Section 45-IA of the Reserve Bank of India Act, 1934, and having its Registered Office at 123, Angappa Naicken Street, Chennai , Tamil Nadu, India Articles of Association of our Company The Board of Directors of our Company and includes any Committee thereof from time to time Director Identification Number The Company Employee Stock Option Scheme of the year 2006, namely, SCUF Employee Stock Option Scheme 2006 The Company Employee Stock Option Scheme of the year 2008, namely, SCUF Employee Stock Option Scheme 2008 Equity shares of face value of ` 10/- each of our Company Fitch Ratings India Private Limited Assets under financing activities Memorandum of Association of our Company Interest income net off the amount of outgoing interest paid by the Company on its liabilities Assets under financing activities net of provision for non-performing assets Net Asset Value Non-Banking Financial Company as defined under Section 45-IA of the RBI Act, 1934 Non Performing Asset Shriram Enterprise Holdings Private Limited and Shriram Retail holdings Private Limited The lawful currency of the Republic of India Shriram Capital Limited i

4 Term SEHPL SHFL SRHPL Shriram Chits Shriram Group Statutory Auditor Subsidiary We, us and our Description Shriram Enterprise Holdings Private Limited Shriram Housing Finance Limited Shriram Retail Holdings Private Limited Entities operating under the brand name of Shriram Chits namely, Shriram Chits Private Limited, Shriram Chits Tamilnadu Private Limited, Shriram Chits Karnataka Private Limited, and Shriram Chits Maharashtra Private Limited Entities operating under the Shriram brand name Our statutory auditor being M/s Pijush Gupta & Co. Subsidiary of our Company namely Shriram Housing Finance Limited Our Company and/or its Subsidiary, unless the context otherwise requires Issue related terms Term Allotment / Allotted Allottee Application Form Bankers to the Issue/Escrow Collection Banks Base Issue Basis of Allotment CARE CRISIL Co-Lead Manager Debentures / NCDs Description Unless the context otherwise requires, the allotment of the NCDs pursuant to the Issue to the Allottees The successful applicant to whom the NCDs are being/have been allotted The form used by an applicant to apply for NCDs being issued through the Prospectus The bank(s) with whom Escrow Accounts will be opened as specified on page 24 of this Prospectus Public Issue of NCDs by our Company aggregating upto ` 37,500 lakhs The basis on which NCDs will be allotted to applicants under the Issue and which is described in Issue Procedure Basis of Allotment on page 165 of this Prospectus. Credit Analysis and Research Limited CRISIL Limited Karvy Investor Services Limited Secured, Redeemable, Non-Convertible Debentures offered through this Prospectus aggregating upto ` 37,500 lakhs with an option to retain oversubscription upto ` 37,500 lakhs for issuance of additional NCDs aggregating to a total of upto ` 75,000 lakhs. ii

5 Term Debenture Holder (s) Debt Listing Agreement Debt Regulations Deemed Date of Allotment Depositories Act Depository(ies) DP / Depository Participant Designated Stock Exchange Draft Prospectus / Draft Offer Document Early Redemption (Call) Date Early Redemption (Call) Period Early Redemption (Put) Date Early Redemption (Put) Period Escrow Agreement Escrow Account Institutional Portion Description The holders of the NCDs The listing agreement entered into/to be entered into between our Company and the relevant stock exchange(s) in connection with the listing of debt securities of our Company. SEBI (Issue and Listing of Debt Securities) Regulations, 2008, issued by SEBI, effective from June 6, 2008 as amended from time to time The date of issue of the Allotment Advice / regret. The Depositories Act, 1996, as amended from time to time National Securities Depository Limited (NSDL) and /or Central Depository Services (India) Limited (CDSL) A depository participant as defined under the Depositories Act National Stock Exchange of India Limited The draft prospectus dated July 21, 2011 filed with the NSE for receiving public comments in accordance with the provisions of the Act and the Debt Regulations The date, 48 months after the expiry of the Deemed Date of Allotment, after which our Company has the right to exercise its Call Option with respect to Option I NCDs The period of 30 days from the Early Redemption (Call) Date within which our Company has the right to exercise its Call Option with respect to Option I NCDs The date, 48 months after the expiry of the Deemed Date of Allotment Date, after which a holder of Option I NCDs has the right to exercise his Put Option with respect to the Option I NCDs held by him The period of 30 days from the Early Redemption (Put) Date within which a holder of Option I NCDs has the right to exercise his Put Option with respect to the Option I NCDs held by him Agreement dated July 28, 2011 entered into amongst our Company, the Registrar, the Escrow Collection Bank(s) and the Lead Managers for collection of the application amounts and for remitting refunds, if any, of the amounts collected, to the applicants on the terms and conditions contained therein Accounts opened in connection with the Issue with the Escrow Collection Banks and in whose favour the applicant will issue cheques or bank drafts in respect of the application amount while submitting the application Portion of applications received from Category I of persons eligible to apply for the issue which includes Public Financial Institutions, Statutory Corporations, Commercial Banks, Co-operative Banks and Regional Rural Banks which are authorised to invest in the NCDs, Provident Funds, Pension iii

6 Term Issue Description Funds and Superannuation Funds and Gratuity Funds which are authorised to invest in the NCDs, Venture Capital funds registered with SEBI, Insurance Companies registered with the IRDA, National Investment Fund and Mutual Funds Public Issue by our Company of NCDs aggregating upto ` 37,500 lakhs with an option to retain over-subscription upto 37,500 lakhs for issuance of additional NCDs aggregating to a total of upto ` 75,000 lakhs. Issue Opening Date August 11, 2011 Issue Closing Date August 27, 2011 Lead Brokers Lead Managers A.K. Stockmart Private Limited, JM Financial Services Private Limited, Karvy Stock Broking Limited, ICICI Securities Limited, R.R Equity Brokers Private Limited, SPA Securities Limited, Integrated Securities Limited, HDFC Securities Limited, Edelweiss Broking Limited, Bajaj Capital Investor Services Limited, Kotak Securities Limited, Enam Securities Private Limited, SMC Global Securities Limited, and Anand Rathi Shares & Stock Brokers Limited JM Financial Consultants Private Limited, A. K. Capital Services Limited and ICICI Securities Limited Market Lot Non-Institutional Portion Options Prospectus / Offer Document Put Option Registrar to the Issue One NCD Category II of persons eligible to apply for the issue which includes Companies, Bodies Corporate and Societies registered under the applicable laws in India and authorised to invest in NCDs, Public/Private Charitable/Religious Trusts which are authorised to invest in the NCDs, Scientific and/or Industrial Research Organisations which are authorised to invest in the NCDs, Partnership Firms in the name of the partners and Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009) Options being offered to the applicants as stated in the section titled Issue Related Information beginning on page 141 of this Prospectus This Prospectus dated August 1, 2011 issued and filed/to be filed with the ROC in accordance with the Debt Regulations containing inter alia the coupon rate for the NCDs and certain other information The right of holders of Option I NCDs to seek redemption of such Option I NCDs held by them at the expiry of 48 months, from the Deemed Date of Allotment Integrated Enterprises (India) Limited Senior Citizen Trustees / Debenture Trustee Any person who has completed the age of 60 years as on the date of the Prospectus Trustees for the Debenture Holders in this case being IDBI Trusteeship Services Limited. iv

7 The subscription list shall remain open for a period as indicated herein, with an option for early closure or extension by such period, as may be decided by the duly authorised committee of Directors of our Company, subject to necessary approvals. In the event of such early closure of subscription list of the Issue, our Company shall ensure that notice of such early closure is given on such early date of closure through advertisement/s in a leading national daily newspaper. Technical & Industry Terms Term ALM ALCO CAR KYC Norms MSME Non-Deposit Accepting NBFC Directions NBFC-D NBFC-ND Prudential Norms Public Deposit Directions SME Conventional / General Terms Description Asset Liability Management Asset - Liability Committee Capital Adequacy Ratio computed on the basis of applicable RBI requirements Customer identification procedure for opening of accounts and monitoring transactions of suspicious nature followed by NBFCs for the purpose of reporting it to appropriate authority Micro Small and Medium Enterprises Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 NBFC registered as a deposit accepting NBFC NBFC registered as a non-deposit accepting NBFC Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 The Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 Small and Medium Enterprises Term AGM AS Act BSE CAGR CDSL Description Annual General Meeting Accounting Standard The Companies Act, 1956, as amended from time to time Bombay Stock Exchange Limited Compounded Annual Growth Rate Central Depository Services (India) Limited v

8 Term DRR EGM EPS FDI Policy FEMA FEMA Regulations FII/FIIs Description Debenture Redemption Reserve Extraordinary General Meeting Earnings Per Share FDI in an Indian company is governed by the provisions of the FEMA read with the FEMA Regulations and the Foreign Direct Investment Policy Foreign Exchange Management Act, 1999, as amended from time to time Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, as amended from time to time Foreign Institutional Investor(s) Financial Year / FY Financial Year ending March 31 GDP GoI HUF IFRS IFSC Indian GAAP IRDA IT Act MCA MICR MSE NECS NEFT NRI NSDL NSE PAN Gross Domestic Product Government of India Hindu Undivided Family International Financial Reporting Standards Indian Financial System Code Generally Accepted Accounting Principles in India Insurance Regulatory and Development Authority The Income Tax Act, 1961, as amended from time to time Ministry of Corporate Affairs, Government of India Magnetic Ink Character Recognition Madras Stock Exchange Limited National Electronic Clearing Services National Electronic Funds Transfer Non Resident Indian National Securities Depository Limited National Stock Exchange of India Limited Permanent Account Number vi

9 Term RBI RBI Act ROC RTGS SBI SCRA SCRR SEBI Description The Reserve Bank of India The Reserve Bank of India Act, 1934, as amended from time to time Registrar of Companies Real Time Gross Settlement State Bank of India Securities Contracts (Regulation) Act, 1956, as amended from time to time The Securities Contracts (Regulation) Rules, 1957, as amended from time to time The Securities and Exchange Board of India constituted under the Securities and Exchange Board of India Act, 1992 SEBI Act TDS WDM The Securities and Exchange Board of India Act, 1992 as amended from time to time Tax Deducted at Source Wholesale Debt Market vii

10 FORWARD LOOKING STATEMENTS Certain statements contained in this Prospectus that are not statements of historical fact constitute forward-looking statements. Investors can generally identify forward-looking statements by terminology such as aim, anticipate, believe, continue, could, estimate, expect, intend, may, objective, plan, potential, project, pursue, shall, should, will, would, or other words or phrases of similar import. All statements regarding our Company s expected financial condition and results of operations and business plans and prospects are forwardlooking statements. These forward-looking statements include statements as to our Company business strategy, revenue and profitability, planned projects and other matters discussed in this Prospectus that are not historical facts. These forward-looking statements and any other projections contained in this Prospectus (whether made by our Company or any third party) are predictions and involve known and unknown risks, uncertainties, assumptions and other factors that may cause our Company s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements or other projections. All forward-looking statements are subject to risks, uncertainties and assumptions about our Company that could cause actual results to differ materially from those contemplated by the relevant forwardlooking statement. Important factors that could cause actual results to differ materially from our Company s expectations include, among others: General economic and business conditions in India and globally; Our ability to successfully implement our strategy, our growth and expansion plans and technological changes; Our ability to compete effectively and access funds at competitive cost; Changes in the value of Rupee and other currency changes; Unanticipated turbulence in interest rates, equity prices or other rates or prices; the performance of the financial and capital markets in India and globally; Availability of funds and willingness of our lenders to lend; Changes in political conditions in India; The rate of growth of our Loan Assets; The outcome of any legal or regulatory proceedings we are or may become a party to; Changes in Indian and/or foreign laws and regulations, including tax, accounting, banking, securities, insurance and other regulations; changes in competition and the pricing environment in India; and regional or general changes in asset valuations; Any changes in connection with policies, statutory provisions, regulations and/or RBI directions in connection with NBFCs, including laws that impact our lending rates and our ability to enforce our collateral; Performance of the sectors and industries that our financial products cater to namely the automobile industry, the small enterprises finance sector sector etc. Changes in the value of gold prices in connection with our loans against gold. viii

11 Emergence of new competitors; Performance of the Indian debt and equity markets; Occurrence of natural calamities or natural disasters affecting the areas in which our Company has operations; and Other factors discussed in this Prospectus, including under the section titled Risk Factors beginning on page 1 of this Prospectus. All forward-looking statements are subject to risks, uncertainties and assumptions about our Company that could cause actual results and valuations to differ materially from those contemplated by the relevant statement. Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to, those discussed under the sections titled Industry and Our Business. The forward-looking statements contained in this Prospectus are based on the beliefs of management, as well as the assumptions made by and information currently available to management. Although our Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it cannot assure investors that such expectations will prove to be correct or will hold good at all times. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements. If any of these risks and uncertainties materialise, or if any of our Company s underlying assumptions prove to be incorrect, our Company s actual results of operations or financial condition could differ materially from that described herein as anticipated, believed, estimated or expected. All subsequent forward-looking statements attributable to our Company are expressly qualified in their entirety by reference to these cautionary statements. Neither our Company, our Directors and Officers nor any of their respective affiliates have any obligation to update or otherwise revise any statements reflecting circumstances arising after the date hereof or to reflect the occurrence of underlying events, even if the underlying assumptions do not come to fruition. ix

12 PRESENTATION OF FINANCIAL AND OTHER INFORMATION General In this Prospectus, unless the context otherwise indicates or implies, references to you, offeree, purchaser, subscriber, recipient, investors and potential investor are to the prospective investors in this Offering, references to our Company, the Company or the Issuer are to Shriram City Union Finance Limited. In this Prospectus, references to US$ is to the legal currency of the United States and references to Rs., ` and Rupees are to the legal currency of India. All references herein to the U.S. or the United States are to the United States of America and its territories and possessions and all references to India are to the Republic of India and its territories and possessions, and the "Government", the "Central Government" or the "State Government" are to the Government of India, central or state, as applicable. Unless otherwise stated, references in this Prospectus to a particular year are to the calendar year ended on December 31 and to a particular fiscal or fiscal year are to the fiscal year ended on March 31. Unless otherwise stated all figures pertaining to the financial information in connection with our Company are on an unconsolidated basis. Presentation of Financial Information Our Company publishes its financial statements in Rupees. Our Company s financial statements are prepared in accordance with Indian GAAP and the Companies Act. The Reformatted Unconsolidated Summary Financial Statements and the Reformatted Consolidated Summary Financial Statements are included in this Prospectus and collectively referred to hereinafter as the Reformatted Summary Financial Statements. The examination reports on the Reformatted Summary Financial Statements, as issued by our Company s Statutory Auditor, M/s Pijush Gupta & Co, are included in this Prospectus in the section titled Financial Information beginning at page 130. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding off. Unless stated otherwise, macroeconomic and industry data used throughout this Prospectus has been obtained from publications prepared by providers of industry information, government sources and multilateral institutions. Such publications generally state that the information contained therein has been obtained from sources believed to be reliable but that their accuracy and completeness are not guaranteed and their reliability cannot be assured. Although the Issuer believes that industry data used in this Prospectus is reliable, it has not been independently verified. x

13 SECTION II : RISK FACTORS Prospective investors should carefully consider the risks and uncertainties described below, in addition to the other information contained in this Prospectus before making any investment decision relating to the NCDs. If any of the following risks or other risks that are not currently known or are now deemed immaterial, actually occur, our business, financial condition and result of operation could suffer, the trading price of the NCDs could decline and you may lose your all or part of your interest and / or redemption amounts. Unless otherwise stated in the relevant risk factors set forth below, we are not in a position to specify or quantify the financial or other implications of any of the risks mentioned herein. The ordering of the risk factors is intended to facilitate ease of reading and reference and does not in any manner indicate the importance of one risk factor over another. This Prospectus contains forward looking statements that involve risk and uncertainties. Our Company s actual results could differ materially from those anticipated in these forward looking statements as a result of several factors, including the considerations described below and elsewhere in this Prospectus. Investors are advised to read the following risk factors carefully before making an investment in the NCDs offered in this Issue. You must rely on your own examination of our Company and this Issue, including the risks and uncertainties involved. INTERNAL RISK FACTORS Risks relating to our Company and its Business 1. Our financial performance is particularly vulnerable to interest rate volatility. Our results of operations are substantially dependent upon the level of our Net Interest Margins. Income from our financing activities is the largest component of our total income, and constituted 87.73% and 92.95% of our total income in fiscal 2010 and fiscal 2011, respectively. As of March 31, 2011, our assets under management were ` 799, lakhs. We borrow funds on both fixed and floating rates. Volatility in interest rates can materially and adversely affect our financial performance. In a rising interest rate environment, if the yield on our interest-earning assets does not increase simultaneously with or to the same extent as our cost of funds, or, in a declining interest rate environment, if our cost of funds does not decline simultaneously or to the same extent as the yield on our interest-earning assets, our net interest income and net interest margin would be adversely impacted. Additional risks arising from increasing interest rates, among others, include: increases in the rates of interest charged on various loans in our loan portfolio, which could result in the extension of loan maturities and higher monthly installments due from borrowers which, in turn, could result in higher rates of default; reductions in the volume of product finance loans, auto loans, personal loans, loans against gold and/or loans to small enterprise finance segment as a result of clients' inability to service high interest rate payments; and reduction in the value of fixed income securities held in our investment portfolio. Accordingly, our operations are susceptible to fluctuations in interest rates. Interest rates are highly sensitive and fluctuations thereof are dependent upon many factors which are beyond our control, including the monetary policies of the RBI, de-regulation of the financial services sector in India, domestic and international economic and political conditions, inflation and other factors. Rise in inflation, and consequent changes in Bank rates, Repo rates and Reverse Repo rates by the RBI has led to an increase in interest rates on loans provided by banks and financial institutions, and market interest rates in India have been volatile in recent periods. 1

14 2. Our business requires substantial capital, and any disruption in funding sources would have a material adverse effect on our liquidity and financial condition. As a finance company, our liquidity and ongoing profitability are, in large part, dependent upon our timely access to, and the costs associated with, raising capital. Our funding requirements historically have been met from a combination of term loans from banks and financial institutions, issuance of redeemable nonconvertible debentures, public deposits, the issue of subordinated bonds and commercial paper. Thus, our business depends and will continue to depend on our ability to access diversified funding sources. Our ability to raise funds on acceptable terms and at competitive rates continues to depend on various factors including our credit ratings, the regulatory environment and policy initiatives in India, developments in the international markets affecting the Indian economy, investors' and/or lenders' perception of demand for debt and equity securities of NBFCs, and our current and future results of operations and financial condition. Changes in economic and financial conditions or continuing lack of liquidity in the market could make it difficult for us to access funds at competitive rates. As an NBFC, we also face certain restrictions on our ability to raise money from international markets which may further constrain our ability to raise funds at attractive rates. Such conditions may occur again in the future and may lead to a disruption in our primary funding sources at competitive costs and would have a material adverse effect on our liquidity and financial condition. 3. High levels of customer defaults could adversely affect our business, financial condition and results of operations. Our business involves lending money and accordingly we are subject to customer default risks including default or delay in repayment of principal or interest on our loans. Customers may default on their obligations to us as a result of various factors including bankruptcy, lack of liquidity, lack of business and operational failure. If borrowers fail to repay loans in a timely manner or at all, our financial condition and results of operations will be adversely impacted. In addition, our customer portfolio principally consists of the under-banked community who does not typically have easy access to financing from commercial banks or other organized lenders and often have limited credit history. Such borrowers generally are less financially resilient than larger corporate borrowers, and, as a result, they can be more adversely affected by declining economic conditions. In addition, a significant majority of our client base belongs to the low or middle income group. In addition, we may not receive updated information regarding any change in the financial condition of our customers or may receive inaccurate or incomplete information as a result of any fraudulent misrepresentation on the part of our customers. Furthermore, unlike several developed economies, a nationwide credit bureau has only recently become operational in India, so there is less financial information available about the creditworthiness of our customers. It is therefore difficult to carry out precise credit risk analyses on our clients. Although we follow certain procedures to evaluate the credit profile of our customers at the time of sanctioning a loan, we generally rely on the referrals from the current or past customers of our Company or those of other entities in the Shriram Group. Although we believe that our risk management controls are sufficient, we cannot be certain that they will continue to be sufficient or that additional risk management policies for individual borrowers will not be required. Failure to continuously monitor the loan contracts, particularly for individual borrowers, could adversely affect our credit portfolio which could have a material and adverse effect on our results of operations and financial condition. 4. We may not be able to recover, on a timely basis or at all, the full value of collateral or amounts which are sufficient to cover the outstanding amounts due under defaulted loans. For our two-wheeler and other vehicle loans, the two-wheeler/vehicle is typically hypothecated in favour of our Company for the tenure of the loan. The value of the vehicle, however, is subject to depreciation, deterioration, and/or reduction in value on account of other extraneous reasons, over the course of time. Consequently, the realizable value of the collateral for the credit facility provided by us, when liquidated, 2

15 may be lower than the outstanding loan from such customers. The hypothecated vehicles, being movable property, may be difficult to locate or seize in the event of any default by our customers. There can also be no assurance that we will be able to sell such vehicles provided as collateral at prices sufficient to cover the amounts under default. In addition, there may be delays associated with such process. In connection with loans against gold provided by us, the gold jewellery and/or ornaments are provided as security. An economic downturn or sharp downward movement in the price of gold could result in a fall in collateral values. In the event of any decrease in the price of gold, customers may not repay their loans and the collateral gold jewellery securing the loans may have decreased significantly in value, resulting in losses which we may not be able to support. No assurance can be given that if the price of gold decreased significantly, our financial condition and results of operations from this business product would not be adversely affected. The impact on our financial position and results of operations of a hypothetical decrease in gold values cannot be reasonably estimated because the market and competitive response to changes in gold values is not pre-determinable. Additionally, we may not be able to realise the full value of our collateral, due to, among other things, defects in the quality of gold or wastage on melting gold jewellery into gold bars. In addition, failure by our employees to properly appraise the value of the collateral provides us with no recourse against the borrower. For the personal loans and loans to small enterprises business, in connection with a customer who is also an existing customer of Shriram Chits we typically create a lien over the chit deposits of such customer. If the value of the chit deposits is insufficient to cover the entire loan amount, we typically also require immovable or movable property to be provided for the remaining value of the loan amount. In cases where the customer is unable to provide such immovable or movable property as security, the applicant is also required to furnish a guarantee from typically an existing or a former customer. Any deterioration in the value of such additional security or our failure to enforce such guarantees or to enforce such charges in a timely manner or at all could adversely affect our operations and profitability. Any default in repayment of the outstanding credit obligations by our customers may expose us to losses. A failure or delay to recover the expected value from sale of collateral security could expose us to a potential loss. Any such losses could adversely affect our financial condition and results of operations. Furthermore, enforcing our legal rights by litigating against defaulting customers is generally a slow and potentially expensive process in India. Accordingly, it may be difficult for us to recover amounts owed by defaulting customers in a timely manner or at all. 5. Our significant indebtedness and the conditions and restrictions imposed by our financing arrangements could restrict our ability to conduct our business and operations in the manner we desire. As of March 31, 2011, we had outstanding secured debt of ` 656, lakhs and unsecured debt of ` 75, lakhs and we will continue to incur additional indebtedness in the future. Most of our borrowings are secured by our immovable and other assets. Our significant indebtedness could have several important consequences, including but not limited to the following: a portion of our cash flow may be used towards repayment of our existing debt, which will reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate requirements; our ability to obtain additional financing in the future at reasonable terms may be restricted or our cost of borrowings may increase due to sudden adverse market conditions, including decreased availability of credit or fluctuations in interest rates; fluctuations in market interest rates may affect the cost of our borrowings as some of our indebtedness are at variable interest rates; there could be a material adverse effect on our business, financial condition and results of operations if we are unable to service our indebtedness or otherwise comply with financial and other covenants specified in the financing agreements; and we may be more vulnerable to economic downturns, may be limited in our ability to withstand 3

16 competitive pressures and may have reduced flexibility in responding to changing business, regulatory and economic conditions. Some of our financing agreements also include various conditions and covenants that require us to obtain lender consents prior to carrying out certain activities and entering into certain transactions. Failure to meet these conditions or obtain these consents could have significant consequences on our business and operations. Specifically, under some of our financing agreements, we require, and may be unable to obtain, consents from the relevant lenders for, among others, the following matters: entering into any scheme of merger; spinning-off of a business division; selling or transferring all or a substantial portion of our assets; making any change in ownership or control or constitution of our Company; making amendments in our Memorandum and Articles of Association; creating any further security interest on the assets upon which the existing lenders have a prior charge; and raising funds by way of any fresh capital issue. Our financing agreements also typically contain certain financial covenants including the requirement to maintain, among others, specified debt-to-equity ratios, debt-to-net worth ratios, or Tier I to Tier II capital ratios that may be higher than statutory or regulatory requirements. These covenants vary depending on the requirements of the financial institution extending the loan and the conditions negotiated under each financing document. Such covenants may restrict or delay certain actions or initiatives that we may propose to take from time to time. A failure to observe the covenants under our financing arrangements or to obtain necessary consents required thereunder may lead to the termination of our credit facilities, acceleration of all amounts due under such facilities and the enforcement of any security provided. Any acceleration of amounts due under such facilities may also trigger cross default provisions under our other financing agreements. If the obligations under any of our financing documents are accelerated, we may have to dedicate a substantial portion of our cash flow from operations to make payments under such financing documents, thereby reducing the availability of cash for our working capital requirements and other general corporate purposes. Further, during any period in which we are in default, we may be unable to raise, or face difficulties raising, further financing. Any of these circumstances could adversely affect our business, credit rating and financial condition and results of operations. Moreover, any such action initiated by our lenders could result in the price of our NCDs being adversely affected. 6. Our entire customer base comprises individual and/or small enterprise segment borrowers, who generally are more likely to be affected by declining economic conditions than larger corporate borrowers. Individual and small enterprise segment borrowers generally are less financially resilient than larger corporate borrowers, and, as a result, they can be more adversely affected by declining economic conditions. In addition, a significant majority of our customer base belongs to the low to medium income group and/or the small enterprises finance sector. Furthermore, unlike several developed economies, a nationwide credit bureau has only recently become operational in India, so there is less financial information available about individuals, particularly our focus customer segment from the low to medium income group who typically have limited access to other financing sources. It is therefore difficult to carry out precise credit risk analyses on our customers. Although we believe that our risk management controls are sufficient, we cannot be certain that they will continue to be sufficient or that additional risk management policies for individual borrowers will not be required. Failure to maintain sufficient credit assessment policies, particularly for individual borrowers, could adversely affect our credit portfolio which could have a material and adverse effect on our results of operations and financial condition. 7. We face increasing competition in our business which may result in declining margins if we are unable to compete effectively. We face competition in all our lines of businesses. Our primary competitors are other NBFCs, public sector banks, private sector banks, co-operative banks and foreign banks and the unorganized financiers who principally operate in the local markets. Over the past few years, the retail financing area has seen the entry of banks, both nationalized as well as foreign. Banks have access to low cost funds which enables them to enjoy higher margins and / or offer finance at lower rates. NBFCs do not have access to large quantities of low cost deposits, a factor which can render them less competitive. In addition, interest rate deregulation 4

17 and other liberalization measures affecting the retail and small enterprises finance sector, together with increased demand for capital by individuals as well as small enterprises, have resulted in an increase in competition. All of these factors have resulted in us facing increased competition from other lenders in each of our lines of businesses, including commercial banks and other NBFCs. Our ability to compete effectively will depend, to some extent, on our ability to raise low-cost funding in the future. Furthermore, as a result of increased competition in the finance sector, finance products are becoming increasingly standardized and variable interest rate and payment terms and lower processing fees are becoming increasingly common in the finance sector in India. There can be no assurance that we will be able to react effectively to these or other market developments or compete effectively with new and existing players in the increasingly competitive finance industry. Increasing competition may have an adverse effect on our net interest margin and other income, and, if we are unable to compete successfully, our market share may decline. If we are unable to compete effectively with other participants in the finance sector, our business, future financial performance and the trading price of the NCDs may be adversely affected. 8. Since we handle high volume of cash and gold jewellery in a dispersed network of branches, we are exposed to operational risks, including employee negligence, fraud, petty theft, burglary and embezzlement, which could harm our results of operations and financial position. Our transactions in connection with loans against gold, personal loans and loans to the small enterprises finance segment involve cash and gold jewellery. Large cash and gold jewellery transactions expose us to the risk of fraud by employees, agents, customers or third parties, theft, burglary and misappropriation or unauthorized transactions by our employees. Our insurance policies, security systems and measures undertaken to detect and prevent these risks may not be sufficient to prevent or deter such activities in all cases, which may adversely affect our operations and profitability. Further, we may be subject to regulatory or other proceedings in connection with any unauthorized transaction, fraud or misappropriation by our representatives and employees, which could adversely affect our goodwill. The nature and size of the items provided as collateral allow these items to be misplaced or mis-delivered, which may have a negative impact on our operations and result in losses. 9. We may not be able to successfully sustain our growth strategy. We have demonstrated consistent growth in our business and in our profitability. Our Assets Under Management have grown by a compounded annual growth rate, or CAGR, of 34% from ` 250, lakhs as of March 31, 2007 to ` 799, lakhs as of March 31, Our capital adequacy ratio as of March 31, 2011 computed on the basis of applicable RBI requirements was 20.53%, compared to the RBI stipulated minimum requirement of 12.00%. Our Tier I capital as of March 31, 2011 was ` 119,419 lakhs. Our Gross NPAs as a percentage of Total Loan Assets were 1.86% as of March 31, Our Net NPAs as a percentage of Net Loan Assets was 0.43% as of March 31, Our total income increased from ` 34, lakhs in fiscal 2007 to ` 132, lakhs in fiscal 2011 at a CAGR of 40%. Our net profit after tax increased from ` 5, lakhs in fiscal 2007 to ` 24, lakhs in fiscal 2011, at a CAGR of 47%. Our growth strategy includes growing our loan book and expanding our customer base. There can be no assurance that we will be able to sustain our growth strategy successfully or that we will be able to expand further or diversify our product portfolio. If we grow our loan book too rapidly or fail to make proper assessments of credit risks associated with new borrowers, a higher percentage of our loans may become non-performing, which would have a negative impact on the quality of our assets and our financial condition. We also face a number of operational risks in executing our growth strategy. We have experienced growth in each of our lines of business particularly in connection with loans to the small enterprises segment and loans against gold businesses, our branch network has expanded significantly, we are entering into new, smaller towns and cities within India as part of our growth strategy and gradually introducing all our products in each of our branches. 5

18 Our rapid growth exposes us to a wide range of increased risks, including business risks, such as the possibility that a number of our impaired loans may grow faster than anticipated, as well as operational risks, fraud risks and regulatory and legal risks. Moreover, our ability to sustain our rate of growth depends significantly upon our ability to manage key issues such as selecting and retaining key managerial personnel, maintaining effective risk management policies, continuing to offer products which are relevant to our target base of clients, developing managerial experience to address emerging challenges and ensuring a high standard of client service. We will need to recruit new employees, who will have to be trained and integrated into our operations. We will also have to train existing employees to adhere properly to internal controls and risk management procedures. Failure to train our employees properly may result in an increase in employee attrition rates, require additional hiring, erode the quality of customer service, divert management resources, increase our exposure to high-risk credit and impose significant costs on us. 10. We have no prior operating experience in the housing finance business and accordingly, we may not be able to successfully implement our growth strategy to foray into the housing finance business. Our Company incorporated a wholly owned subsidiary namely Shriram Housing Finance Limited in November 2010, with a view of entering the housing finance sector. We have applied to National Housing Bank (wholly owned by the Reserve Bank of India), for a certificate of registration under the National Housing Bank Act, 1987, to carry on business of a housing finance institution. The aforesaid Subsidiary will commence operations once it is registered with the National Housing Bank. Shriram Housing Finance Limited will typically target middle-income customers in semi-urban locations. We cannot assure that our foray into the housing finance business would yield favorable or expected results as our overall profitability and success will be subject to various factors including, among others, our ability to obtain necessary statutory and/or regulatory approvals and licenses in connection with the said business, our ability to effectively recruit, retain and motivate appropriate managerial talent, our inexperience in the housing finance sector and ability to compete with banks, housing finance companies and other financial institutions that are already well established in this market segment as well as our ability to effectively absorb additional infrastructure costs. Our housing finance business will require significant capital investments and commitments of time from our senior management, there also can be no assurance that our management will be able to develop the skills necessary to successfully manage these new business areas. Our inability to effectively manage any of these issues could materially and adversely affect our business and impact our future financial performance. 11. We may experience difficulties in expanding our business into new regions and markets in India and introducing our complete range of products in each of our branches. As part of our growth strategy, we continue to evaluate attractive growth opportunities to expand our business into new regions and markets in India. Factors such as competition, culture, regulatory regimes, business practices and customs and customer requirements in these new markets may differ from those in our current markets and our experience in our current markets may not be applicable to these new markets. In addition, as we enter new markets and geographical regions, we are likely to compete not only with other banks and financial institutions but also the local unorganized or semi-organized private financiers, who are more familiar with local regulations, business practices and customs and have stronger relationships with customers. As a part of our growth strategy, we propose to target establishing our operations through new branches in cities and towns where we historically had relatively limited operations, such as in eastern and northern parts of India, and to further consolidate our position and operations in western and southern parts of India. We target to gradually introduce our entire range of product offerings, namely (i) product finance loans, (ii) pre-owned and new vehicles loans, (iii) personal loans, (iv) loans against gold, and (v) loans to small enterprises at each of our existing branches across India. Our business may be exposed to various additional challenges including obtaining necessary governmental approvals, identifying and collaborating with local business and partners with whom we may have no 6

19 previous working relationship; successfully gauging market conditions in local markets with which we have no previous familiarity; attracting potential customers in a market in which we do not have significant experience or visibility; being susceptible to local taxation in additional geographical areas of India and adapting our marketing strategy and operations to different regions of India in which different languages are spoken. Our inability to expand our current operations may adversely affect our business prospects, financial conditions and results of operations. 12. A large number of our branches are located in southern India, and any downturn in the economy in the states in India where we operate, or any change in consumer preferences in that region could adversely affect our results of operations and financial condition. We have a strong concentration of our business in south India with 248 of our 559 branches as on March 31, 2011, located in the states of Tamil Nadu, Andhra Pradesh and Karnataka. Any adverse change in the political and/or economic environment in the states of Tamil Nadu, Andhra Pradesh and Karnataka or any unfavourable changes in the regulatory and policy regime in the said region could adversely affect our manufacturing operations, financial condition and/or profitbility. Further, any changes in consumer preferences in the said region could also affect our operations and profitability. 13. Any downgrade of our credit ratings would increase borrowing costs and constrain our access to capital and lending markets and, as a result, would negatively affect our net interest margin and our business. In relation to our long-term debt instruments, we currently have ratings of CARE AA from Credit Analysis and Research Limited ( CARE ), AA-(ind) from Fitch Ratings India Private Limited, ( Fitch ) and CRISIL AA- /Stable from CRISIL. In relation to our short-term debt instruments, we have also received ratings of CARE A1+ from CARE, F1+(ind) from Fitch, and CRISIL A1+ from CRISIL. Our fixed deposit programme has been rated as CARE AA (FD) by CARE, and taa- (ind) by Fitch. The NCDs proposed to be issued under this Issue have been rated CARE AA by CARE for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, 2011, and CRISIL AA-/Stable by CRISIL for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, The rating of the NCDs by CARE indicates high degree of safety regarding timely servicing of financial obligations and carrying very low credit risk. The rating of NCDs by CRISIL indicates high degree of safety regarding timely servicing of financial obligations. Any downgrade of our credit ratings would increase borrowing costs and constrain our access to capital and debt markets and, as a result, would negatively affect our net interest margin and our business. In addition, downgrades of our credit ratings could increase the possibility of additional terms and conditions being added to any additional financing or refinancing arrangements in the future. Any such adverse development could adversely affect our business, financial condition and results of operations. A large number of our branches are located in southern India and any downturn in the economy of southern India or adverse change in consumer preferences in that region could adversely affect our results of operations 14. If we are unable to manage the level of NPAs in our Loan Assets, our financial position and results of operations may suffer. Our Gross NPAs as a percentage of Total Loan Assets were 1.86 % and 2.27 % as of March 31, 2011 and March 31, 2010 respectively, while our Net NPAs as a percentage of Net Loan Assets were 0.43 % and 0.71 % as of March 31, 2011 and March 31, 2010, respectively. We cannot be sure that we will be able to improve our collections and recoveries in relation to our NPAs or otherwise adequately control our level of NPAs in future. Moreover, as our loan portfolio matures, we may experience greater defaults in principal and/or interest repayments. Thus, if we are not able to control or reduce our level of NPAs, the overall quality of our loan portfolio may deteriorate and our results of operations may be adversely affected. Furthermore, our current provisions may not be adequate when compared to the loan portfolios of other financial institutions. Moreover, there also can be no assurance that there will be no further deterioration in our provisioning coverage as a percentage of Gross NPAs or otherwise, or that the percentage of NPAs that we will be able to recover will be similar to our past experience of recoveries of NPAs. In the event of any further deterioration in our NPA portfolio, there could be an even greater, adverse impact on our results of operations. 7

20 15. A decline in our capital adequacy ratio could restrict our future business growth. As per RBI notification dated February 17, 2011, all deposit taking NBFCs have to maintain a minimum capital adequacy ratio, consisting of Tier I and Tier II capital, which shall not be less than 15.00% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items w.e.f. March 31, Our capital adequacy ratio computed on the basis of applicable RBI requirements was % as of March 31, 2011, with Tier I capital comprising %. If we continue to grow our loan portfolio and asset base, we will be required to raise additional Tier I and Tier II capital in order to continue to meet applicable capital adequacy ratios with respect to our business. There can be no assurance that we will be able to raise adequate additional capital in the future on terms favorable to us or at all and this may adversely affect the growth of our business. 16. System failures or inadequacy and security breaches in computer systems may adversely affect our business. Our business is increasingly dependent on our ability to process, on a daily basis, a large number of transactions. Our financial, accounting or other data processing systems may fail to operate adequately or become disabled as a result of events that are wholly or partially beyond our control including a disruption of electrical or communications services. Our ability to operate and remain competitive will depend in part on our ability to maintain and upgrade our information technology systems on a timely and cost-effective basis. The information available to and received by our management through our existing systems may not be timely and sufficient to manage risks or to plan for and respond to changes in market conditions and other developments in our operations. We may experience difficulties in upgrading, developing and expanding our systems quickly enough to accommodate our growing customer base and range of products. Our operations also rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could compromise data integrity and security. Any failure to effectively maintain or improve or upgrade our management information systems in a timely manner could materially and adversely affect our competitiveness, financial position and results of operations. Moreover, if any of these systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes or systems, it could affect our operations or result in financial loss, disruption of our businesses, regulatory intervention or damage to our reputation. In addition, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the localities in which we are located. 17. We may not be able to maintain our current levels of profitability due to increased costs or reduced spreads. Our business strategy involves a relatively high level of ongoing interaction with our customers. We believe that this involvement is an important part of developing our relationship with our customers, identifying new cross-selling opportunities and monitoring our performance. However, this level of involvement also entails higher levels of costs and also requires a relatively higher gross spread, or margin, on the finance products we offer in order to maintain profitability. There can be no assurance that we will be able to maintain our current levels of profitability if the gross spreads on our finance products were to reduce substantially, which could adversely affect our results of operations. 18. As part of our business strategy we assign or securitize a substantial portion of our Loan Assets to banks and other institutions. Any deterioration in the performance of any pool of receivables assigned or securitized to banks and other institutions may adversely impact our financial performance. 8

21 As part of our means of raising and/or managing our funds, we assign or securitize a substantial portion of the receivables from our loan portfolio to banks and other institutions. Such assignment or securitization transactions are conducted on the basis of our internal estimates of our funding requirements, which may vary from time to time. In fiscal 2007, 2008, 2009, 2010 and 2011 we securitized/assigned assets of a book value of ` 80, lakhs, ` 75, lakhs, ` 88, lakhs, ` 30,000 lakhs, and ` 117, lakhs respectively. Any change in statutory and/regulatory requirements in relation to assignments or securitizations by financial institutions, including the requirements prescribed by RBI and the Government of India, could have an adverse impact on our assignment or securitization transactions. Any adverse changes in the policy and/or regulations in connection with securitization of assets by NBFCs and/or new circulars and/or directions issued by the RBI in this regard, affecting NBFCs or the purchasers of assets, would affect the securitization market in general and our ability to securitise and/or assign our assets. We are also required to provide a credit enhancement for the securitization/assignment transactions by way of either fixed deposits or corporate guarantees and the aggregate credit enhancement amount outstanding as on March 31, 2011 was ` 15, lakhs by way of cash collateral. In the event a relevant bank or institution does not realize the receivables due under such Loan Assets, such bank or institution would have recourse to such credit enhancement, which could have a material adverse effect on our results of operations and financial condition. 19. We face asset-liability mismatches which could affect our liquidity and consequently may adversely affect our operations and profitability. We face potential liquidity risks due to varying periods over which our assets and liabilities mature. As is typical for NBFCs, a portion of our funding requirements is met through short-term funding sources such as bank loans, working capital demand loans, cash credit, short term loans and commercial papers. However, each of our products differs in terms of the average tenor, average yield, average interest rates and average size of loan. The average tenor of our products may not match with the average tenor of our liabilities. Consequently, our inability to obtain additional credit facilities or renew our existing credit facilities, in a timely and cost-effective manner or at all, may lead to mismatches between our assets and liabilities, which in turn may adversely affect our operations and financial performance. Further, mismatches between our assets and liabilities are compounded in case of pre-payments of the financing facilities we grant to our customers. 20. Any change in control of our Promoters and/or any disassociation of our Company from the Shriram Group could adversely affect our operations and profitability. As of June 31, 2011, SCL holds % of the paid up share capital of our Promoter Shriram Retail Holdings Private Limited, ( SRHPL ), and the remaining shares in SRHPL were held by certain strategic investors. SEHPL and SRHPL hold 36.04% and 17.20% of the paid up share capital of our Company as on March 31, 2011, respectively. If SCL ceases to exercise control over SRHPL as a result of any transfer of shares or otherwise, our ability to derive any benefit from the brand name Shriram and our goodwill as a part of the Shriram Group of companies may be adversely affected, which in turn could adversely affect our business and results of operations. Any such change of control could also significantly influence our business policies and operations. We benefit in several ways from other entities under the Shriram Group. We leverage on the Shriram Group s ecosystem to reach out to our prospective customers and our focus has been in maximizing our association with the Shriram brand name and the synergies offered by the infrastructure, of other entities in the Shriram Group. Our customer base over the years has comprised of customers of other entities in the Shriram Group. The large customer bases and wide-spread network of branches of entities such as Shriram Transport Finance Company Limited, (one of the largest organized asset financing NBFCs in India), and entities operating under the Shriram Chits brand name has continued to provide us with a large platform of target customers. Further, typically loans provided to chit depositors of Shriram Chits are partly or entirely secured by the deposits made with Shriram Chits. Accordingly, any disassociation of our Company from the Shriram Group and/or our inability to have access to the infrastructure provided by other 9

22 companies in the Shriram Group could adversely affect our ability to attract customers and to expand our business, which in turn could adversely affect our goodwill, operations and profitability. 21. The trade mark/service mark and logo in connection with the Shriram brand which we use is licensed to us and consequently, any termination or non-renewal of such license may adversely affect our goodwill, operations and profitability. Pursuant to a license agreement dated April 1, 2010 between our Company and Shriram Ownership Trust, ( SOT ) we are entitled to use the brand name Shriram and the associated mark. In this regard, our Company has to pay to SOT, 0.25% on the gross turnover of our Company for the first year of the license agreement. Royalty rates for the subsequent years will be decided mutually on or before April 1 st of the respective financial years. Along with the royalty, our Company also is required to pay to SOT amounts by way of reimbursement of actual expenses incurred by SOT in respect of protection and defence of the Copyright. The agreement is valid for a period of three years from the date of execution thereof, subject to any pre-mature termination thereof by SOT in accordance with the terms and conditions of the agreement. In the event such license agreement is terminated or is not renewed or extended in the future, we may not be entitled to use the brand name Shriram and the associated mark in connection with our business operations. Consequently, we will not be able to derive the goodwill that we have been enjoying under the Shriram brand. Further, if the commercial terms and conditions including the consideration payable pursuant to the said agreement are revised unfavorably, our Company may be required to allocate larger portions of its profits and/or revenues towards such consideration, which would adversely affect our profitability. We operate in a competitive environment and we believe that our brand recognition is a significant competitive advantage to us. If the license and user agreement is not renewed or terminated, we may need to change our name, trade mark/service mark or the logo. Any such change could require us to incur additional costs and may adversely impact our goodwill, business prospects and results of operations. 22. We have certain contingent liabilities which may adversely affect our financial condition. As of March 31, 2011, we had certain contingent liabilities not provided for, including the following: Guarantees issued by the company `6.81 lakhs Guarantees issued by others ` 1, lakhs For further information on such contingent liabilities, see Annexure VI to our Reformatted Consolidated Summary Financial Statements. In the event that any of these contingent liabilities materialize, our financial condition may be adversely affected. 23. We are involved in various legal and other proceedings that if determined against us could have a material adverse effect on our financial condition and results of operations. We are currently involved in a number of legal proceedings arising in the ordinary course of our business. These proceedings are pending at different levels of adjudication before various courts and tribunals, primarily relating to civil suits and tax disputes. For further information relating to certain significant legal proceedings that we are involved in, please refer to the section titled Pending Proceedings and Statutory Defaults beginning on page 169 of this Prospectus. An adverse decision in these proceedings could materially and adversely affect our business, financial condition and results of operations. 10

23 24. We may have to comply with strict regulations and guidelines issued by regulatory authorities in India. We are regulated principally by and have reporting obligations to the RBI. We are also subject to the corporate, taxation and other laws in effect in India. The regulatory and legal framework governing us may continue to change as India s economy and commercial and financial markets evolve. In recent years, existing rules and regulations have been modified, new rules and regulations have been enacted and reforms have been implemented which are intended to provide tighter control and more transparency in India s asset finance sector. Further, RBI may increase the minimum capital adequacy requirement for deposit taking NBFCs such as us. Compliance with many of the regulations applicable to our operations may involve significant costs and otherwise may impose restrictions on our operations. If the interpretation of the regulators and authorities varies from our interpretation, we may be subject to penalties and the business of our Company could be adversely affected. There can be no assurance that changes in these regulations and the enforcement of existing and future rules by governmental and regulatory authorities will not adversely affect our business and future financial performance. 25. Our ability to assess, monitor and manage risks inherent in our business differs from the standards of some of our counterparts in India and in some developed countries. We are exposed to a variety of risks, including liquidity risk, interest rate risk, credit risk, operational risk and legal risk. The effectiveness of our risk management is limited by the quality and timeliness of available data. Our hedging strategies and other risk management techniques may not be fully effective in mitigating our risks in all market environments or against all types of risk, including risks that are unidentified or unanticipated. Some methods of managing risks are based upon observed historical market behavior. As a result, these methods may not predict future risk exposures, which could be greater than the historical measures indicated. Other risk management methods depend upon an evaluation of information regarding markets, customers or other matters. This information may not in all cases be accurate, complete, current, or properly evaluated. Management of operational, legal or regulatory risk requires, among other things, policies and procedures to properly record and verify a number of transactions and events. Although we have established these policies and procedures, they may not be fully effective. Our future success will depend, in part, on our ability to respond to new technological advances and evolving NBFC and retail finance sector standards and practices on a cost-effective and timely basis. The development and implementation of such technology entails significant technical and business risks. There can be no assurance that we will successfully implement new technologies or adapt our transaction-processing systems to customer requirements or evolving market standards. 26. Our Promoters have significant control in our Company, which will enable them to influence the outcome of matters submitted to shareholders for approval, and their interests may differ from those of other holders of Equity Shares. As of June 30, 2011, our Promoters SEHPL and SRHPL beneficially owned 36.04% and 17.20%, respectively, of our paid-up equity share capital. See Capital Structure. Our Promoters have the ability to control our business including matters relating to any sale of all or substantially all of our assets, the timing and distribution of dividends and the election or termination of appointment of our officers and directors. This control could delay, defer or prevent a change in control of our Company, impede a merger, consolidation, takeover or other business combination involving our Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company even if it is in our Company s best interest. In addition, for so long as our Promoters continue to exercise significant control over our Company, it may influence the material policies of our Company in a manner that could conflict with the interests of our other shareholders. The Promoters may have interests that are adverse to the interests of our other shareholders and may take positions with which we or our other shareholders do not agree. 11

24 27. We have entered into certain related party transactions and may continue to do so in the future. We have entered into transactions with related parties, within the meaning of AS 18 as notified by the Companies (Accounting Standards) Rules, These transactions include royalty paid to Shriram Ownership Trust pursuant to the License Agreement dated April 1, 2010 between our Company and Shriram Ownership Trust in connection with the use of the brand name "Shriram" and the associated mark. For further information on our related party transactions please see the section titled Financial Information. Such transactions may give rise to current or potential conflicts of interest with respect to dealings between us and such related parties. Additionally, there can be no assurance that any dispute that may arise between us and related parties will be resolved in our favor. 28. Any failure by us to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully could adversely affect our results of operations, business and prospects. As part of our business strategy, we may acquire complementary companies or businesses, divest non-core businesses or assets, enter into strategic alliances and joint ventures and make investments to further our business. In order to pursue this strategy successfully, we must identify suitable candidates for and successfully complete such transactions, some of which may be large and complex, and manage the integration of acquired companies or employees. We may not fully realize all of the anticipated benefits of any such transaction within the anticipated timeframe or at all. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make such transactions less profitable or unprofitable. Managing business combination and investment transactions requires varying levels of management resources, which may divert our attention from other business operations, may result in significant costs and expenses and charges to earnings. The challenges involved in integration include: combining product offerings and entering into new markets in which we are not experienced; consolidating and maintaining relationships with customers; consolidating and rationalizing transaction processes and corporate and IT infrastructure; integrating employees and managing employee issues; coordinating and combining administrative and other operations and relationships with third parties in accordance with applicable laws and other obligations while maintaining adequate standards, controls and procedures; achieving savings from infrastructure integration; and managing other business, infrastructure and operational integration issues. 29. Our success depends in large part upon our management team and key personnel and our ability to attract, train and retain such persons. Our ability to sustain our rate of growth depends significantly upon our ability to manage key issues such as selecting and retaining key managerial personnel, developing managerial experience to address emerging challenges and ensuring a high standard of client service. In order to be successful, we must attract, train, motivate and retain highly skilled employees, especially branch managers and product executives. If we cannot hire additional qualified personnel or retain them, our ability to expand our business will be impaired and our revenue could decline. We will need to recruit new employees, who will have to be trained and integrated into our operations. We will also have to train existing employees to adhere properly to internal controls and risk management procedures. Failure to train and motivate our employees properly may result in an increase in employee attrition rates, divert management resources and subject us to incurring additional human resource related expenditure. Hiring and retaining qualified and skilled managers are critical to our future, as our business model depends on our credit-appraisal and asset 12

25 valuation mechanism, which are personnel-driven operations. Moreover, competition for experienced employees in the finance sector can be intense. While we have an incentive structure and two employee stock option schemes namely, ESOP 2006 and ESOP 2008, designed to encourage employee retention, our inability to attract and retain talented professionals, or the resignation or loss of key management personnel, may have an adverse impact on our business and future financial performance. 30. We are exposed to fluctuations in the market values of our investment and other asset portfolio. Recent turmoil in the financial markets has adversely affected economic activity globally, including in India. Continued deterioration of the credit and capital markets could result in volatility of our investment earnings and impairments to our investment and asset portfolio, which could negatively impact our financial condition and reported income. 31. Our results of operations could be adversely affected by any disputes with our employees. As of March 31, 2011, we employed 2,318 employees. Currently, none of our employees are members of any labor union. While we believe that we maintain good relationships with our employees, there can be no assurance that we will not experience future disruptions to our operations due to disputes or other problems with our work force, which may adversely affect our business and results of operations. 32. Our inability to obtain, renew or maintain our statutory and regulatory permits and approvals required to operate our business may have a material adverse effect on our business. We require certain statutory and/or regulatory permits and approvals for our business. Our Company incorporated a wholly owned subsidiary namely Shriram Housing Finance Limited in November 2010, with a view of entering the housing finance sector. We have applied to National Housing Bank (wholly owned by the Reserve Bank of India), for a certificate of registration under the National Housing Bank Act, 1987, to carry on business of a housing finance institution. Failure to obtain the same will adversely affect our proposed business in the housing finance sector. In the future, we will be required to renew such permits and approvals and obtain new permits and approvals for any proposed operations. There can be no assurance that the relevant authorities will issue any of such permits or approvals in a timely manner or at all, and/or on favorable terms and conditions. Failure by us to comply with the terms and conditions to which such permits or approvals are subject, and/or to renew, maintain or obtain the required permits or approvals may result in the interruption of our operations and may have a material adverse effect on our business, financial condition and results of operations. 33. We are subject to supervision and regulation by the RBI as a deposit-taking NBFC, and changes in RBI s regulations governing us could adversely affect our business. We are subject to the RBI s guidelines on financial regulation of NBFCs, including capital adequacy, exposure and other prudential norms. The RBI also regulates the credit flow by banks to NBFCs and provides guidelines to commercial banks with respect to their investment and credit exposure norms for lending to NBFCs. The RBI s regulations of NBFCs could change in the future which may require us to restructure our activities, incur additional costs or could otherwise adversely affect our business and our financial performance. The RBI, from time to time, amends the regulatory framework governing NBFCs to address, inter-alia, concerns arising from certain divergent regulatory requirements for banks and NBFCs. Pursuant to two notifications dated December 6, 2006, (Notifications No. DNBS. 189 / CGM (PK)-2006 and DNBS.190 / CGM (PK)-2006), the RBI amended the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, reclassifying deposit taking NBFCs, such as us. We are also subject to the requirements of the Non Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, issued by the RBI on February 22, 2007, as amended. The laws and regulations governing the banking and financial services industry in India have become increasingly complex and cover a wide variety of issues such as interest rates, liquidity, securitization, investments, ethical issues, money laundering and privacy. In some cases, there are overlapping regulations 13

26 and enforcement authorities. Moreover, these laws and regulations can be amended, supplemented or changed at any time such that we may be required to restructure our activities and incur additional expenses to comply with such laws and regulations, which could materially and adversely affect our business and our financial performance. For instance, RBI has vide recent circular dated May 3, 2011 clarified that bank finance to NBFCs would not be classified as priority sector lending, which has affected profitability of NBFCs engaged in money lending activities. Compliance with many of the regulations applicable to our operations in India and/or outside India, including any restrictions on investments, lending and other activities currently being carried out by our Company, involves a number of risks, particularly in areas where applicable regulations may be subject to varying interpretations. If the interpretation of the regulators and authorities varies from our interpretation, we may be subject to penalties and our business could be adversely affected. We are also subject to changes in Indian laws, regulations and accounting principles and practices. There can be no assurance that the laws governing the Indian financial services sector will not change in the future or that such changes or the interpretation or enforcement of existing and future laws and rules by governmental and regulatory authorities will not adversely affect our business and future financial performance. 34. Our insurance coverage may not adequately protect us against losses. We maintain such insurance coverage that we believe is adequate for our operations. Our insurance policies, however, may not provide adequate coverage in certain circumstances and are subject to certain deductibles, exclusions and limits on coverage. We maintain general liability insurance coverage including coverage for errors or omissions. We cannot, however, assure you that the terms of our insurance policies will be adequate to cover any damage or loss suffered by us or that such coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies including premium increases or the imposition of a larger deductible or co-insurance requirement could adversely affect our business, financial condition and results of operations. 35. There is ambiguity on whether or not NBFCs are required to comply with the provisions of state money lending laws, which if interpreted unfavorably by statutory/regulatory authorities or courts of law could adversely affect our operations and profitability. There is ambiguity on whether or not NBFCs are required to comply with the provisions of state money lending laws that establish ceilings on interest rates. We also carry out operations in several states such as Andhra Pradesh, Tamil Nadu, Madhya Pradesh, and Maharashtra, where there are money lending statutes in operation. The relevant state money lending statutes provide penalties for non-compliance with such statutes, including civil and criminal consequences. In the event that the government of any state in India requires us to comply with the provisions of their respective state money lending laws or imposes any penalty against us, our Directors or our officers, including for prior non-compliance, our business, results of operations and financial condition may be adversely affected. 36. We do not own most of our branch offices and our registered office. Any failure on our part to execute and/or renew leave and license agreements and/or lease deeds in connection with such offices or failure to locate alternative offices in case of termination of the leases and/or leave and license arrangements in connection with any branch could adversely affect our operations and profitability. Our Registered Office and most of our branches are located on leased and/or licensed premises. If any of the owners of these premises does not renew an agreement under which we occupy the premises or if any of the owners seeks to renew an agreement on terms and conditions unfavorable to us, we may suffer a disruption in our operations or increased costs, or both, which may adversely affect our business and results of operations. 14

27 Risks Relating to the Utilization of Issue Proceeds 37. The fund requirement and deployment mentioned in the Objects of the Issue have not been appraised by any bank or financial institution. We intend to use the proceeds of the Issue, after meeting the expenditures of and related to the Issue, for our various financing activities including lending and investments, subject to applicable statutory and/or regulatory requirements, to repay our existing loans and our business operations including for our capital expenditure and working capital requirements. For further details, please refer to the section titled Objects of the Issue beginning on page 60 of this Prospectus. The fund requirement and deployment is based on internal management estimates and has not been appraised by any bank or financial institution. The management will have significant flexibility in applying the proceeds received by us from the Issue. Further, as per the provisions of the Debt Regulations, we are not required to appoint a monitoring agency and therefore no monitoring agency has been appointed for this Issue. Risks Relating to the NCDs 38. Changes in interest rates may affect the price of our NCDs. All securities where a fixed rate of interest is offered, such as our NCDs, are subject to price risk. The price of such securities will vary inversely with changes in prevailing interest rates, i.e. when interest rates rise, prices of fixed income securities fall and when interest rates drop, the prices increase. The extent of fall or rise in the prices is a function of the existing coupon, days to maturity and the increase or decrease in the level of prevailing interest rates. Increased rates of interest, which frequently accompany inflation and/or a growing economy, are likely to have a negative effect on the price of our NCDs. 39. You may not be able to recover, on a timely basis or at all, the full value of the outstanding amounts and/or the interest accrued thereon in connection with the NCDs. Our ability to pay interest accrued on the NCDs and/or the principal amount outstanding from time to time in connection therewith would be subject to various factors inter-alia including our financial condition, profitability and the general economic conditions in India and in the global financial markets. We cannot assure you that we would be able to repay the principal amount outstanding from time to time on the NCDs and/or the interest accrued thereon in a timely manner or at all. Although our Company will create appropriate security in favour of the Debenture Trustee for the NCD holders on the assets adequate to ensure at least 100% asset cover for the NCDs, which shall be free from any encumbrances, the realizable value of the assets charged as security, when liquidated, may be lower than the outstanding principal and/or interest accrued thereon in connection with the NCDs. A failure or delay to recover the expected value from a sale or disposition of the assets charged as security in connection with the NCDs could expose you to a potential loss. 40. If we do not generate adequate profits, we may not be able to maintain an adequate Debenture Redemption Reserve, ( DRR ) for the NCDs issued pursuant to this Prospectus. Section 117C of the Act states that any company that intends to issue debentures must create a DRR to which adequate amounts shall be credited out of the profits of the company until the debentures are redeemed. The Ministry of Corporate Affairs has, through its circular dated April 18, 2002, ( Circular ), specified that the quantum of DRR to be created before the redemption liability actually arises in normal circumstances should be adequate to pay the value of the debentures plus accrued interest, (if not already paid), till the debentures are redeemed and cancelled. The Circular however further specifies that, for NBFCs like our Company, (NBFCs which are registered with the RBI under Section 45-IA of the RBI Act), the adequacy of the DRR will be 50% of the value of debentures issued through the public issue. Accordingly, our Company is required to create a DRR of 50% of the value of debentures issued through the public issue. As further clarified by the Circular, the amount to be credited as DRR will be carved out of the profits of the company only and there is no obligation on the part of the company to create DRR if 15

28 there is no profit for the particular year. Accordingly, if we are unable to generate adequate profits, the DRR created by us may not be adequate to meet the 50% of the value of the NCDs. This may have a bearing on the timely redemption of the NCDs by our Company. 41. Any downgrading in credit rating of our NCDs may affect the value of NCDs and thus our ability to raise further debts. The NCDs proposed to be issued under this Issue have been rated CARE AA by CARE for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, 2011, and CRISIL AA-/Stable by CRISIL for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, The rating of the NCDs by CARE indicates high degree of safety regarding timely servicing of financial obligations and carrying very low credit risk. The rating of NCDs by CRISIL indicates high degree of safety regarding timely servicing of financial obligations. The ratings provided by CRISIL and/or CARE may be suspended, withdrawn or revised at any time by the assigning rating agency and should be evaluated independently of any other rating. These ratings are not a recommendation to buy, sell or hold securities and investors should take their own decisions. Please refer to page 28 for the rationale for the above ratings There is no active market for the NCDs on the stock exchanges. As a result the liquidity and market prices of the NCDs may fail to develop and may accordingly be adversely affected. There can be no assurance that an active market for the NCDs will develop. If an active market for the NCDs fails to develop or be sustained, the liquidity and market prices of the NCDs may be adversely affected. The market price of the NCDs would depend on various factors inter alia including (i) the interest rate on similar securities available in the market and the general interest rate scenario in the country, (ii) the market price of our Equity Shares, (iii) the market for listed debt securities, (iv) general economic conditions, and, (v) our financial performance, growth prospects and results of operations. The aforementioned factors may adversely affect the liquidity and market price of the NCDs, which may trade at a discount to the price at which you purchase the NCDs and/or be relatively illiquid. 43. There may be a delay in making refunds to applicants. We cannot assure you that the monies refundable to you, on account of (a) withdrawal of your applications, (b) our failure to receive minimum subscription in connection with the Base Issue, (c) withdrawal of the Issue, or (d) failure to obtain the final approval from the NSE and/or BSE for listing of the NCDs, will be refunded to you in a timely manner. We however, shall refund such monies, with the interest due and payable thereon as prescribed under applicable statutory and/or regulatory provisions. B. EXTERNAL RISK FACTORS 44. Our two-wheeler and other vehicle loans businesses are dependent on the automobile and transportation industry in India. Our two-wheeler and other vehicle loans businesses to a large extent depend on the continued growth in the automobile and transportation industry in India, which are influenced by a number of extraneous factors which are beyond our control, inter-alia including (a) the macroeconomic environment in India, (b) the demand for transportation services, (c) natural disasters and calamities, and (d) changes in regulations and policies in connection with motor vehicles. Such factors may result in a decline in the sales or value of new and pre-owned vehicles. Correspondingly, the demand for availing finance for new and pre-owned vehicles may decline, which in turn may adversely affect our financial condition and the results of our operations. Further, the ability of vehicle owners and/or operators to perform their obligations under existing financing agreements may be adversely affected if their businesses suffer as a result of the aforesaid factors. 45. Our loans to the small enterprises is dependent on the performance of the small enterprises sector in India, competition from public sector banks and financial institutions and other NBFCs, and government policies and statutory and/or regulatory reforms in the small enterprises finance sector. 16

29 As on March 31, 2011, 24 % of our Assets Under Management were represented by loans to the small enterprises segment. In recognition of the contribution and vast potential of the small enterprises finance sector in the economy, provision of adequate credit to this sector continues to be an important element of banking policy, particularly after the initiation of structural reforms in According to the Ministry of Finance, Government of India, small and medium enterprises sector contribute about 40% of total manufacturing and 34% of total exports and is crucial to India's economic growth, employment generation and entrepreneurial development, (Source: Ministry Website). The Government of India has from time to time taken economic policy initiatives to promote this sector and enhance credit to small and medium enterprises. Some of the initiatives of the Government towards MSME financing include setting up of credit guarantee fund trust for small industries, risk sharing facility, venture capital funding, micro credit, etc. The small enterprises finance sector currently is catered to largely by public sector banks, public financial institutions and local unorganized private financiers. Any change in statutory and/or regulatory requirements in connection with the small enterprises finance sector, change in government policies, slow down in liberalization and reforms affecting the sector could affect the performance of small enterprises, which would affect the demand for finance in this sector, which in turn would affect the results of our operations from loans to the small enterprises finance sector. Further, progressive reforms, policy, statutory and/regulatory provisions in connection with the sector could enable easier access to finance to small enterprises from banks, NBFCs and other financial institutions which in turn could result in increased competition for our Company in relation to loans issued to small enterprises. Our inability to manage such competition could adversely affect our results of operations from loans to the small enterprises finance sector. 46. Increase in competition from our peer group in the finance sector may result in reduction of our market share, which in turn may adversely affect our profitability. We have been increasingly facing competition from domestic and foreign banks and NBFCs in each of our lines of businesses. Some of our competitors are very aggressive in underwriting credit risk and pricing their products and may have access to funds at a lower cost, wider networks and greater resources than our Company. Our financial condition and results of operations are dependent on our ability to obtain and maintain low cost funds and to provide prompt and quality services to our customers. If our Company is unable to access funds at a cost comparable to or lower than our competitors, we may not be able to offer loans at competitive interest rates to our customers. While our Company believes that it has historically been able to offer competitive interest rates on the loans extended to our customers, there can be no assurance that our Company will be able to continue to do so in the future. An increase in competition from our peer group may result in a decline in our market share, which may in turn result in reduced incomes from our operations and may adversely affect our profitability. 47. Our growth depends on the sustained growth of the Indian economy. An economic slowdown in India and abroad could have a direct impact on our operations and profitability. Macroeconomic factors that affect the Indian economy and the global economic scenario have an impact on our business. The quantum of our disbursements is driven by the growth in demand for vehicles, capital by small enterprises and loans by individuals. Any slow down in the Indian economy may have a direct impact on our disbursements and a slowdown in the economy as a whole can increase the level of defaults thereby adversely impacting our Company s profitability, the quality of its portfolio and growth plans. 48. Political instability or changes in the government could delay further liberalization of the Indian economy and adversely affect economic conditions in India generally, which could impact our business. 17

30 Since 1991, the Government has pursued a policy of economic liberalization, including significantly relaxing restrictions on the private sector. There can be no assurance that these liberalization policies will continue in the future as well. The rate of economic liberalization could change and specific laws and policies affecting financial services companies, foreign investment, currency exchange rates and other matters affecting investments in Indian companies could change as well. A significant slowdown in India s economic liberalization and deregulation policies could disrupt business and economic conditions in India, thus affecting our business. Any political instability in the country, including any change in the Government, could materially impact our business adversely. 49. Civil unrest, terrorist attacks and war would affect our business. Terrorist attacks and other acts of violence, war or conflicts, particularly those involving India, as well as the United States of America, the United Kingdom, Singapore and the European Union, may adversely affect Indian and global financial markets. Such acts may negatively impact business sentiment, which could adversely affect our business and profitability. India has from time to time experienced and continues to experience, social and civil unrest, terrorist attacks and hostilities with neighbouring countries. Also, some of India s neighbouring countries have experienced or are currently experiencing internal unrest. This, in turn, could have a material adverse effect on the Indian economy and in turn may adversely affect our operations and profitability and the market for the NCDs. 50. Our business may be adversely impacted by natural calamities or unfavourable climatic changes. India, Bangladesh, Pakistan, Indonesia, Japan and other Asian countries have experienced natural calamities such as earthquakes, floods, droughts and a tsunami in recent years. Some of these countries have also experienced pandemics, including the outbreak of avian flu. These economies could be affected by the extent and severity of such natural disasters and pandemics which could, in turn affect the financial services sector of which our Company is a part. Prolonged spells of abnormal rainfall, draught and other natural calamities could have an adverse impact on the economy, which could in turn adversely affect our business and the price of our NCDs. 51. Any downgrading of India's sovereign rating by an international rating agency (ies) may affect our business and our liquidity to a great extent. Any adverse revision to India's credit rating for domestic and international debt by international rating agencies may adversely impact our ability to raise additional finances at favourable interest rates and other commercial terms. This could have an adverse effect on our growth, financial performance and our operations. PROMINENT NOTES 1. This is a public issue of NCDs by our Company aggregating upto ` 37,500 lakhs with an option to retain over-subscription upto ` 37,500 lakhs for issuance of additional NCDs, aggregating to a total of ` 75,000 lakhs. 2. For details on the interest of our Company s Directors, please refer to the sections titled Our Management and Capital Structure beginning on pages 111 and 49 of this Prospectus, respectively. 3. Our Company has entered into certain related party transactions, within the meaning of AS 18 as notified by the Companies (Accounting Standards) Rules, 2006, as disclosed in the section titled Financial Information beginning on page 130 of this Prospectus. 4. Any clarification or information relating to the Issue shall be made available by the Lead Managers, the Co-Lead Manager and our Company to the investors at large and no selective or additional information would be available for a section of investors in any manner whatsoever. 18

31 5. Investors may contact the Registrar to the Issue, Compliance Officer, the Lead Managers and the Co-Lead Manager for any complaints pertaining to the Issue. In case of any specific queries on allotment/refund, Investor may contact Registrar to the Issue. 6. In the event of oversubscription to the Issue, allocation of NCDs will be as per the "Basis of Allotment" set out on page 165of this Prospectus. 7. Our Equity Shares are listed on the NSE and BSE. 8. Some of our privately placed non convertible debentures are listed in BSE. 9. As of March 31, 2011, we had certain contingent liabilities not provided for, including the following: Guarantees issued by the company `6.81 lakhs Guarantees issued by others `1, lakhs For further information on such contingent liabilities, see Annexure VI to our Reformatted Unconsolidated Summary Financial Statements. 10. For further information relating to certain significant legal proceedings that we are involved in, see Pending Proceedings and Statutory Defaults beginning on page 169 of this Prospectus. 19

32 Shriram City Union Finance Limited SECTION III : INTRODUCTION GENERAL INFORMATION Date of Incorporation: March 27, Our Company was incorporated as a private limited company under the provisions of the Act. Subsequently, our Company became a public limited company pursuant to a fresh certificate of incorporation dated April 10, Registered Office: 123, Angappa Naicken Street, Chennai, Tamil Nadu Corporate Office: 221, Royapettah High Road, Mylapore, Chennai, Tamil Nadu Tel.: ; Fax: Registration: Corporate Identification Number: L65191TN1986PLC issued by the Registrar of Companies, Chennai, Tamil Nadu. Our Company holds a certificate of registration dated April 17, 2007, bearing registration no issued by the RBI to carry on the activities of a NBFC under section 45 IA of the RBI Act, Compliance Officer (and Company Secretary): The details of the person appointed to act as Compliance Officer for the purposes of this Issue is set out below: Mr. C. R. Dash Company Secretary Shriram City Union Finance Limited 221, Royapettah High Road Mylapore, Chennai Tamil Nadu Tel.: Fax: Investors may contact the Registrar to the Issue or the Compliance Officer in case of any pre-issue or post-issue related matters such as non-receipt of Allotment Advice, demat credit, refund orders or interest on application money. 20

33 Lead Managers: JM Financial Consultants Private Limited 141 Maker Chambers III Nariman Point Mumbai Tel: Fax: Investor Grievance Website: Contact Person: Ms. Lakshmi Lakshmanan Compliance Officer: Mr. Chintal Sakaria SEBI Registration No.: INM A. K. Capital Services Limited 30-39, Free press House Free Press Journal Marg 215, Nariman Point Mumbai Tel: /6634 Fax: Investor Grievance Website: Contact Person: Mr. Hitesh Shah Compliance Officer: Mr. Vikas Agarwal SEBI Registration No: INM ICICI Securities Limited ICICI Centre, H.T. Parekh Marg, Churchgate Mumbai Tel: Fax: Investor Grievance Website: Contact Person: Mr. Manvendra Tiwari Compliance Officer: Mr. Subir Saha SEBI Registration No: INM Co-Lead Managers: Karvy Investor Services Limited Regent Chambers, 2 nd floor Nariman Point, Mumbai Tel : Fax: Investor Grievance Website: Contact Person: Mr. Omkar Barve Compliance Officer: Mr. Rajnish Rangari SEBI Registration No: INM Debenture Trustee: IDBI Trusteeship Services Limited Asian Building, Ground Floor 17, R Kamani Marg Ballard Estate Mumbai Tel: Fax: Website: Contact Person: Ms. Brindha V SEBI Registration No.: IND IDBI Trusteeship Services Limited has by its letter dated July 4, 2011 given its consent for its appointment as Debenture Trustee to the Issue and for its name to be included in this Prospectus and in all the subsequent periodical communications sent to the holders of the Debentures issued pursuant to this Issue. 21

34 Registrar to the Issue Integrated Enterprises (India) Limited 2 nd Floor, Kences Towers No.1 Ramakrishna Street North Usman Road, T Nagar Chennai Tel: , , Fax: Investor Grievance Website: Contact Person: Mr. K. Balasubramanian / Mr. Sriram S SEBI Registration No.: INR Statutory Auditor: Our statutory auditor being: M/s Pijush Gupta & Co Chartered Accountants P-199, C.I.T. Road, Scheme IV-M Kolkata Tel: Firm registration number: E Credit Rating Agencies: Credit Analysis & Research Limited 4 th Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway Sion (East), Mumbai Tel: Fax: CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai Tel: Fax: Legal Advisor to the Issue: J Sagar Associates Vakils House, 18, Sprott Road Ballard Estate Mumbai Tel: Fax: Lead Brokers to the Issue JM Financial Services Private Limited 141 Maker Chambers III, 13 th Floor, Nariman Point, Mumbai , India Tel: / Fax: Website: 22 AK Stockmart Private Limited 30-39, Free Press House, Free Press Journal Marg, 215, Nariman Point, Mumbai , India. Tel: Fax: Website:

35 Contact Person: Mr. Rohit Singh SEBI Registration No: NSE: INB BSE: INB ICICI Securities Limited ICICI Centre, HT Parekh Marg, Churchgate, Mumbai , India Tel: Fax: Website: Contact Person: Mr. Mitesh Shah SEBI Registration No: NSE: INB BSE: INB Anand Rathi Shares & Stock Brokers Limited 4 th Floor, Silver Metropolis Jai Coach Compound, Opposite Bimbisar Nagar, Goregaon (East) Mumbai , India. Tel: Fax: Website: Contact Person: Mr. Vinay Mahajan SEBI Registration No: NSE: INB BSE: INB Edelweiss Broking Limited Edelweisss House Off. C.S.T. Road, Kalina, Mumbai , India. Tel: , Fax: Website: Contact Person: Mr. Nirmal Rewaria SEBI Registration No: NSE: INB BSE: INB HDFC Securities Limited Office Floor 8, I Think Building, Jolly Board Campus, Opp. Crompton Greaves Factory, Kanjurmarg (East) Mumbai , India. Tel: Fax: Website: Contact Person: Mr. Sunil Raula SEBI Registration No: NSE: INB BSE: INB Kotak Securities Limited 3 rd Floor, Nirlon House, Dr. Annie Besant Road, Worli, Mumbai , India Tel: Fax: Contact Person: Mr. Alpesh Busa SEBI Registration No: INB Karvy Stock Broking Limited Karvy House 46, Avenue 4, Street No.1,Banjara Hills, Hyderabad , India Tel: Fax: Website: Contact Person: Mr. Ramapriyan PB SEBI Registration No: INB Bajaj Capital Investor Services Limited 5 th Floor, Bajaj House, 97, Nehru Place, New Delhi India. Tel: Fax: Website: Contact Person: Mr. Surajit Misra SEBI Registration No: INB ENAM Securities Private Limited Khatau Building, 2 nd Floor, 44 Bank Street, Fort, Mumbai , India. Tel: Fax: Website: Contact Person: Mr. Ajay Sheth / Mr. Vinay Ketkar SEBI Registration No: NSE: INB BSE: INB Integrated Securities Limited 15, 1 st Floor, Modern House, Dr. V.B. Gandhi Marg, Forbes Street, Fort, Mumbai , India Tel: Fax: Website: Contact Person: Mr. V. Krishnan SEBI Registration No: INB RR Equity Brokers Private Limited 47, MM Road, Rani Jhansi Marg, Jhandewalan, New Delhi , India Tel: /63 Fax:

36 Website: Contact Person: Mr. Sanjeeb Kumar Das SEBI Registration No: NSE: INB BSE: INB SMC Global Securities Limited 11/6B, Shanti Chambers Pusa Road, New Delhi, India. Tel: Fax: Website: Contact Person: Mr. Mahesh Gupta SEBI Registration No: INB Website: Contact Person: Mr. Manish Agrawal SEBI Registration No: INB SPA Securities Limited 101-A, 10 th Floor, Mittal Court, Nariman Point, Mumbai , India Tel: / Fax: /09 Website: Contact Person: Mr. Rajesh Gandhi SEBI Registration No: NSE: INB BSE: INB Bankers to the Issue: HDFC Bank Limited FIG - OPS Department, - Lodha, I Think Techno Campus, O-3, Level, Next to Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai Tel: Fax: Website: Contact Person: Mr. Deepak Rane SEBI Registration No.: INBI Dhanlaxmi Bank Ground Floor, Janmabhoomi Bhavan, Janmabhoomi Marg, Fort, Mumbai Tel: / Fax: / Website: Contact Person: Venkataraghavan T. A. SEBI Registration No.: INBI INDUSIND Bank Limited Cash Management Services Solitare Corporate Park, No. 1001, Building No. 10, Ground Floor, Guru Hargovindji Marg, Andheri (East), Mumbai Tel: Fax: Website: Contact Person: Suresh Esaki SEBI Registration No.: INBI YES Bank Limited 3 rd Floor, Ion House, Dr. E. Moses Road, Mahalaxmi, Mumbai Tel: Fax: Website: Contact Person: Mr. Mahesh Shirali SEBI Registration No.: INBI ICICI Bank Limited Rajabahadur Mansion, 30, Mumbai Samachar Marg, Fort, Mumbai Tel: /12 Fax: Website: Contact Person: Mr.Anil Gadoo SEBI Registration No.: INBI The Hongkong and Shanghai Banking Corporation Limited Plot No B, Western Express Highway, Sahar Road Junction, Ville Parle (East), Mumbai Tel: Fax: Website: Contact Person: Swapnil Pavale SEBI Registration No.: INBI Kotak Mahindra Bank Limited 5th Floor, Dani Corporate Park, 158 CST Road, Kalina, Santacruz (East), Mumbai

37 Tel: Fax: Website: Contact Person: Vidhi Gupta SEBI Registration No.: INBI Bankers to our Company ANDHRA BANK Corporate Finance Branch, 16 th, Earnest House, NCPA Marg, Nariman Point, Mumbai Tel: Fax: BANK OF INDIA Chennai Corporate Banking Branch, IV Floor, Tarapore Towers, 826, Anna Salai, Chennai Tel: Fax: CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK Westminster Building 2 nd Floor, New No. 70, Dr. Radhakrishnann Salai, Mylapore, Chennai Tel: Fax: CENTRAL BANK OF INDIA Industrial Finance Branch, No.49, Montieth Road, Egmore, Chennai Tel: Fax: CITY UNION BANK LIMITED "Keerthis", First Floor, No.67, Mandaveli Street, Mandaveli, Chennai Tel: Fax: DENA BANK T Nagar Branch No.1, Thanikachalam Road, Chennai Tel: Fax: AXIS BANK Ground Floor, Karumuthu Nilayam, No. 192, Anna Salai, Chennai Tel: Fax: BANK OF MAHARASHTRA 16, East Mada Street, Chennai Tel: Fax: CANARA BANK Prime Corporate Branch, Ground Floor Spencer Tower-I, No.770, Anna Salai, Chennai Tel: Fax: CORPORATION BANK White Road Branch, 38 & 39, Whites Road, Chennai Tel: Fax: DBS BANK LIMITED DBS Building, 806 Annasalai, Chennai Tel: Fax: FEDERAL BANK LIMITED 61, Anna Salai, Chennai Tel: Fax:

38 HDFC BANK LIMITED Corporate Banking Department, 2 nd Floor, Process House, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai Tel: Fax: THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Nagabrahma Towers, No.76. Cathedral Road Chennai Tel: Fax: ICICI BANK LIMITED 3 rd Floor No.1, Cenotaph Road Teynampet Chennai Tel: Fax: INDIAN BANK No.66, Rajaji Salai, Chennai Tel: Fax: INDUSIND BANK 1 st Floor, IndusInd House, 425, Dadasaheb Bhadkamkar Marg, Opera House, Mumbai Tel: Fax: INDIAN OVERSEAS BANK Commercial & Institutional Credit Branch, "Auras Corporate Centre", 98-A, Dr. Radhakrishnan Salai, Mylapore, Chennai Tel: Fax: IDBI Bank Limited No.115, Anna Salai, P.B. No. 805, Saidapet, Chennai Tel: Fax: JAMMU & KASHMIR BANK Voltax International Centre, No. 52, Armenian Street, Parrys Chennai Tel: Fax: ING VYSYA BANK Regional Office: No. 185, Anna Salai, 02 nd Floor, Chennai Tel: Fax: ORIENTAL BANK OF COMMERCE Spencer Plaza, Ground Floor, 769, Anna Salai, Chennai Tel: Fax: PUNJAB NATIONAL BANK No.10,Raja Street, T. Nagar, Chennai Tel: Fax: KARUR VYSYA BANK LIMITED Kamanwala Chambers, Sir P.M. Road, Fort, Mumbai Tel: Fax: KOTAK MAHINDRA BANK LIMITED 04th Floor, Kotak Infiniti, Building No.21, Infinity Park, Gen A.K. Vaidya Marg, Malad (E), Mumbai Tel: Fax: STANDARD CHARTERED BANK Origination & Client Coverage, 19, Rajaji Salai, 4 th Floor, Chennai Tel: Fax:

39 THE SOUTH INDIAN BANK LIMITED Industrial Finance Branch, No. 110, Raheja Towers, 177, Anna Salai, Chennai Tel: Fax: STATE BANK OF BIKANER AND JAIPUR 1 st Floor, Giriraj Bldg., 73, Sant Tukaram Road, Danabunder, Masjid (E), Mumbai Tel: Fax: SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA Overseas Towers, No. 756L, Anna Salai (Opp. TVS), Chennai Tel: Fax: STATE BANK OF MAURITIUS LIMITED Prince Arcade, 4th Floor, 22-A, Cathedral Road, Chennai Tel: Fax: STATE BANK OF MYSORE Branch 224-C, Mittal Court, 4 th Floor, Nariman Point, Mumbai Tel: Fax: STATE BANK OF INDIA Industrial Finance Branch, Mumbai 'The Arcade" 2nd floor, World Trade Centre, Cuffe Parade, Coloba, Mumbai Tel: Fax: STATE BANK OF TRAVANCORE 556 Anna Salai, Teynampet, Chennai Tel: Fax: TAMIL NADU MERCANTILE BANK 738, Anna Salai, (Near District Central Library), Chennai Tel: Fax: STATE BANK OF PATIALA Commercial Branch, Atlanta, First Floor, Nariman Point, Mumbai Tel: Fax: SYNDICATE BANK 170 Eldams Road, Teynampet Chennai Tel: Fax: UNION BANK OF INDIA 12/13, Kodambakkam High Road, Nunqambakkam, Chennai Tel: Fax: VIJAYA BANK 168 Mount Road, Chennai Tel: Fax: UNITED BANK OF INDIA United Bank of India, No. 25, Sir P.M. Road, Fort, Mumbai Tel: Fax: YES BANK LIMITED 143/1, Nungambakkam High Road, Chennai Tel: Fax:

40 Impersonation As a matter of abundant precaution, attention of the investors is specifically drawn to the provisions of sub-section (1) of section 68A of the Act, relating to punishment for fictitious applications. Minimum Subscription If our Company does not receive the minimum subscription of 75 % of the Base Issue, i.e. ` 28,125 lakhs, on the date of closure of the Issue, the entire subscription shall be refunded to the applicants within 30 days from the date of closure of the Issue. If there is delay in the refund of subscription by more than 8 days after our Company becomes liable to refund the subscription amount, our Company will pay interest for the delayed period at rates prescribed under sub-sections (2) and (2A) of Section 73 of the Companies Act, Credit Rating and Rationale The NCDs proposed to be issued under this Issue have been rated CARE AA by CARE for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, 2011, and CRISIL AA-/Stable by CRISIL for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, The rating of the NCDs by CARE indicates high degree of safety regarding timely servicing of financial obligations and carrying very low credit risk. The rating of NCDs by CRISIL indicates high degree of safety regarding timely servicing of financial obligations. Rationale The rationale for the aforementioned credit rating issued by CARE is as follows: The rating factors in the strong business growth of the Company with good profitability and asset quality parameters. The rating also factors in the strengths that the Company derives from the Shriram Group franchise, SCUF s position as a niche player in the semi urban and rural areas, diversified product portfolio, adequate capitalization and strong resource raising capability with diversified funding base and experienced management. The rating is however constrained on account of regional concentration of the Company s business and evolving nature of the management information system. SCUF s ability to maintain asset quality and raise capital to sustain growth are the key rating sensitivities. CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. The rationale for the aforementioned credit rating issued by CRISIL is as follows: The rating reflects the Company s following strengths, (i) synergies derived from association with the Shriram Group, (ii) healthy capitalization and (iii) adequate earnings. The aforementioned strengths are partially offset by the Company s following weaknesses, (i) exposure to potential asset quality risks from lending to low income group segments and (ii) geographical concentration in lending portfolio. CRISIL rating reflects CRISIL's current opinion on the likelihood of timely payment of the obligations under the rated instrument and does not constitute an audit of the rated entity by CRISIL. CRISIL ratings are based on information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the rating is based. A CRISIL rating is not a recommendation to buy, sell, or hold the rated instrument; it does not comment on the market price or suitability for a particular investor. All CRISIL ratings are under surveillance. Ratings are revised as and when circumstances so 28

41 warrant. CRISIL is not responsible for any errors and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this product. Utilisation of Issue proceeds Our Board of Directors certifies that: all monies received out of the Issue shall be credited/transferred to a separate bank account other than the bank account referred to in sub-section (3) of Section 73 of the Act; details of all monies utilised out of the Issue referred above shall be disclosed under an appropriate separate head in our balance sheet indicating the purpose for which such monies have been utilised; details of all unutilised monies out of the Issue, if any, shall be disclosed under an appropriate head in our balance sheet indicating the form in which such unutilised monies have been invested; and we shall utilize the Issue proceeds only upon creation of security as stated in this Prospectus in the section titled Issue Structure beginning on page 144 of this Prospectus. the Issue proceeds shall not be utilized towards full or part consideration for the purchase or any other acquisition, inter alia by way of a lease, of any property. Issue Programme The subscription list for the Issue shall remain open for subscription at the commencement of banking hours and shall close at the close of banking hours on the dates indicated below or earlier or on such date, as may be decided at the discretion of the Board of Directors or any committee of the Board of Directors of our Company subject to necessary approvals ISSUE OPENS ON August 11, 2011 ISSUE CLOSES ON August 27, 2011 The subscription list for the Issue shall remain open for subscription at the commencement of banking hours and close at the close of banking hours on the dates indicated above or earlier or on such date as may be decided at the discretion of the Committee of Directors of our Company subject to necessary approvals. In the event of such early closure of subscription list of the Issue, our Company shall ensure that notice of such early closure is given on such early date of closure through advertisement/s in a leading national daily newspaper. 29

42 SUMMARY OF BUSINESS, STRENGTH & STRATEGY Frost & Sullivan India Private Limited has used due care and caution in preparing the report titled Analysis of MSME Loan Markets for NBFCs July Information has been obtained from sources that Frost & Sullivan India Private Limited considers reliable. However, Frost & Sullivan India Private Limited does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. No part of the said report may be published / reproduced in any form without Frost & Sullivan India Private Limited s prior written approval. Frost & Sullivan India Private Limited is not liable for investment decisions which may be based on the views expressed in the said report. Overview Our Company is a deposit-accepting NBFC registered with RBI, offering (i) financing for two wheelers, appliances and other commercial goods, ( Product Finance ), (ii) pre-owned and new vehicle loans, (iii) personal loans, (iv) loans against gold, and (v) loans to the small enterprise finance segment. Our current lines of business and organisational structure are as follows: According to the Frost and Sullivan report titled Analysis of MSME Loan Markets for NBFCs July 2011, our Company is the largest small enterprise finance company in India. In the small loan segment (loans of `1 lakh -10 lakh) our Company has a dominant share of 95%. Our Company also leads the total Indian micro, small and medium enterprises market with 53 % share. Our Company was established in 1986 and we have a track record of twenty five years in the financial services sector in India. Since 2005 we have focused on the retail financing segment. Our Company has been registered as a deposit-taking NBFC with the RBI since September 4, 2000 under Section 45IA of the Reserve Bank of India Act, We are a part of the Shriram Group of companies which has a strong presence in financial services in India, including commercial vehicle financing, consumer finance, life and general insurance, stock broking, chit funds and distribution of financial products such as life and general insurance products and mutual fund products, as well as a growing presence in other businesses such as property development, engineering projects and information technology. 30

43 We leverage on the Shriram Group s ecosystem to reach out to our prospective customers and our focus has been in maximizing our association with the Shriram brand name and the synergies offered by the infrastructure, of other entities in the Shriram Group. Our customer base over the years has significantly comprised of customers of other entities in the Shriram Group. The large customer bases and wide-spread network of business outlets of entities such as, Shriram Transport Finance Company Limited, (one of the largest organized asset financing NBFCs in India), and entities operating under the Shriram Chits brand name, has continued to provide us with a large platform of target customers. Over the last 25 years our Company has established a pan-india presence, with 559 branches and 91 other business outlets as of March 31, 2011, across 17 states in India, with a significant presence in south India. As on March 31, 2011, our total employee strength was 2,318. We operate in a hub-and spoke business model, where responsibilities from loan origination to recoveries of loans are vested in each of our business outlets, under the general supervision and control of our head office in Chennai. Our business outlet networks are interconnected and each business outlet is connected to our head office through an ERP platform developed by Take Solution Limited, Chennai. We have demonstrated consistent growth in our business and in our profitability. Our Assets Under Management have grown by a compounded annual growth rate, or CAGR, of 34% from ` 250, lakhs as of March 31, 2007 to ` 799, lakhs as of March 31, Our capital adequacy ratio as of March 31, 2011 computed on the basis of applicable RBI requirements was 20.53%, compared to the RBI stipulated minimum requirement of 12.00%. Our Tier I capital as of March 31, 2011 was ` 119, lakhs. Our Gross NPAs as a percentage of Total Loan Assets were 1.86% as of March 31, Our Net NPAs as a percentage of Net Loan Assets was 0.43% as of March 31, Our total income increased from ` 34, lakhs in fiscal 2007 to ` 132, lakhs in fiscal 2011 at a CAGR of 40%. Our net profit after tax increased from ` 5, lakhs in fiscal 2007 to ` 24, lakhs in fiscal 2011, at a CAGR of 47%. A summary of our assets under management, net non performing assets, total income and net profit after tax for the corresponding periods specified below are as follows: Particulars Assets Under Management Net Non performing assets ` In Lakhs As at March As at March As at March As at March As at March 31, , , , , , , , , , , , , , , For the For the For the For the For the Financial Financial Financial Financial Financial Year Ended Year Ended Year Ended Year ended year ended March 31, March 31, March 31, March 31, March 31, Total Income 34, , , , , Net Profit after Tax 5, , , , , Our Strengths We believe that the following are our key strengths: Diversified Portfolio of Products Our Company s product portfolio comprises (i) Product Finance loans, (ii) pre-owned and new vehicles loans, (iii) personal loans, (iv) loans against gold, and (v) loans to small enterprise finance segment. Each of our products differs in terms of the average tenor, average yield, average interest rates and average size of loan. As on March 31, 2011 approximately 15 % of our Assets Under Management comprised product finance loans, 24 % of our Assets Under Management comprised vehicle loans, 9 % of our Assets Under Management comprised personal loans, 28 % 31

44 of our Assets Under Management comprised loans against gold, and 24 % of our Assets Under Management comprised loans to small enterprise finance segment. Our diverse revenue streams reduce our dependence on any particular product, thus enabling us to spread and mitigate our risk exposure to any particular industry, business or customer segment. Pan-India Presence, Strong Foot-hold in Southern India and Synergies with Other Shriram Group Entities As of March 31, 2011, we had 559 branches and 91 other business outlets across 17 states in India, with a significant presence in south India. As on March 31, 2011, our total employee strength was 2,318. We have a strong foothold in south India. We leverage on the Shriram Group s ecosystem to solicit our customers and our focus has been in maximizing our association with the Shriram brand name and the synergies offered by the infrastructure, of other entities in the Shriram Group. Our customer base over the years has significantly comprised of customers of other entities in the Shriram Group. The large customer bases and wide-spread network of business outlets of entities such as, Shriram Transport Finance Company Limited, (one of the largest organized asset financing NBFCs in India), and entities operating under the Shriram Chits brand name, has continued to provide us with a large platform of target customers. We believe the under-banked community, especially the small enterprise finance segment often do not have sufficient movable and/or immovable property to provide as security or collateral for loans. Our relationship and knowledge of customers requirements also enables us to minimize our risks while extending loans to such under-banked communities. For instance, loans provided to chit depositors of Shriram Chits, are partly or entirely secured by the deposits made with Shriram Chits. Shriram Chits has several years of experience of collecting chit deposits from self-employed professionals, wholesale/retail dealers, merchants, builders, manufacturers and small and medium scale business operators, which provides us a with an extensive database of potential borrowers, specially for our loans to the small enterprise finance segment. Hub and Spoke Business Model with Efficient Credit Policies and Procedures We operate in a hub-and spoke business model, where the responsibilities from loan origination to recoveries of loans are vested in each of our business outlets, under the general supervision and control of our head office in Chennai. Our business outlet networks are interconnected and each business outlet is connected to our head office through an ERP platform developed by Take Solution Limited, Chennai. The ERP platform enables our management to monitor each loan right from its origination to final closure of accounts. Our head office and senior management is primarily responsible for the broad policy formulation for our businesses. However, the decision making process in connection with loans is decentralized and majorly vested in our business outlets, which ensures speedy credit approvals and more efficient turn around times in processing loans. We focus on closely monitoring our assets and borrowers through our officials at each business outlet. Our branch officials develop relationships with our target customer base, which enables us to capitalize on local knowledge. We follow stringent credit policies, including limits on customer exposure, to ensure the asset quality of our loans and the security provided for such loans. Further, we have nurtured a culture of accountability by making our product executives responsible for loan administration and monitoring as well as recovery of the loans they originate. We have a dedicated team of officials at each business outlet who are responsible for (i) loan origination, (ii) credit evaluation, (iii) pre-lending field investigations where our officials personally visit our prospective customers at their homes or offices, and (v) post lending credit appraisal. The team of officials responsible for origination of a loan is also responsible for the timely servicing of loans, recoveries, and monitoring the performance of each loan from origination to closure of the loan. We offer incentivized salary structures to such officials, where their incentives are linked to recovery of installments of the principal amount and interest on the loans. We believe our efficient credit policies, credit approval procedures, credit delivery process and relationship-based loan administration and monitoring methodology have aided in increasing our customer loyalty and earn repeat business and customer referrals. Our stringent credit policies and relationship based model has helped us maintain relatively low NPA levels. Our Gross NPAs as a percentage of Total Loan Assets were 1.86 % as of March 31, Our Net NPAs as a percentage of Net Loan Assets was 0.43 % as of March 31,

45 Access to a range of cost effective funding sources We fund our capital requirements through a variety of sources. Our fund requirements are currently predominantly sourced through term loans from banks, issue of redeemable non-convertible debentures on a private placement basis, and cash credit from banks including working capital loans. We access funds from a number of credit providers, including nationalized banks, private Indian banks and foreign banks, and our track record of prompt debt servicing has allowed us to establish and maintain strong relationships with these financial institutions. We have also placed commercial paper, as and when required in the past. As a deposit-taking NBFC, we are also able to mobilize retail fixed deposits at competitive rates. We have also raised subordinated loans eligible for Tier II capital. We also undertake securitization/assignment transactions to increase the efficient use of our capital and as a cost effective source of funds. In relation to our long-term debt instruments, we currently have ratings of CARE AA from Credit Analysis and Research Limited ( CARE ), AA-(ind) from Fitch Ratings India Private Limited, ( Fitch ) and CRISIL AA- /Stable from CRISIL. In relation to our short-term debt instruments, we have also received ratings of CARE A1+ from CARE, F1+(ind) from Fitch, and CRISIL A1+ from CRISIL. Our fixed deposit programme has been rated as CARE AA (FD) by CARE, and taa- (ind) by Fitch. The NCDs proposed to be issued under this Issue have been rated CARE AA by CARE for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, 2011, and CRISIL AA-/Stable by CRISIL for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, The rating of the NCDs by CARE indicates high degree of safety regarding timely servicing of financial obligations and carrying very low credit risk. The rating of NCDs by CRISIL indicates high degree of safety regarding timely servicing of financial obligations. We believe that we have been able to achieve a relatively stable cost of funds despite the difficult conditions in the global and Indian economy and the resultant reduced liquidity and an increase in interest rates, primarily due to our improved credit ratings, (as evidenced by the recent upgrade in our ratings by Fitch and CARE). We believe we are able to borrow from a range of sources at competitive rates. Experienced senior management team Our Board consists of 12 Directors, (including representatives of the TPG Group), with extensive experience in the financial services sectors. Our senior and middle management personnel have significant experience and in-depth industry knowledge and expertise. Our management promotes a result-oriented culture that rewards our employees on the basis of merit. In order to strengthen our credit appraisal and risk management systems, and to develop and implement our credit policies, we have hired a number of senior managers who have extensive experience in the Indian banking and financial services sector and in specialized finance firms providing loans to retail customers. We believe that the in-depth industry knowledge and loyalty of our management and professionals provide us with a distinct competitive advantage. Strategy Our key strategic priorities are as follows: Further expand operations by growing our business outlet network and introducing full range of products in all business outlets We intend to continue to strategically expand our operations in target markets establishing additional business outlets. Our customer origination and servicing efforts strategically focus on building long term relationships with our customers and address specific issues and local business requirements of potential customers in a particular region. We have a strong concentration of our business in south India with 248 of our 559 branches as on March 31, 2011, located in the states of Tamil Nadu, Andhra Pradesh and Karnataka. 91 % of our Assets Under Management as on March 31, 2011 were represented by loans originated in the states of Tamil Nadu, Karnataka and Andhra Pradesh. However, we have continued to make efforts to expand and penetrate into other regions in India. Currently, we have succeeded in opening business outlets in 17 different states in India. We propose to target establishing our operations through new business outlets in cities and towns where we historically had relatively limited operations, such as in eastern and northern parts of India, and to further consolidate our position and 33

46 operations in western and southern parts of India. Our focus would be to typically target Tier II and Tier III cities, where we believe that demand for our products will grow steadily in the near future. As an internal policy, we typically introduce our products in a particular location only after having evaluated the regional market and the demand for each individual product. Currently, not all of our business outlets offer our full range of products. As a part of our strategy we target to gradually introduce our entire range of product offerings, namely (i) Product Finance loans, (ii) pre-owned and new vehicles loans, (iii) personal loans, (iv) loans against gold, and (v) small enterprise finance segment at each of our existing business outlets across India. Continue growth in the Loans to Small Enterprises Finance Segment Our Company started offering customized loans to small enterprises finance segment in 2006 and has continually focused on expanding our customer base for this product since then. We see a significant opportunity for our Company to expand our customer base in small enterprise finance segment. According to the Frost and Sullivan report titled Analysis of MSME Loan Markets for NBFCs July 2011, our Company is the largest small enterprise finance company in India. In the small loan segment (loans of `1 lakh -10 lakh) our Company has a dominant share of 95 %. Our Company also leads the total Indian micro, small and medium enterprises market with 53 % share. As a strategy, we will continue to leverage on the infrastructure provided by entities operating under the Shriram Chits brand name. Shriram Chits has several years of experience of collecting chit deposits from selfemployed professionals, wholesale/retail dealers, merchants, builders, manufacturers and small and medium scale business operators, which provides us a with an extensive database of potential borrowers, specially for our loans to the small enterprises segment. We also propose to extend such loans to our existing customer base for our other products and propose to introduce small enterprises segment loans in all our current business outlets as well as in new business outlets that we open in the future. Increase focus on loans against gold business Since 2007 we have been providing personal and business loans secured by gold jewellery and ornaments, primarily to individuals who possess gold jewellery but do not have access to formal credit within a reasonable time, or to whom credit may not be available at all, to meet their short-term requirements. We propose to utilize our existing business outlet networks, our existing customer base as well as the infrastructure offered by other Shriram Group entities, to expand our reach and customer base for loans against gold. We expect to establish this product in new markets and to target potential customers using the Shriram Group s eco-system, to include customers who otherwise continue to rely on the unorganized sector for timely funding requirements. We propose to capitalize on the Shriram brand name and our good-will with our existing customers to further develop our business for this product. Continue to implement advanced processes and systems We have invested in our technology systems and processes to create a stronger organization and ensure good management of customer credit quality. Our information technology strategy is designed to increase our operational and managerial efficiency. We aim to increasingly use technology in streamlining our credit approval, administration and monitoring processes to meet customer requirements on a real-time basis. We continue to implement technology led processing systems to make our appraisal and collection processes more efficient, facilitate rapid delivery of credit to our customers and augment the benefits of our relationship based approach. We also believe that deploying strong technology systems will enable us to respond to market opportunities and challenges swiftly, improve the quality of services to our customers, and improve our risk management capabilities. Foray into Housing Finance Business Our Company incorporated a wholly owned subsidiary namely Shriram Housing Finance Limited in November 2010, with a view of entering the housing finance sector. We have applied to National Housing Bank (wholly owned by the Reserve Bank of India), for a certificate of registration under the National Housing Bank Act, 1987, to carry on business of a housing finance institution. We believe that offering housing finance will help us expand our product portfolio and we are well positioned to enter into this business through our established infrastructure, our existing customer base as well as through leveraging our association with other entities in the Shriram Group. The aforesaid Subsidiary will commence operations once it is registered with the National Housing Bank. As a part of its strategy, Shriram Housing Finance Limited will typically target middle-income customers in semi-urban locations. 34

47 THE ISSUE The following is a summary of the Issue. This summary should be read in conjunction with, and is qualified in its entirety by, more detailed information in the chapter titled Terms of the Issue beginning on page 141 of this Prospectus. Common Terms of NCDs Issuer Shriram City Union Finance Limited Issue Stock Exchanges proposed for listing of the NCDs Issuance and Trading Trading Lot Depositories Security Rating Public Issue by our Company of NCDs aggregating upto ` 37,500 lakhs with an option to retain over-subscription upto ` 37,500 lakhs for issuance of additional NCDs aggregating to a total of upto ` 75,000 lakhs. NSE and BSE Compulsorily in dematerialised form One NCD NSDL and CDSL Security for the purpose of this Issue will be created in accordance with the terms of the Debenture Trust Deed. For further details please refer to the section titled Issue Structure beginning on page 144 of this Prospectus. The NCDs proposed to be issued under this Issue have been rated CARE AA by CARE for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, 2011, and CRISIL AA-/Stable by CRISIL for an amount of upto ` 75,000 Lakhs vide its letter dated July 14, The rating of the NCDs by CARE indicates high degree of safety regarding timely servicing of financial obligations and carrying very low credit risk. The rating of NCDs by CRISIL indicates high degree of safety regarding timely servicing of financial obligations. Issue Schedule Pay-in date Deemed Date of Allotment The Issue shall be open from August 11, 2011 to August 27, 2011 with an option to close earlier and/or extend upto a period as may be determined by our Board. 3 (three) Business Days from the date of reciept of application or the date of realisation of the cheques/demand drafts, whichever is later. Deemed date of allotment shall be the date of issue of the Allotment Advice / regret. *The subscription list shall remain open for a period as indicated, with an option for early closure or extension by such period, upto a period of 30 days from date of opening of the Issue, as may be decided by the Board of Directors of our Company. In the event of such early closure of subscription list of the Issue, our Company shall ensure that notice of such early closure is given on such early date of closure through advertisement/s in a leading national daily newspaper. 35

48 The specific terms of each instrument are set out below: Options I II Frequency of Interest Payment Annual Annual Minimum Application ` 10,000/- (10 NCDs) (for all options of NCDs, namely Options I and Option II either taken individually or collectively) In Multiples of ` 1,000 (1 NCD) ` 1,000 (1 NCD) Face Value of NCDs ` 1,000 ` 1,000 (` / NCD) Issue Price (` / NCD) ` 1,000 ` 1,000 Mode of Interest Payment Through Various options available Through Various options available Coupon (%) for NCD Holders in 11.60% per annum 11.50% per annum Category I and Category II Coupon (%) for NCD holders in the 12.10% per annum 11.85% per annum Reserved Individual Portion Coupon (%) for NCD holders in the 11.85% per annum 11.60% per annum Unreserved Individual Portion Effective Yield (per annum) For NCD holders in the Reserved Individual Portion 12.10% For NCD holders in the Unreserved Individual Portion 11.85% For all other NCD holders 11.60% For NCD holders in the Reserved Individual Portion 11.85% For NCD holders in the Unreserved Individual Portion 11.60% For all other NCD holders 11.50% Put and call option Exercisable at the end of 48 months from the Deemed Date of Allotment Nil Tenor 60 months* 36 months Redemption Date 60 months from the Deemed Date of Allotment* 36 months from the Deemed Date of Allotment. Redemption Amount (`/NCD) Nature of Indebtedness CRISIL Repayment of the Face Value plus any interest that may have accrued at the Redemption Date, or at the date of early redemption if any Put Option or Call Option is exercised, as the case may be* Pari Passu with other secured creditors and priority over unsecured creditors Credit Rating 'AA-/Stable' for an amount of upto ` 75,000 Lakhs Repayment of the Face Value plus any interest that may have accrued at the Redemption Date. Pari Passu with other secured creditors and priority over unsecured creditors 'AA-/Stable' for an amount of upto ` 75,000 Lakhs CARE 'CARE AA' for an amount of upto ` 75,000 Lakhs Deemed Date of Allotment Deemed date of allotment shall be the date of issue of the Allotment Advice / regret. * Subject to the exercise of the put and/or call option 'CARE AA' for an amount of upto ` 75,000 Lakhs Deemed date of allotment shall be the date of issue of the Allotment Advice / regret. 36

49 SUMMARY FINANCIAL INFORMATION The following tables present an extract of Reformatted Consolidated Summary Financial Statements and the Reformatted Unconsolidated Summary Financial Statements. The Reformatted Consolidated Summary Financial Statements and the Reformatted Unconsolidated Summary Financial Statements should be read in conjunction with the examination report thereon issued by our Statutory Auditors and statement of significant accounting policies and notes to accounts on the Reformatted Consolidated Summary Financial Statements and the Reformatted Unconsolidated Summary Financial Statements contained in the section titled Financial Information beginning on page 130 of this Prospectus. A. SUMMARY INFORMATION OF OUR UNCONSOLIDATED ASSETS AND LIABILITIES A. Assets (` in lakhs) Particulars As at March 31, Fixed and Intangible Assets(Net) (including CWIP) 2, , , , , B Investments C Deferred Tax Asset (Net) 1, , D Current Assets, Loans & Advances 936, , , , , F Total (A+B+C+D) 941, , , , , G Liabilities Secured Loans 656, , , , , H Unsecured Loans 75, , , , , I Deferred Tax Liability (Net) , J Current Liabilities 70, , , , , K Provisions 17, , , , , L Total (G+H+I+J+K) 819, , , , ,

50 M (` in lakhs) Particulars As at March 31, Net Worth (F-L) 121, , , , , (i) (ii) (iii) (iv) (v) (vi) Represented By Share Capital 4, , , , , Share application money pending allotment Stock Option Outstanding 1, , , Optionally Convertible warrants - - 2, Reserves and Surplus 114, , , , , Less : Miscellaneous Expenditure (to the extent not written off or adjusted) Total (i+ii+iii+iv+v-vi) 121, , , , ,

51 B. SUMMARY INFORMATION OF OUR UNCONSOLIDATED PROFIT AND LOSS ACCOUNT (` in lakhs) Particulars For the year ended March 31, A. Income i Income from Operations 131, , , , , ii Other Income , , , , Total Income 132, , , , , B. Expenditure i Financial Expenses 58, , , , , ii Personnel Expenses 4, , , , iii Operating & Other Expenses 20, , , , , iv Depreciation and amortization , , v Impairment loss/(reversal) on Fixed assets & stock - - 1, vi Share & Debenture Issue expenses written off vii Provisions & Write offs (net) 11, , , , , Total Expenditure 96, , , , , C. Net Profit Before Taxation (A-B) 36, , , , , D. Provision for taxation Current tax 12, , , , , Deferred tax (458.96) (809.65) (946.04) (2,340.33) (191.70) Wealth tax 1.76 Fringe Benefit Tax Fringe Benefit Tax of earlier Year Total Tax 12, , , , , E. Net Profit after Taxation (C-D) 24, , , , , Balance in Profit & Loss Account brought forward 22, , , , ,

52 Particulars (` in lakhs) For the year ended March 31, F. Balance Available for Appropriations 46, , , , , G. Appropriations Dividend - Cumulative Redeemable Preference Shares Equity Shares - Interim dividend 1, Equity Shares - Proposed final dividend 1, , , , Preference Shares - Proposed final dividend Tax on dividend Tax on proposed dividend Transfer to statutory reserve 4, , , , , Transfer to general reserve 2, , , Transfer to Capital Redemption Reserve - - 2, Total Appropriations 10, , , , , H. Balance carried to Balance Sheet (F-G) 36, , , , ,

53 C. SUMMARY INFORMATION OF OUR UNCONSOLIDATED CASH FLOW STATEMENT Particulars For the year ended March 31, (` in lakhs) A. Cash flow from operating activities Net profit before taxation 36, , , , , Depreciation and amortization , , Share and debenture issue expenses written off (Profit) / loss on sale of fixed assets (net) Lease equalization Adjustments (11.49) (Profit) / loss on sale of current and long term investments (net) Interest income on current and long term investments and interest income on fixed deposits (270.70) (1,203.65) (258.14) (228.64) (302.65) Dividend income - (444.91) (56.47) (46.06) (65.27) Employees Stock option compensation cost , Provision for impairment - - 1, Provision for hedging contracts (546.62) Provisions for non performing assets and bad debts written off 10, , , , , Provisions for standard assets 1, Provision for gratuity Provision for leave encashment Provision for diminution in value of investments Operating profit before working capital changes 48, , , , , Movements in working capital: (Increase) / decrease in current assets: (Increase) / decrease in assets under financing activities (233,365.56) (111,057.72) (101, ) (108, ) (88, ) (Increase) / decrease in sundry debtors (13.21) (60.52) (Increase) / decrease in lease assets - net of sales (Increase) / decrease in other current assets (11,530.50) (5,552.81) (29.55) (94.98)

54 Particulars (Increase) / decrease in other loans and advances (` in lakhs) For the year ended March 31, (931.92) 4, , (2,111.58) (1,734.19) Increase / (decrease) in current liabilities 23, , , (2,119.00) Cash generated from operations (173,741.42) (58,154.50) (65,430.87) (92,733.06) (68, ) Direct taxes paid (net of refunds) (11,127.69) (9,197.57) (6,450.11) (6,522.66) (3,154.36) Net cash used in operating activities (A) (184,869.11) (67,352.07) (71,880.98) (99,255.72) (71, ) B. Cash flows from investing activities Investment in Fixed deposits (net) 7, (12,665.70) (5,855.70) Purchase of fixed assets and intangibles (1,663.61) (1,058.11) (879.02) (670.26) Proceeds from sale of fixed assets , (368.18) Purchase of Investment (200.00) Investment in subsidiary company (250.00) - (4.55) (4.99) - Proceeds from sale of investment in subsidiary company Proceeds from sale of investments - 1, Interest received on current and long term investments and interest on fixed deposits , Dividend received Net cash used in investing activities (B) 6, (7,901.05) (6,361.73) (282.06) C. Cash Flows from financing activities Proceeds from issue of equity share capital including securities premium & Share application , , , , Proceeds from issue of share warrants - - 2, (327.80) Increase / (decrease) in bank borrowings (net) 180, (3,271.15) 70, , , Increase / (decrease) in long term borrowings(net) 62, , , , Increase / (decrease) in fixed deposits (net) (45.64) (12.06) (52.87) (214.31) 2.84 Increase / (decrease) in subordinate debts (net) , , , ,

55 Particulars For the year ended March 31, (` in lakhs) Increase / (decrease) in redeemable non convertible debentures (net) - - (3,500.00) 3, Increase / (decrease) in unsecured loans 22, (5,425.00) 5, (247.50) Dividend paid (2,710.89) (2,358.20) (1,897.26) (1,324.00) (959.32) Tax on dividend (450.25) (400.77) (322.44) (225.01) (134.55) Net cash from financing activities (C) 263, , , , , Net increase / (decrease) in cash and cash equivalents (A + B + C) 84, (33,257.14) 67, , , Cash and Cash Equivalents at the beginning of the year 116, , , , , Cash and Cash Equivalents at the end of the year 201, , , , , Components of Cash and Cash Equivalents Cash and Cash Equivalents at the end of the year as per Balance Sheet As at March 31, , , , , , Less: Balance in Current account held for unpaid dividends Less : Fixed deposits held for unpaid dividends Less : Fixed deposits held for more than three months Less : Fixed Deposit under Lien , , , , , , , ,

56 D. SUMMARY INFORMATION OF OUR CONSOLIDATED ASSETS AND LIABILITIES Assets (` in lakhs) Particulars As at March 31, 2011 A. Fixed and Intangible Assets(Net) (including CWIP) 2, B Investments C Deferred Tax Asset (Net) 1, D Current Assets, Loans & Advances 936, E Total (A+B+C+D) 941, Liabilities F Secured Loans 656, G Unsecured Loans 75, H Current Liabilities 70, I Provisions 17, J Total (F+G+H+I) 820, K Net Worth (F-K) 121, Represented By (i) Share Capital 4, (ii) Stock Option Outstanding 1, (iii) Reserves and Surplus 114, (iv) Less : Miscellaneous Expenditure (to the extent not written off or adjusted) Total (i+ii+iii+iv+v-vi) 121,

57 E. SUMMARY INFORMATION OF OUR CONSOLIDATED PROFIT AND LOSS ACCOUNT A. Income Particulars (` in lakhs) For the year ended March 31,2011 i Income from Operations 131, ii Other Income Total Income 132, B. Expenditure i Financial Expenses 58, ii Personnel Expenses 4, iii Operating & Other Expenses 20, iv Depreciation and amortization v Provisions & Write offs (net) 11, Total Expenditure 96, C. Net Profit Before Taxation (A-B) 36, D. Provision for taxation Current tax 12, Deferred tax (458.96) Total Tax 12, E. Net Profit after Taxation (C-D) 24, Balance in Profit & Loss Account brought forward 22, F. Balance Available for Appropriations 46, G. Appropriations Equity Shares - Interim dividend 1, Equity Shares - Proposed final dividend 1, Tax on dividend Tax on proposed dividend Transfer to statutory reserve 4,

58 Particulars (` in lakhs) For the year ended March 31,2011 Transfer to general reserve 2, Total Appropriations 10, H. Balance carried to Balance Sheet (F-G) 36,

59 F. SUMMARY INFORMATION OF OUR CONSOLIDATED CASH FLOW STATEMENT (` in lakhs) Particulars Total As at March 31, 2011 A. Cash flow from operating activities Net Profit before taxation 36, Depreciation and amortisation (Profit)/loss on sale of assets(net) income on fixed deposits (270.70) Employees Stock option compensation cost Provision for hedging contracts (546.62) Provision for non performing assets and bad debts written off 10, Contingent Provision against Standard assets 1, Provision for gratuity Provision for leave encashment Operating profit before working capital changes 48, Movements in working capital: (Increase) / decrease in assets under financing activities (233,365.55) (Increase) / decrease in other current assets (11,530.50) (Increase)/decrease in other loans and advances (931.92) Increase / (decrease) in current liabilities 23, Cash generated from operations (173,722.74) Direct taxes paid ( net of refunds) (11,127.69) Net cash used in operating activities (A) (184,850.43) B. Cash flows from investing activities Investment in Fixed deposits (net) 7, Purchase of fixed and intangible assets (1,666.35) Proceeds from sale of fixed assets 2.52 Interest on fixed deposit Pre-operative Expenditure (21.03) Preliminary Expenditure (2.73) Net cash used in investing activities (B) 6, C. Cash Flows from financing activities Proceeds from issue of equity share capital including securities premium and Share Application Money Increase/ (decrease) in bank borrowings(net) 180, Increase/ (decrease) in long term borrowings (net) 62, Increase/ (decrease) in fixed deposits (net) (45.64) Increase/ (decrease) in subordinate debts (net) Increase / (decrease) in unsecured loans 22, Dividend paid (2,710.89) Tax on dividend (450.25) Net cash from financing activities (C) 263, Net increase / (decrease) in cash and cash equivalents (A + B + C) 84,

60 (` in lakhs) Particulars Total As at March 31, 2011 Cash and Cash Equivalents at the beginning of the period 116, Cash and Cash Equivalents at the end of the year 201, Components of Cash and Cash Equivalents Cash and Cash Equivalents at the end of the year as per Balance Sheet 216, Less: Balance in Current account held for unpaid dividends Less: Fixed deposits held for more than three months Less: Fixed deposit under lien 15, ,

61 CAPITAL STRUCTURE Details of share capital The share capital of our Company as at date of this Prospectus is set forth below: Share Capital ` in Lakhs AUTHORISED SHARE CAPITAL 60,000,000 Equity Shares of ` 10/- each 6, ,000 Cumulative Redeemable Preference Shares of ` 100/- each 4, TOTAL 10, ISSUED 49,733,379 Equity Shares of ` 10 /- each 4, SUBSCRIBED 49,733,379 Equity Shares of ` 10 /- each 4, PAID-UP SHARE CAPITAL 49,733,379 Equity Shares of ` 10/- each 4, TOTAL 4, Changes in the authorised capital of our Company as on the date of this Prospectus: Sr. FY Alteration No The Authorised Share capital of our Company was increased from ` 2,500,000 divided into 25,000 Equity shares of `100/- each to ` 5,000,000 divided into 50,000 Equity shares of ` 100/- each The Authorised Share capital of our Company was increased from ` 5,000,000 divided into 50,000 Equity shares of `100/- each to ` 20,000,000 divided into 2,000,000 Equity shares of ` 10/- each The Authorised Share capital of our Company was reorganised and increased from ` 20,000,000 divided into 2,000,000 Equity shares of ` 10/- each to ` 60,000,000 divided into 6,000,000 Equity shares of `10/- each The Authorised Share capital of our Company was reorganised ` 60,000,000 divided into 6,000,000 Equity shares of `10/- each to ` 45,000,000 divided into 4,500,000 Equity shares of `10/- each and ` 15,000,000 divided into 1,500,000 preference shares of `10/- each The Authorised Share capital of our Company was increased from ` 60,000,000 divided into 4,500,000 Equity shares of `10/- each and 1,500,000 preference shares of `10/- each to ` 100,000,000 divided into 8,500,000 Equity shares of `10/- each and 1,500,000 preference shares of `10/- each The Authorised Share capital of our Company was increased from ` 100,000,000 divided into 8,500,000 Equity shares of `10/- each and 1,500,000 preference shares of `10/- each to ` 200,000,000 divided into 15,000,000 Equity Shares of `10/- each and 5,000,000 redeemable preference shares of `10/- each The Authorised Share capital of our Company was increased from ` 200,000,000 divided into 15,000,000 Equity Shares of `10/- each and 5,000,000 redeemable preference shares of `10/- each to ` 250,000,000 divided into 15,000,000 Equity shares of `10/- each and 1,000,000 Cumulative Redeemable Preference shares of `100/- each with redemption period of 5 years carrying dividends by the Board The Authorised Share capital of our Company was increased from ` 250,000,000 divided into 15,000,000 Equity shares of `10/- each and 1,000,000 Cumulative Redeemable Preference shares of `100/- each to ` 350,000,000 divided into 15,000,000 Equity shares of `10/- each and 2,000,000 49

62 Sr. No. FY Alteration Cumulative Redeemable Preference shares of `100/- each with redemption period of 5 years carrying dividends by the Board The Authorised Share capital of our Company was increased from ` 350,000,000 divided into 15,000,000 Equity shares of `10/- each and 2,000,000 Cumulative Redeemable Preference shares of `100/- each to ` 450,000,000 divided into 15,000,000 Equity shares of `10/- each and 3,000,000 Cumulative Redeemable Preference shares of `100/- each with redemption period of 5 years carrying dividends by the Board The Authorised Share capital of our Company was increased from ` 4,50,000,000 divided into 15,000,000 Equity shares of `10/- each and 3,000,000 Cumulative Redeemable Preference shares of `100/- each to ` 550,000,000 divided into 25,000,000 Equity shares of `10/- each and 3,000,000 Cumulative Redeemable Preference shares of `100/- each with redemption period of 5 years carrying dividends by the Board The Authorised Share capital of our Company was increased from ` 550,000,000 divided into 25,000,000 Equity shares of `10/- each and 3,000,000 Cumulative Redeemable Preference shares of `100/- each to ` 850,000,000 divided into 45,000,000 Equity shares of `10/- each and 4,000,000 Cumulative Redeemable Preference shares of `100/- each with redemption period of 5 years carrying dividends by the Board The Authorised Share capital of our Company was increased from ` 850,000,000 divided into 45,000,000 Equity shares of `10/- each and 4,000,000 Cumulative Redeemable Preference shares of `100/- each to ` 1,000,000,000 divided into 60,000,000 Equity shares of `10/- each and 4,000,000 Cumulative Redeemable Preference shares of `100/-each. Equity Share Capital History of our Company Date of Allotment Number of shares issued and allotted Cumulative Paid-up capital in (`) 50 Nature of Issue Issue Price (`) Premiu m (`) March 27, ,000 Subscribers to the Memorandum 100/- Nil April 7, , ,000 Further Issue 100/- Nil May 14, , ,000 Further Issue 100/- Nil May 30, ,000 1,000,000 Further Issue 100/- Nil August 2, ,000 1,100,000 Further Issue 100/- Nil September 6,1986 5,000 1,600,000 Further Issue 100/- Nil November 29,1986 4,000 2,000,000 Further Issue 100/- Nil March 7,1987 3,500 2,350,000 Further Issue 100/- Nil April 14,1987 3,500 2,700,000 Further Issue 100/- Nil November 21, ,000 3,500,000 Further Issue 100/- Nil June 11, ,000 5,000,000 Further Issue 100/- Nil October 29, ,000 6,000,000 Rights Issue 100/- Nil December 30, ,000 7,500,000 Rights Issue 10/- Nil March 27, ,000 9,900,000 Rights Issue 10/- Nil January 22, ,000 19,800,000 Rights Issue 10/- Nil June 10, ,980,000 39,600,000 Rights Issue 10/- Nil June 14, ,000 40,000,000 Preferential Issue 10/- Nil December 22, ,000,000 60,000,000 Public Issue 10/- 10/- February 19, ,500,000 75,000,000 Bonus Issue Nil Nil September 12, ,600, ,000,000 Preferential Issue 10/- 5.35/- December 22, ,000, ,000,000 Preferential Issue 10/- 150/- December 27, ,000, ,000,000 Preferential Issue 10/- 150/-

63 Date of Allotment Number of shares issued and allotted Cumulative Paid-up capital in (`) Nature of Issue Issue Price (`) Premiu m (`) December 29, ,000, ,000,000 Preferential Issue 10/- 150/- March 20, ,055, ,550,000 Preferential Issue 10/- 150/- (Conversion of Warrants) May 14, ,837, ,925,000 Preferential Issue 10/- 390/- May 16, ,412, ,050,000 Preferential Issue 10/- 390/- June 27, ,445, ,500,000 Preferential Issue 10/- 150/- (Conversion of Warrants) January 30, , ,568,000 ESOP $ 10/- 25/- May 29, , ,638,500 ESOP $ 10/- 25/- 587, ,513,500 Preferential Issue 10/- 390/- November 6, 2009 (Conversion of Warrants) November 9, , ,138,500 Preferential Issue 10/- 390/- (Conversion of Warrants) 2,000, ,138,500 Preferential Issue 10/- 390/- November 11,2009 (Conversion of Warrants) January 6, , ,239,500 ESOP $ 10/- 25/- March 30, , ,547,000 ESOP $ 10/- 25/- May 31, , ,818,840 ESOP $ 10/- 25/- June 30, , ,024,560 ESOP $ 10/- 25/- August 13, , ,855,820 ESOP $ 10/- 25/- September 17, , ,255,390 ESOP $ 10/- 25/- October 19, , ,595,890 ESOP $ 10/- 25/- November 8, , ,927,390 ESOP $ 10/- 25/- December 04, , ,130,890 ESOP $ 10/- 25/- December 31, , ,622,390 ESOP $ 10/- 25/- January 31, , ,104,390 ESOP $ 10/- 25/- March 2, , ,252,490 ESOP $ 10/- 25/- March 31, , ,368,770 ESOP $ 10/- 25/- April 30, ,48, ,852,770 ESOP $ 10/- 25/- June 7, , ,288,270 ESOP $ 10/- 25/- June 29, , ,333,790 ESOP $ 10/- 25/- Total 49,733, ,333,790 $ Equity shares allotted to the employees of our Company as fully paid up under the Company s ESOP 2006 on exercise of vested options. Notes: 1. On March 20, 2008, the Company issued and allotted 2,055,000 Equity Shares of ` 10/- each at a premium of ` 150/- per Equity share on conversion of warrants to Shriram Enterprise Holdings Private Limited 2. On June 27, 2008, the Company issued and allotted 1,445,000 Equity Shares of ` 10/- each at a premium of ` 150/- per Equity share on conversion of warrants to Shriram Enterprise Holdings Private Limited. 3. On November 6, 2009, the Company issued and allotted 587,500 Equity Shares of ` 10/- each at a premium of ` 390/- per Equity share on conversion of warrants to Asiabridge fund I LLC 4. On November 9, 2009 the Company issued and allotted 662,500 Equity Shares of ` 10/- each at a premium of ` 390/- per Equity share on conversion of warrants to Van Gogh Limited. 51

64 5. On November 11, 2009, the Company issued and allotted 2,000,000 Equity Shares of ` 10/- each at a premium of ` 390/- per Equity share on conversion of warrants, to Bessemer Venture Partners Trust (1,250,000) and IDBI Trusteeship Services Limited (India Advantage Fund VI)(750,000). Share holding pattern of our Company as on June 30, 2011: Sr. No Category of Shareholder Number of shareholders Total number of Equity Shares Number of shares held in dematerialized form Total shareholding as a % of total number of Equity Shares % of shares (A+B) % of shares (A+B+C) Shares pledged or otherwise encumbered Number of As a % shares (A) Shareholding of Promoters and Promoter Group (A) (1) Indian (1) (a) Individuals/Hindu Undivided Family (b) Central Government/State Government(s) (c) Bodies Corporate 2 26,477,663 26,477, (d) Financial Institutions/Banks (e) Any Other Sub Total A (1) 2 26,477,663 26,477, (2) Foreign (a) Individuals (Non Resident Individuals/Foreign Individuals) (b) Bodies Corporate (c) Institutions/FII (d) Any Other Sub Total A (2) Total Shareholding 2 26,477,663 26,477, of Promoters and Promoter Group (A)= (A)(1)+(A)(2) (B) Public shareholding (1) Institutions (a) Mutual Funds/ UTI 5 21,891 21, (b) Financial Institutions 2 100, , / Banks (c) Central Government/State Government(s) (d) Venture Capital Fund (e) Insurance Companies (f) Foreign Institutional 12 7,492,395 7,492, Investors (g) Foreign Venture Capital Investor (h) Any other Sub-Total (B)(1) 19 7,614,411 7,614, (2) Non-institutions 52

65 Sr. No Category of Shareholder Number of shareholders Total number of Equity Shares Number of shares held in dematerialized form Total shareholding as a % of total number of Equity Shares % of shares (A+B) % of shares (A+B+C) Shares pledged or otherwise encumbered Number of As a % shares (a) Bodies Corporate , , (b) Individuals (i) Individual shareholders holding nominal share capital up to ` 1 Lakh 4,926 1,284, , (ii) (c) (C) Individual shareholders holding nominal share capital in excess of ` 1 Lakh Any other Non Resident Indians , , ,353 21, N.A N.A Trust 2 3,700,124 3,700, N.A N.A Clearing Members 24 19,392 19, N.A N.A Overseas Corporate 3 10,300,000 10,300, N.A N.A Bodies Sub-Total (B) (2) 5,096 15,641,305 15,256, N.A N.A Total Public Shareholding (B) = (B)(1)+(B)(2) 5,115 23,255,716 22,871, N.A N.A TOTAL (A) + (B) 5,117 49,733,379 49,348, Shares held by custodians and against which Depository receipts have been issued C1 Promoter and Promoter Group C2 Public Total C=C1+C GRAND TOTAL (A)+(B)+(C) 5,117 49,733,379 49,348, List of top ten holders of Equity Shares of our Company as on June 30, 2011: Sr. No Name of shareholders 1. Shriram Enterprise Holdings Private Limited 2. Shriram Retail Holdings Private Limited 3. Van Gogh Limited Address Mookambika Complex, No.4, Lady Desika Road, Mylapore, Chennai Mookambika Complex, No.4, Lady Desika Road, Mylapore, Chennai HDFC Bank Limited, Custody Services, Lodha- I Think Techno Campus Office Floor- 53 Percentage Total Number of Equity Shares held Holding (%) 17,921, ,556, ,625,

66 Sr. No Name of shareholders Address 8, Next to Kanjurmarg railway station, Kanjurmarg (East) Mumbai Total Number of Equity Shares held Percentage Holding (%) 4. Norwest Ventures Partners X FII Mauritius 5. IDBI Trusteeship Services Limited 6. Bessemer Venture Partners Trust 7. Acacia Partners LP 8. Asiabridge Fund I LLC 9. Acacia Institutional Partners LP 10. Morgan Stanley Mauritius Company Limited C/o Standard Chartered Bank, Securities Services, M.G. Road, Fort Mumbai ICICI Bank Limited, 1 st Floor SMS Department 414 Empire House S B Marg Lower Parel, Mumbai Deutsche Bank AG, DB House, Hazrimal Somani Marg, Post Box No. 1142, Fort Mumbai Citibank N.A. Custody Services, 3 rd Floor, Trent House, G Block, Plot No. 60, Bandra Kurla Complex, Bandra (East) Mumbai Citibank N.A. Custody Services, 3 rd Floor, Trent House, G Block, Plot No. 60, BKC Bandra (East) Mumbai Citibank N.A. Custody Services, 3 rd Floor, Trent House, G Block, Plot No. 60, BKC Bandra (East) Mumbai HSBC Securities Services Limited, 2 nd Floor SHIV Plot no B Western Express Highway, Sahar Road Junction Vile Parle (East), Mumbai ,342, ,700, ,500, ,555, ,175, , , List of top ten holders of debt instruments, as on July 18, 2011: 1. List of top ten holders of Secured Redeemable Non Convertibles Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07067): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Corporation Bank Allahabad Bank Central Bank of India Trustees Central Bank of India Employees

67 Sr. No. Name of holder Number of instruments Pension Fund 5. Trustees Central Bank of India Employees Pension Fund Aggregate Amount (`. in lakhs) List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07075): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Corporation Bank Allahabad Bank Central Bank of India Trustees Central Bank of India Employees Pension Fund 5. Trustees Central Bank of India Employees Pension Fund List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07083): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Corporation Bank Allahabad Bank Central Bank of India Trustees Central Bank of India Employees Pension Fund 5. Trustees Central Bank of India Employees Pension Fund List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07091): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Corporation Bank Allahabad Bank Central Bank of India Trustees Central Bank of India Employees Pension Fund 5. Trustees Central Bank of India Employees Pension Fund List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07109): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Central Bank of India Bank of Baroda

68 6. List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07117): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Central Bank of India Bank of Baroda List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07125): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Central Bank of India Bank of Baroda List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,00,000/- per debenture as on July 18, 2011 (ISIN :INE722A07133): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Central Bank of India Bank of Baroda List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,000,000/- per debenture as on July 18, 2011 (ISIN :INE722A07141): Sr. No. Name of holder Number of instruments 1. Standard Chartered Bank (Mauritius) Limited-Debt Aggregate Amount (`. in lakhs) 1,750 17, List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,000,000/- per debenture as on July 18, 2011 (ISIN :INE722A07158): Sr. No. Name of holder Number of instruments 1. Reliance Capital Trustee Company Limited A/c Reliance Dual Advantage Fixed tenure Fund Plan A 2. Reliance Capital Trustee Company Limited A/c Reliance Fixed Horizon Fund XIX Series Reliance Capital Trustee Company Limited A/c Reliance Fixed Horizon Fund XIX Series Reliance Capital Trustee Company Limited A/c Reliance Fixed Horizon Fund XIX Series Reliance Capital Trustee Company Limited A/c Reliance Monthly Income Plan 56 Aggregate Amount (`. in lakhs) 220 2, ,

69 11. List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,000,000/- per debenture as on July 18, 2011 (ISIN :INE722A07166): Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. United India Insurance Company Limited 100 1, Employees Provident Fund 2. Board of Trustees for Bokaro Steel Employees Provident Fund 3. ING Vysya Bank Limited List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,000,000/- per debenture as on July 18, 2011 (ISIN :INE722A07174) Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Bank of Maharashtra 190 1, Board of Trustees for Bokaro Steel Employees Provident Fund 3. The Jalgaon People s Co operative Bank Limited 4. The Thane District Central Co operative Bank Staff Provident Fund 5. Iris Mercantile Private Limited Dhwani Mercantile Private Limited Shrikrishna Baburao Malpekar Jacobs H and G private Limited Employees Provident Fund 9. Ushma Niren Nagri List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,000,000/- per debenture as on July 18, 2011 (ISIN :INE722A07182) Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Jharkhand Gramin Bank List of top ten holders of Secured Redeemable Non-Convertible Debentures (issued on private placement basis) of face value ` 1,000,000/- per debenture as on July 18, 2011 (ISIN :INE722A07190) Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. Nederlandse Financierings-Maatschappij 2,500 25, Voor Ontwikkelingslanden N.V. (FMO) 2. Deutsche Bank AG 250 2,

70 15. List of top ten holders of Commercial Paper of face value ` 500,000/- as on July 18, 2011 (ISIN :INE722A14089) Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. ICICI Prudential Life Insurance Company 1, Limited 2. UTI-Treasury Advantage Fund 500 2, UTI-FMP-Yearly Series August , UTI FIIF Annual Interval Plan II 200 1, List of top ten holders of Commercial Paper of face value ` 500,000/- as on July 18, 2011 (ISIN :INE722A14097) Sr. No. Name of holder Number of instruments 1. TATA Trustee Company Limited A/c TATA Mutual Fund A/c TATA Fixed Maturity Plan- Scheme 27 Scheme A Aggregate Amount (`. in lakhs) , List of top ten holders of Commercial Paper of face value ` 500,000/- as on July 18, 2011 (ISIN :INE722A14105) Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. UTI-FMP- Yearly Series September , UTI-FIIF Annual Interval Plan S-III 200 1, Cholamandalam Ms General Insurance Company Limited List of top ten holders of Commercial Paper of face value ` 500,000/- as on July 18, 2011 (ISIN :INE722A14113) Sr. No. Name of holder Number of instruments 1. TATA Trustee Company Limited A/c TATA Mutual Fund A/c TATA Fixed Maturity Plan Series 27 Scheme B Aggregate Amount (`. in lakhs) 300 1, List of top ten holders of Commercial Paper of face value ` 500,000/- as on July 18, 2011 (ISIN :INE722A14154) Sr. No. Name of holder Number of instruments 1. Kotak Mahindra Trustee Company Limited A/c Kotak Floater Short Term Scheme Aggregate Amount (`. in lakhs) 2,000 10, List of top ten holders of Commercial Paper of face value ` 500,000/- as on July 18, 2011 (ISIN :INE722A14147) Sr. No. Name of holder Number of instruments Aggregate Amount (`. in lakhs) 1. UTI Liquid Cash Plan 1,000 5,

71 Employee Stock Option Schemes Pursuant to a special resolution dated October 30, 2006 passed by the shareholders of our Company, our Company has formulated an employee stock option scheme in 2006, namely, SCUF Employee Stock Option Scheme 2006, ( ESOP 2006 ). As on the date of this Prospectus, our Company had issued 1,355,000 stock options under the ESOP 2006, of which nil stock options have lapsed, 602,000 stock options are unvested, 119,621 stock options are vested and unexercised and 633,379 stock options have been vested and exercised for Equity Shares. Under the ESOP 2006 the exercise price for stock options is ` 35 per Equity Share to be issued upon the exercise of such stock options. Pursuant to a special resolution dated May 3, 2008 passed by the shareholders of our Company, our Company has formulated an employee stock option scheme in 2008, namely, SCUF Employee Stock Option Scheme 2008, ( ESOP 2008 ). As on the date of this Prospectus, our Company has not granted any stock options under the ESOP Under the ESOP 2008 the exercise price for stock options is ` 112 per Equity Share to be issued upon the exercise of such stock options. Debt - Equity ratio: The debt-equity ratio prior to this Issue is based on a total outstanding consolidated debt of ` 732, lakhs and consolidated shareholder funds amounting to ` 121, lakhs as on March 31, The debt equity ratio post the Issue, (assuming subscription of NCDs aggregating to ` 75,000 lakhs would be 6.66 times, is based on a total outstanding debt of ` 807, lakhs and shareholders fund of ` 121, lakhs as on March 31, (` in lakhs) Particulars# Prior to the Issue Post Issue* Secured loans as on March 31, , , Unsecured loans as on March 31, , , Total Debt 732, , Share capital as on March 31, , , Stock Option outstanding as on March 31, , , Reserves as on March 31, , , Total Shareholders Fund 121, , Debt Equity Ratio (Number of times) # On a consolidated basis. * The debt-equity ratio post the Issue is indicative and is on account of assumed inflow of ` 75,000 lakhs from the Issue as on March 31, 2011 and does not include contingent and off-balance sheet liabilities. The actual debt-equity ratio post the Issue would depend upon the actual position of debt and equity on the date of allotment. For details on the total outstanding debt of our Company, please refer to the section titled Disclosures on Existing Financial Indebtedness beginning on page 131 of this Prospectus. 59

72 OBJECTS OF THE ISSUE The funds raised through this Issue, after meeting the expenditures of and related to the Issue, will be used for our various financing activities including lending and investments, subject to applicable statutory and/or regulatory requirements, to repay our existing loans and our business operations including for our capital expenditure and working capital requirements. The Main Objects clause of the Memorandum of Association of our Company permits our Company to undertake the activities for which the funds are being raised through the present Issue and also the activities which our Company has been carrying on till date. Further, in accordance with the Debt Regulations, our Company will not utilize the proceeds of the Issue for providing loans to or acquisitions of shares of any person who is a part of the same group as our Company or who is under the same management as our Company. The Issue proceeds shall not be utilized towards full or part consideration for the purchase or any other acquisition, inter alia by way of a lease of any property. Further, the Company undertakes that Issue proceeds from NCDs allotted to banks shall not be used for any purpose which may be in contravention of the RBI guidelines on bank financing to NBFCs. Interim Use of Proceeds The management of our Company, in accordance with the policies formulated by it from time to time, will have flexibility in deploying the proceeds received from the Issue. Pending utilization of the proceeds out of the Issue for the purposes described above, our Company intends to temporarily invest funds in high quality interest bearing liquid instruments including money market mutual funds, deposits with banks or temporarily deploy the funds in investment grade interest bearing securities as may be approved by the Board. Such investment would be in accordance with the investment policies approved by the Board or any committee thereof from time to time. Monitoring of Utilization of Funds There is no requirement for appointment of a monitoring agency in terms of the SEBI (Issue and Listing of Debt Securities) Regulations, Our Board shall monitor the utilization of the proceeds of the Issue. For the relevant Financial Years commencing from FY 2012, our Company will disclose in our financial statements, the utilization of the net proceeds of the Issue under a separate head along with details, if any, in relation to all such proceeds of the Issue that have not been utilized thereby also indicating investments, if any, of such unutilized proceeds of the Issue. We shall utilize the proceeds of the Issue only upon the execution of the documents for creation of security as stated in this Prospectus in the section entitled Terms of the Issue - Security on page 154 and upon the listing of the NCDs. 60

73 STATEMENT OF TAX BENEFITS Under the current tax laws, the following tax benefits interalia, will be available to the Debenture Holders as mentioned below. The tax benefits are given as per the prevailing tax laws and may vary from time to time in accordance with amendments to the law or enactments thereto. The Debenture Holder is advised to consider in his own case the tax implications in respect of subscription to the Debentures after consulting his tax advisor as alternate views are possible. We are not liable to the Debenture Holder in any manner for placing reliance upon the contents of this statement of tax benefits. To our Debenture Holder A. INCOME-TAX I To the Resident Debenture Holder 1. Interest on NCD received by Debenture Holders would be subject to tax at the normal rates of tax in accordance with and subject to the provisions of the I.T. Act. No income tax is deductible at source as per the provisions of section 193 of the Income Tax Act (IT Act) on interest on debentures in respect of the following: (a) In case the payment of interest on debentures to resident individual Debenture Holder in the aggregate during the financial year does not exceed ` 2,500 provided the debentures are listed on a recognized stock exchange in India and the interest is paid by an account payee cheque. (b) When the Assessing Officer issues a certificate on an application by a Debenture Holder on satisfaction that the total income of the Debenture holder justifies no/lower deduction of tax at source as per the provisions of Section 197(1) of the I.T. Act; and that certificate is filed with our Company BEFORE THE PRESCRIBED DATE OF CLOSURE OF BOOKS FOR PAYMENT OF DEBENTURE INTEREST. (c) When the resident Debenture Holder with PAN (not being a company or a firm or a senior citizen) submits a declaration in the prescribed Form 15G verified in the prescribed manner to the effect that the tax on his estimated total income of the previous year in which such income is to be included in computing his total income will be nil as per the provisions of section 197A (1A) of the I.T. Act. HOWEVER under section 197A (1B) of the I.T. Act, Form 15G cannot be submitted nor considered for exemption from deduction from tax at source if the aggregate of income of the nature referred to in the said section, viz. dividend, interest, etc as prescribed therein, credited or paid or likely to be credited or paid during the Previous year in which such income is to be included exceeds the maximum amount which is not chargeable to tax, as may be prescribed in each year s Finance Act. To illustrate, as on April 1, 2011, the maximum amount of income not chargeable to tax in case of individuals (other than women assesses, senior citizens and super senior citizens) and HUFs is ` 180,000; in the case of every individual being a woman resident in India and below the age of 60 years at any time during the previous year is ` 190,000; in the case of every individual being a resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year (Senior Citizen) is ` 250,000; and in the case of every individual being a resident in India, who is of the age of 80 years or more at any time during the previous year (Super Senior Citizen) is ` 500,000 for Previous Year Senior citizens, who are 60 or more years of age at any time during the financial year, enjoy the special privilege to submit a self-declaration in the prescribed Form 15H for non deduction of tax at source in accordance with the provisions of section 197A (1C) of the I.T. Act even if the aggregate income credited or paid or likely to be credited or paid exceeds the maximum amount not chargeable to tax i.e. ` 250,000 for FY provided that the tax due on total income of the person is NIL. In all other situations, tax would be deducted at source as per prevailing provisions of the I.T. Act; Form No.15G WITH PAN / 15H WITH PAN / Certificate issued u/s 197(1) has to be filed with our Company before the prescribed date of closure of books for payment of debenture interest. 61

74 (d) On any security issued by a company in a dematerialized form and is listed on recognized stock exchange in India. (w.e.f ). 2. Under section 2(29A) of the I.T. Act, read with section 2(42A) of the I.T. Act, a listed debenture is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 10% of capital gains calculated without indexation of the cost of acquisition. The capital gains will be computed by deducting cost of acquisition of the debenture and expenditure incurred in connection with such transfer from the full value of sale consideration. In case of an individual or HUF, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate mentioned above. 3. Short-term capital gains on the transfer of listed debentures, where debentures are held for a period of not more than 12 months would be taxed at the normal rates of tax in accordance with and subject to the provisions of the I.T. Act. The provisions relating to maximum amount not chargeable to tax, surcharge and education cess described at para 2 above would also apply to such short term capital gains. 4. In case the debentures are held as stock in trade, the income on transfer of debentures would be taxed as business income or loss in accordance with and subject to the provisions of the I.T. Act. 5. HOWEVER IN CASE WHERE TAX HAS TO BE SOURCE WHILE PAYING DEBENTURE INTEREST, THE COMPANY IS NOT REQUIRED TO DEDUCT SURCHARGE, EDUCATION CESS : AND SECONDARY AND HIGHER EDUCATION CESS. II To the Non Resident Indians 1. A non resident Indian has an option to be governed by Chapter XII-A of the I.T. Act, subject to the provisions contained therein which are given in brief as under: a) Under section 115E of the I.T. Act, interest income from debentures acquired or purchased with or subscribed to in convertible foreign exchange will be taxable at 20%, whereas, long term capital gains on transfer of such Debentures will be taxable at 10% of such capital gains without indexation of cost of acquisition. Short-term capital gains will be taxable at the normal rates of tax in accordance with and subject to the provisions contained therein. b) Under section 115F of the I.T. Act, subject to the conditions and to the extent specified therein, long term capital gains arising to a non-resident Indian from transfer of debentures acquired or purchased with or subscribed to in convertible foreign exchange will be exempt from capital gain tax if the net consideration is invested within six months after the date of transfer of the debentures in any specified asset or in any saving certificates referred to in clause (4B) of section 10 of the I.T. Act in accordance with and subject to the provisions contained therein. c) Under section 115G of the I.T. Act, it shall not be necessary for a non-resident Indian to file a return of income under section 139(1) of the I.T. Act, if his total income consists only of investment income as defined under section 115C and/or long term capital gains earned on transfer of such investment acquired out of convertible foreign exchange, and the tax has been deducted at source from such income under the provisions of Chapter XVII- B of the I.T. Act in accordance with and subject to the provisions contained therein. d) Under section 115H of the I.T. Act, where a non-resident Indian becomes a resident in India in any subsequent year, he may furnish to the Assessing Officer a declaration in writing along with return of income under section 139 for the assessment year for which he is assessable, to the effect that the provisions of Chapter XII-A shall continue to apply to him in relation to the investment income (other than on shares in an Indian Company) derived from any foreign exchange assets in accordance with and subject to the provisions contained therein. On doing so, the 62

75 provisions of Chapter XII-A shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets. 2. In accordance with and subject to the provisions of section 115I of the I.T. Act, Non-Resident Indian may opt not to be governed by the provisions of Chapter XII-A of the I.T. Act. In that case, please refer to para A (2, 3 and 4) for the tax implications arising on transfer of debentures. 3. Under Section 195 of the I.T. Act, the company is required to deduct tax at source at the rate of 20% on investment income and at the rate of 10% on any long-term capital gains as prescribed in section 115E; at the normal rates for Short Term Capital Gains if the payee Debenture Holder is a Non Resident Indian. 2% education cess and 1% secondary and higher education cess on the total income tax is also deductible. 4. As per section 90(2) of the I.T. Act read with the circular no. 728 dated October 30, 1995 issued by the CBDT, in the case of a remittance to a country with which a Double Tax Avoidance Agreement (DTAA) is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee. 5. Alternatively, to ensure non deduction or lower deduction of tax at source, as the case may be, the Debenture Holder should furnish a certificate under section 197(1) of the I.T. Act, from the Assessing Officer before the prescribed date of closure of books for payment of debenture interest. III To the Foreign Institutional Investors (FIIs): In accordance with and subject to the provisions of section 115AD of the I.T. Act on transfer of debentures by FIIs, long term capital gains are taxable at 10% (plus applicable surcharge and education and secondary and higher education cess) and short-term capital gains are taxable at 30% (plus applicable surcharge and education and secondary and higher education cess). The cost indexation benefit will not be available. Further, benefit of provisions of the first proviso of section 48 of the I.T. Act will not apply. Income other than capital gains arising out of debentures is taxable at 20% in accordance with and subject to the provisions contained therein. In addition to the aforesaid tax, in case of foreign corporate FIIs where the income exceeds ` 1,00,00,000 a surcharge of 2% of such tax liability is also payable. A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge) is payable by all categories of FIIs. In accordance with and subject to the provisions of section 196D(2) of the I.T. Act, no deduction of tax at source is applicable in respect of capital gains arising on the transfer of debentures by FIIs. The provisions at para II (4 and 5) above would also apply to FIIs. IV. To the Other Eligible Institutions: All mutual funds registered under Securities and Exchange Board of India or set up by public sector banks or public financial institutions or authorised by the Reserve Bank of India are exempt from tax on all their income, including income from investment in Debentures under the provisions of Section 10(23D) of the I.T. Act subject to and in accordance with the provisions contained therein. B. WEALTH TAX Wealth-tax is not levied on investment in debentures under section 2(ea) of the Wealth-tax Act, C. GIFT TAX Gift-tax is not levied on gift of debentures in the hands of the donor as well as the donee because the provisions of the Gift-tax Act, 1958 have ceased to apply in respect of gifts made on or after October 1, HOWEVER, IF ANY INDIVIDUAL OR HUF, RECEIVES THESE DEBENTURES OF THE AGGREGATE VALUE OVER ` 50,000 FROM ANY PERSON OR PERSONS WITHOUT CONSIDERATION OR RECEIVES THESE 63

76 DEBENTURES FOR A CONSIDERATION WHICH IS LESS THAN AGGREGATE FAIR MARKET VALUE OF THE DEBENTURES BY AN AMOUNT EXCEEDING FIFTY THOUSAND RUPEES, THERE WILL BE LIABILITY TO INCOME TAX TO THE EXTENT PROVIDED IN SEC.56(2)(VII) OF THE INCOME TAX ACT 1961 TO SUCH RECEIVER. HOWEVER, THE DEBENTURES RECEIVED AS GIFTS FROM ANY RELATIVE AS DEFINED IN SEC.56(2)(VII) OF THE INCOME TAX ACT WILL NOT ATTRACT INCOME TAX LIABILITY IN THE HANDS OF THE RECEIVER. D. REQUIREMENT TO FURNISH PERMANENT ACCOUNT NUMBER UNDER I.T. ACT 1. Sec.139A(5A): Subsection (5A) of Sec.139A lays down that every person whose income tax has been deducted at source under chapter XVII B of the Income Tax Act shall furnish his Permanent Account Number to the person responsible for deduction of tax at source. 2. Sec.206AA: (1) Notwithstanding anything contained in any other provisions of I.T. Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereinafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereinafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely: (i) at the rate specified in the relevant provision of this Act; or (ii) at the rate or rates in force; or (iii) at the rate of twenty per cent. (2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration. (3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1). (4) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly. 64

77 SECTION IV : ABOUT THE ISSUER COMPANY AND THE INDUSTRY INDUSTRY The information in this section is derived from various government publications and other industry sources. Neither we, nor any other person connected with the issue has verified this information. Industry sources and publications generally state that the information contained therein has been obtained from sources generally believed to be reliable, but their accuracy, completeness and underlying assumptions are not guaranteed and their reliability cannot be assured and accordingly, investment decisions should not be based on such information. In connection with the report by CRISIL Research titled "CRISIL - Retail Finance - Auto May 2010", CRISIL Limited has used due care and caution in preparing the aforementioned report. Information has been obtained by CRISIL from sources it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. No part of the aforementioned report may be published / reproduced in any form without CRISIL s prior written approval. CRISIL is not liable for any investment decisions which may be based on the views expressed in the aforementioned report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL s Rating Division, which may, in its regular operations, obtain information of a confidential nature that is not available to CRISIL Research. Frost & Sullivan India Private Limited has used due care and caution in preparing the report titled Analysis of MSME Loan Markets for NBFCs July Information has been obtained from sources that Frost & Sullivan India Private Limited considers reliable. However, Frost & Sullivan India Private Limited does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. No part of the said report may be published / reproduced in any form without Frost & Sullivan India Private Limited s prior written approval. Frost & Sullivan India Private Limited is not liable for investment decisions which may be based on the views expressed in the said report. Indian Economy India is the world s largest democracy by the population size with an estimated population of approximately 11,900 Lakhs (July 2011 estimate). It is also one of the fastest growing economies in the world with the real growth rate of GDP being 8.5% (Source: Press Information Bureau, Government of India, Press Note dated May 31, 2011). The International Monetary Fund has projected India s year on year growth at 8.2% for 2011(Source: World Economic Outlook Projections International Monetary Fund June 2011). Structure of India s Financial Services Industry The RBI is the central regulatory and supervisory authority for the Indian financial system. SEBI and the IRDA regulate the capital markets and insurance sector, respectively. A variety of financial intermediaries in the public and private sectors participate in India s financial sector, including the following: Commercial banks; NBFCs ; Specialized financial institutions like the National Bank for Agriculture and Rural Development (NABARD), Export-Import Bank of India (EXIM Bank), the Small Industries Development Bank of India (SIDBI) and the Tourism Finance Corporation of India (TFCI); Securities brokers; Investment banks; Insurance companies; Mutual funds; and Venture capital funds. 65

78 Non-Banking Finance Companies (NBFCs) Non-Banking Finance Companies (NBFCs) are an integral part of the country s financial system, catering to a large market of niche customers and have emerged as one of the major purveyors of retail and SME credit in India. It is a heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways such as accepting deposits, making loans and advances, providing leasing/hire purchase services, among others. There are over 12,000 NBFCs in India, (Source: Reserve Bank of India, Annual Report, August 2009) mostly in the private sector. The RBI defines an NBFC as a company registered under the Companies Act, 1956 and engaged in the business of loans and advances, acquisition of shares, stock, bonds, debentures, and securities issued by the GoI or local government authorities, or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business. However, this excludes institutions whose principal business is in the agricultural or industrial sector, or in the sale, purchase and construction of immovable property. A non-banking entity that has as its principal line of business the receipt of deposits, under any scheme or arrangement, or the extension of loans, in any manner, is also considered an NBFC. Gradually, NBFCs have become recognized as complementary to the banking sector due to their customer-oriented services, simplified procedures, attractive rates of return on deposits, flexibility and timeliness in meeting the credit needs of specified sectors, among other reasons. NBFCs have traditionally extended credit across the country through their widespread geographical presence, with NBFCs supplying credit in segments such as equipment leasing, hire purchase, and consumer finance. These are areas which warrant infusion of financing due to the existing demand-supply gap. NBFCs have provided a more flexible source of financing and have been able to disburse funds to a gamut of clientele, from local individual customers to a variety of corporate clientele. NBFCs can be divided into deposit taking NBFCs, i.e., those which accept deposits from the public and non-deposit taking NBFCs, i.e., those which do not accept deposits from the public. The activities carried out by NBFCs in India can be grouped as follows: NBFC Fund Based Activities Equipment Leasing Hire Purchase Bill Discounting Loans / Investments Venture Capital Factoring Equity Participation Short Term Loans Inter Corporate Loans Fee based Activities Investment Banking Portfolio Management Wealth Management Corporate Consulting Project Consulting Loan / Lease Syndication Advisory Services Even though NBFCs perform functions similar to those of banks, there are a few differences: (i) (ii) (iii) NBFCs cannot accept demand deposits; NBFCs are not a part of the payment and settlement system and as such cannot allow their customers to operate accounts through the issuance of cheques; and Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors. 66

79 Initially, the NBFCs registered with the RBI could only operate as equipment leasing companies, hire purchase companies, loan companies and investment companies. However, effective December 6, 2006, NBFCs registered with the RBI have been reclassified as (i) asset finance companies ( AFCs ); (ii) investment companies ( IC ); and (iii) loan companies ( LC ). Further, RBI through a notification dated February 12, 2010, introduced a fourth category of NBFCs namely, Infrastructure Finance Company ( IFC ), which are predominantly engaged in the business of infrastructure financing. Efforts have been made to integrate NBFCs into the mainstream financial sector by strengthening the prudential guidelines relating to income recognition, asset classification and provisioning. A number of measures to enhance the regulatory and supervisory standards of NBFCs in order to put them on par with commercial banks were undertaken by the RBI over a period of time including the alignment of interest rates, allowing diversification of businesses e.g. issuance of co-branded cards and distribution of mutual fund and insurance products, regulation of systemically important NBFCs and introduction of a fair practices code and corporate governance. Retail Finance Automobiles Automotive Industry Overview In terms of global scale, the Indian automotive industry is the second largest two-wheeler market in the world, the fourth largest heavy commercial vehicle market in the world and the eleventh largest passenger vehicle market in the world. As one of the largest industrial sectors in India, it contributes nearly 17.0% to total indirect taxes. Although the automotive industry provides direct and indirect employment to over 130 lakh people, the penetration levels for vehicles in India are among the lowest in the world. [Source: Society of Indian Automobile Manufacturers (SIAM) ]. According to SIAM, the demand for automobiles in India is projected to grow by 12% -15% by as compared to The forecasts made by SIAM in this regard are as follows: Automobile segments growth over (per cent) Passenger cars 16-18% Utility vehicles 12-14% Light Commercial Vehicles (goods) 18-21% Medium and Heavy Commercial Vehicles (goods) 10-12% Commercial vehicles (buses) 8-10% Motorcycles 11-13% Scooters 15-17% Three wheelers (Cargo) 4-6% Three wheelers (passengers) 10-12% Automobile Industry 12-15% Source: SIAM Demand Forecasts for Indian Automobile Industry According to the Automotive Mission Plan , prepared by the Ministry of Industries & Public Enterprises, Government of India, ( Automotive Mission Plan ), India is emerging as one of the world s fastest growing passenger car markets and the second largest two wheeler manufacturer. The growth of the Indian middle class with increasing purchasing power along with robust growth in economy in recent years has attracted major global auto manufacturers to Indian market. The Indian automotive industry after de-licensing has grown approximately at a rate of 17%. Passenger vehicles segment grew at % during April 2011 over same month last year. Passenger cars grew by %, utility vehicles grew by 6.25 % and Vans grew by % in April 2011 as compared to same month last year. The overall commercial vehicles segment registered growth of 8.22 % in April 2011 as compared to the same month last year. While medium and heavy commercial vehicles registered only a marginal growth rate of 0.70 %, light commercial vehicles grew at %. Three wheelers sales recorded a growth rate of only 1.94 % in April 67

80 2011. Two Wheelers registered a healthy growth of % in April Mopeds, motorcycles and scooters grew by %, % and % respectively in April [Source SIAM] In the month of April 2011 overall automobile exports registered a growth rate of %. Passenger Vehicles registered growth at % in the month. Commercial Vehicles, Three Wheelers and Two Wheelers segments recorded growth of %, % and % respectively in April [Source SIAM] The domestic market share between passenger cars, commercial vehicles, two wheelers and three wheelers for were as follows: Segment wise Market Share in Commercial Vehicles 4.36% Three Wheelers 3.39% Passenger Vehicles 16.25% Tw o Wheelers 76.00% Source: SIAM Two Wheeler Industry The two-wheeler industry's domestic sales volumes are expected to grow by % in , driven by a strong rural demand, an improvement in the financing scenario and new model launches. Segment-wise change in demand for two-wheelers [Source: CRISIL Retail Finance Auto May 2011] 1. Motorcycles: The motorcycles segment is the largest in the two-wheelers industry, accounting for almost 79 % of total domestic sales. The segment primarily targets the urban and rural male population in the age group of years. Penetration of motorcycles has been higher in the urban markets compared to the rural markets due to easy availability of finance in the former and an increased focus on the establishment of dealers, service and distribution networks in these areas. On the flipside, the introduction of ultra lowcost cars and the declining cost of ownership would pose a threat to motorcycle demand over the long term. The entry of new players and the launch of new models in the ungeared scooter segment is also likely to affect the demand for motorcycles. Going forward, higher disposable incomes due to the restructuring of personal income tax slabs, loan waivers for farmers and pay commission hikes are likely to drive motorcycle demand. 2. Ungeared scooters: The target market for ungeared scooters in urban areas has mainly been the female population in the age group of years and to some extent, the male population in the age group of years. In the long run, the growth potential for this segment would be higher due to the current lower penetration levels and a low base over the previous year. Convenient riding, increasing urban incomes, continuing urbanisation and an increase in the number of educated women and workforce population would drive demand for ungeared scooters. In many households, ungeared scooters are preferred as a second vehicle after cars, which is a major demand driver. Lower dependence on finance, which relatively insulates the segment from such issues, also aids demand. 3. Mopeds: The major target customers for this segment are low-income, self-employed professionals and shopkeepers in urban areas. Although demand for mopeds has been rising, the prospects of any significant increase are capped due to increase in substitution by ungeared scooters, limited regional presence and lack of player interest. 68

81 Overall Demand Drivers in the Two Wheeler Industry [Source: CRISIL Retail Finance Auto May 2011] 1. Demographic trends: Going forward, growth in two-wheeler demand would come mainly from rising population in the relevant age and income groups (which is defined as population in the age group of years and income bracket of ` million) and increasing use of personal transport. Growth in relevant population in urban areas is expected to have slowed down to about 5 % during 2005 to 2010, while it is expected to increase to 7.3 % in rural areas. Two-wheelers are estimated to have fairly penetrated the relevant population in both the rural and urban markets. However, growth in demand is mainly expected to come from rural markets. 2. Need for mobility and shift in preferred mode of transport: A growing population and rising economic activity is expected to increase consumers' need for mobility. Other contributors to mobility are an increasing female workforce, especially in urban areas, and the rising trend of drifting away from agricultural employment in rural areas. Thus, there is likely to be a modal shift in demand for transport. Going ahead, the share of private modes of transport is expected to increase in comparison to public modes of transport. In rural markets, demand for transport arises from rudimentary means like walking, bicycles, animal-drawn vehicles and tractors. Going ahead, we expect dependence on walking and bicycles to shift in favour of two-wheelers and buses. Thus, increasing need for mobility and the substitution effect will drive rural demand for two-wheelers. Urban markets are likely to stagnate as here the shift is expected to be in favour of four-wheelers from two-wheelers and public modes. 3. Improving finance disbursement to support two-wheeler demand: Players have come out with schemes such as Direct Cash Collection (DCC) systems where cash is collected every month on a door-to-door basis and loans are given to people who do not have access to formal payment options like a bank account. Such schemes along with the increasing risk appetite of two-wheeler players are expected to support sales in the industry. Cars and Utility Vehicles Industry The domestic cars and utility vehicles (UV) industry grew by 33 % during the first half of primarily backed by higher disposable incomes, easy availability of finance and price-competitive model launches by players. The industry's domestic volumes are expected to grow by % for In , car and UV domestic sales volume increased by 28.7 per cent and 27.4 per cent, respectively. Sales volume increased on account of increased confidence among consumers with economic recovery and reduced uncertainty over income growth. In , car sales volume is forecasted to further grow by per cent and UV sales volumes to grow by 9-10 per cent. The volume growth would mainly be driven by the small car segment, which has become the focal area for many original equipment manufacturers. [Source: CRISIL Retail Finance Auto May 2011] Segment-wise assessment of demand drivers The small car segment accounts for the largest proportion (about 78 %) of overall domestic car sales volumes. The mid-size segment, which accounts for about 20 % of domestic car sales, depends on upgradation demand and additional demand. An expected rise in corporate profitability, better financing environment and improved customer sentiment would drive growth in the industry. Domestic sales in higher segments (the executive, premium and luxury segments) are expected to grow at % in owing to the availability of internationally-renowned brands and the perceived prestige attached to bigger cars and due to improved business confidence and better corporate profitability. International brands are likely to enhance their presence in India in these segments. [Source: CRISIL Retail Finance Auto May 2011] Domestic utility vehicle (UV) sales are likely to be driven by strong growth in the personal UV segment, on the back of new model launches and an increase in the addressable market, driven by the increase in per capita income. Higher-end sports utility vehicle sales will also grow aggressively, due to the launch of new models and the status ascribed to owning one. However, sales of commercial UVs are expected to grow at a moderate rate. [Source: CRISIL Retail Finance Auto May 2011] 69

82 Overall demand drivers for the passenger cars industry [Source: CRISIL Retail Finance Auto May 2011] 1. Increase in affordability: Growth in passenger car sales is mainly driven by greater affordability, which enhances the aspiration levels of the consumers. The following factors determine affordability: 2. Growth in addressable market, led by increase in disposable income: Addressable households in India trebled during to , led by an increase in per capita income. During to , there was a huge increase in the addressable market due to higher affordability, led by rise in per capita income. However, in , the size of the addressable market rose on account of a decline in car prices, which was in turn the result of a reduction in excise duty on small cars from 16 % to 8 %. Over the next 5 years, increase in per capita income and a reduction in entry-level prices of cars will be the major drivers for the increase in affordability. A fall in car prices due to a rise in competition in the small car segment, with the launch of ultra low-cost cars are likely to substantially increase the addressable market in New launches: There is a significant increase in car sales after the launch of new models, as customers are tempted to prepone their decision to purchase the vehicle. With competition intensifying, the number of new launches has gone up, which will continue to drive demand. New launches at competitive prices across segments, which are less penetrated, would also woo customers for new purchases. 4. Increase in dealerships and easy access to finance: The widening of distribution networks by automakers will push up car sales, as a large number of households will be added to the target population. Typically, these households have the potential to buy a car, but defer the decision due to lack of sales and service infrastructure. With most urban centres covered by dealership networks, car manufacturers are setting up new dealerships in smaller towns to increase penetration and sales in semi-urban and rural areas. Enhanced penetration of financing will also help the rise in passenger car sales across all segments. Most manufacturers are targeting rural and semi-urban areas to increase sales volumes due to the rise in disposable incomes in these areas. Along with increasing the number of dealerships, manufacturers are providing easy accessibility to finance in these markets to enable customers to purchase cars. 5. Reduction in excise duty: A cut in excise duty on cars, which if passed on by original equipment manufacturers, increases affordability for buyers. In December 2008, excise duty on small cars (cars that are less than 4,000 mm long and have an engine capacity below 1,200 cc and 1,500 cc for petrol cars and diesel cars, respectively) was cut to 8 % from 12 %. For other cars and UVs, the duty was reduced to 20 % from 24 %. The decline in small-car prices led to increase in demand on account of the lower cost of ownership and growth in the addressable market. 6. Reduction in holding period increases demand for a second car: A decline in the average holding period will also increase passenger car sales, mainly in the mainstream/ small car/ mid-size segments. The average holding period has shrunk to 3-4 years in from 5-6 years in , implying frequent upgradations to advanced models from the same or higher segment. Also, the concept of a second car is on the rise in urban areas. With more than one working member in a family, the need for personal transportation is an impetus for purchasing more than one car. Commercial Vehicles Industry The commercial vehicle industry is segmented into light commercial vehicles (for vehicles with gross vehicle weight of less than 7.5 tons) and medium and heavy commercial vehicles (for vehicles weighing more than 7.5 tons). The performance of the medium and heavy commercial vehicle industry bears a high correlation with industrial growth and is driven by economic development, improved road infrastructure (such as the Golden Quadrilateral) for long haulage transportation and a favorable regulatory environment (in this regard, demand created in the years was attributable to the strict enforcement of overloading restrictions and age norms). In turn, the performance of the light commercial vehicle industry tends to be less cyclical in nature and is driven by GDP growth and demand for last mile distribution. The market share of light commercial vehicles increased rapidly - the introduction of a sub-one ton carrier by certain players created a new segment typically occupied by three- 70

83 wheelers and similar forms of intra-city transport, resulting in significant growth in the commercial vehicle market as a whole. Total domestic sales in the commercial vehicle industry reached 6,76,048 units in From to , domestic sales had grown at a healthy CAGR of 13.4%. The reduction in domestic sales was attributed to the slowdown in economic development, credit availability and costs, an increase in fuel prices, in addition to the base effect due to the one-time demand created in by the strict enforcement of overloading restrictions. [Source: SIAM] Domestic commercial Vehicle Sales Volumes Units 800, , , , % 351,041 CAGR : 13.4% 33.3% 4.9% 467, , % 384, % 532, % 676, , Source: CRISIL Retail Finance Auto May 2011 Numbers in italics represent change over previous year Source: Society of Indian Automobile Manufacturers ("SIAM") After a stable second quarter in fiscal 2009, the automotive sector in India suffered severe contraction in demand in the third quarter of fiscal 2009, arising from major financial and other market upheavals. This, along with contraction in freight movement in many segments of the industry, led to a massive drop in the medium and heavy commercial vehicle segment demand. High interest rates and peak commodity prices also affected the industry and the supply chain. In the third quarter of fiscal 2009, industry commercial vehicle sales were down 44.0% and passenger vehicle sales dropped by as much as 16.5% against the comparable quarter of the previous year. The economy grew 5.3% in the December 2008 quarter from a year earlier, below forecasts of 6.2% and the previous quarter's 7.6% as the global economic crisis cut demand and exports. As a result, volumes declined 21.7%. With the Indian economy gaining momentum and rising GDP growth, the sales of the commercial vehicles increased by 38.7% in and by 27.0% in Over the long term, the commercial vehicle industry and consequently, commercial vehicle financing, is expected to continue to show growth in light of the following factors: Modernization of trucking industry. A replacement boom is likely to be triggered by stricter enforcement of regulations banning trucks beyond 15 years and overloading, as well as the introduction by transport associations of a voluntary retirement scheme for old trucks with better financing options. An anticipated replacement demand for 11 Lakh new as well as pre-owned trucks will require financing of ` 1,07,80,000 Lakhs. (Source: Society of Indian Automobile Manufacturers) Structural shift to hub-and-spoke model and improving road infrastructure. All commercial vehicle segments are expected to experience a boost from the fast-evolving hub- and spoke-structure of the freight industry. Longdistance haulage between hubs is typically serviced by heavy commercial vehicles on highways which continue to benefit from the Golden Quadrilateral and road development projects, with freight distribution from the hub to the local warehouse at the end of the spoke requiring medium commercial vehicles and distribution over the last mile requiring small commercial vehicles. Growing freight capacity. GDP growth rate continues to drive incremental freight capacity, which is estimated to increase at 1.25 times of GDP growth. 71

84 Growth of construction industry. The share of the construction industry in GDP has increased from 6.1% in to 6.9% in This increase has been largely propelled by government spending. Because a substantial portion of construction investment is spent on equipment, this construction boom heralds a similar expansion in the need for construction vehicles. The Indian construction industry is dominated by small contractors that perform over 90.0% of projects. These local players often lack adequate access to institutional finance, creating enormous opportunities in the area of construction equipment financing. (Source: Government of India Planning Commission Eleventh Five Year Plan) Vehicle Finance Industry Overview Strong growth in underlying asset sales, improvement in finance penetration and increase in the average ticket size are the primary factors driving the growth of the Indian vehicle finance market. The vehicle finance disbursements are expected to grow at around 23% in Amongst individual segments, the cars and utility vehicle segments are expected to grow the fastest. Disbursements in the new car and utility vehicle finance industry are expected to grow by 26% in Over the next five years, the vehicle finance disbursements are projected to grow at 22% CAGR. [CRISIL Retail Finance Auto May 2011] Two Wheeler Finance Industry Unlike passenger cars and commercial vehicles, market sentiment in the two-wheeler finance industry is expected to remain subdued in the next 2 years. High operating expenses and a high probability of defaults, despite healthy growth in sales volume, are expected to restrain many financiers from re-entering or becoming aggressive in the market. Currently, only captive financiers and some NBFCs and few private banks are lending to the two-wheeler buyers. Small ticket size, high operating expenses and high probability of defaults is expected to keep several financiers wary of the market in the next months. [CRISIL Retail Finance Auto May 2011]. The two-wheeler finance disbursements in are expected to grow at 18%, reaching ` 99 billion. A 21.3 % rise in underlying sales volume in over supports this positive growth. Deterioration in asset quality and increased operating expenses has led many financiers to withdraw from some markets, particularly in the northern and eastern regions of India, [CRISIL Retail Finance Auto May 2011]. The growth in two-wheeler finance disbursements over to can be summarized as follows: ` billion E E P P P 72 CAGR ( to ) New TW finance market % New TW market size % E: Estimated; P: Projected Source: CRISIL Retail Finance Auto May 2011 Disbursements towards two-wheelers are expected to grow moderately by 11 % annually over the next 4 years mainly supported by underlying assets volume growth. [CRISIL Retail Finance Auto May 2011]. Domestic sales volume of two-wheelers recorded a growth of 21.3 % in with strong performance across all segments. The aforesaid growth rate was primarily on account of a low base effect of previous year and growing demand from rural areas. The domestic demand for two wheelers is expected to grow at a CAGR of 8-10 % cent till However, growing sales in rural markets will negatively affect the percentage of vehicles financed, as consumers in these markets prefer to pay in cash for the vehicle purchased. Finance penetration which has fallen to 30 % in from 37 % in , is expected to improve marginally to 31 % by However, with players expected to increase their level of finance provided on account of better risk appetite, finance penetration levels are expected to increase marginally and reach a level of around 33 % till [CRISIL Retail Finance Auto May 2011].

85 Players are now adopting stringent norms, including adequate check on past track record and proper documentation. Average Loan to Value (LTV) ratio in the two-wheeler finance industry, which had dropped to 65 % in , is estimated to have increased marginally to 69 % in Stringent credit appraisal norms, better information about customers due to Credit Information Bureau of India Limited (CIBIL) and increase in risk appetite of financiers are expected to increase levels of finance provided in the industry. This is expected to translate into higher LTV ratio for the industry with the LTV ratio expected to reach a level of 70 % by and remain constant thereon. [CRISIL Retail Finance Auto May 2011]. Drivers for two-wheeler finance market % 80% 65% 67% 69% 70% 70% 60% 40% 20% 37% 33% 30% 31% 33% 0% E E P P P Finance penetration LTV E- Estimated; P- Projected; Source: CRISIL Retail Finance Auto May 2011 Car and Utility Vehicle Finance Industry Strong recovery in underlying car and UV sales and decline in financiers risk aversion towards borrowers has led to a strong growth in loan disbursements towards the sector. Disbursements in the new car and UV finance industry are estimated to have grown by 44 % in The industry is expected to register a growth of % in The growth can mainly be attributed to swift recovery in the economy which has boosted consumer confidence, thereby leading to higher car sales and increased willingness on the part of financiers to lend. Average ticket size for car loans is also estimated to have increased on account of higher value car sales. [Source: CRISIL Retail Finance Auto May 2011] Aggregate disbursements towards cars and UVs are forecasted to register a CAGR of 21 % till Continued growth in underlying vehicle demand, increase in finance penetration and higher LTV would drive the disbursements growth in the next four years. [Source: CRISIL Retail Finance Auto May 2011] Growth in car and UV finance disbursements ` billion E E P P P CAGR ( to ) New Car finance market , % New UV finance market % New car and UV finance market , % E: Estimated; P: Projected Source: CRISIL Retail Finance Auto May 2011 Finance penetration The percentage of vehicles financed for cars and UVs increased from 68 % and 60 % in to 74 % and 61 % in The aggressive interest rate schemes and decline in risk aversion amongst players is expected to lead to an increase in the finance penetration in the cars and UV segment to improve to 80% and 69% by Increase 73

86 in competition and strong growth in underlying asset are expected to aid the growth of finance penetration going forward. [Source: CRISIL Retail Finance Auto May 2011] Finance Penetration % 90% 80% 70% 60% 50% 80% 74% 75% 69% 71% 69% 60% 62% 61% 63% E E P P P Cars Utility Vehicles E- Estimated; P-Projected Source: CRISIL Retail Finance Auto May 2011 Players have adopted stringent underwriting norms since the economic slowdown in which led to a number of financiers facing high delinquency levels. However, improvement in business sentiments and reduction in uncertainty over income growth have increased the comfort level of financiers in lending. Also, better information about customers due to CIBIL has led to players increasing their LTV ratios for the segment. Hence, average LTV ratio is estimated to have increased to 75 % and 70 % for cars and UVs, respectively. Over the next 4 years, we expect LTV ratio for cars and UV segment to rise to 78 % and 72 % respectively. [Source: CRISIL Retail Finance Auto May 2011] Average LTV Ratio % 80% 75% 72% 73% 75% 76% 78% 70% 65% 67% 68% 70% 71% 72% 60% E E P P P Cars Utility Vehicles E: Estimated; P: Projected Source: CRISIL Retail Finance Auto May 2011 Commercial Vehicle Finance Continued economic growth and strong credit appraisal mechanisms are expected to maintain the industry's growth momentum in the next 4 years. Led by a robust growth of 28 % in underlying vehicle domestic sales volume, the commercial vehicle finance industry is estimated to have recorded a strong growth of 44 % in disbursements in Disbursements are expected to remain buoyant over the medium term on account of revival of sales, decline in risk aversion levels and increase in average ticket size for players. Commercial vehicles disbursements are projected to grow by 22 per cent and 19 per cent in and , respectively owing to healthy growth in underlying sales volume and higher LTVs. The industry is expected to register a CAGR of 19 % in disbursements, reaching a level of around ` 795 billion by [Source: CRISIL Retail Finance Auto May 2011] 74

87 Growth in CV finance disbursements ` billion E E P P P CAGR ( to ) New LCV finance market % New MHCV finance market % New CV finance market % E- Estimated; P Projected LCV Light Commercial Vehicle; MHCV Medium and Heavy Commercial Vehicle Source: CRISIL Retail Finance Auto May 2011 Financiers are expected to marginally increase LTVs given their growing confidence in the transporter's earning potential and repayment capabilities and consequently, increase their disbursements. CRISIL Research forecasts average LTV ratio to increase from 74 % in to 75 % in However, credit appraisal mechanisms are expected to remain stringent in the next 2 years due to the anxiety of deterioration in asset quality. Small fleet operators and first-time users continue to remain at a higher risk from the financier s perspective. On this backdrop, we expect LTV levels to increase to a level of around 78 % by [Source: CRISIL Retail Finance Auto May 2011] Commercial vehicle finance industry is already highly penetrated in terms of credit availed. Typically, more than 95 % of vehicles are purchased on finance. Finance penetration had decreased marginally in However, the finance penetration levels have improved in This represents a huge dependence on finance industry. Finance penetration levels are expected to remain high at a level of around 98 % by [Source: CRISIL Retail Finance Auto May 2011] Micro Small and Medium Enterprises (MSME) Finance MSME Sector Micro, Small and Medium Enterprises (MSMEs), including khadi and village/rural enterprises credited with generating the highest rates of employment growth, account for a major share of industrial production and exports. They also play a key role in the development of economies with their effective, efficient, flexible and innovative entrepreneurial spirit. The socio-economic policies adopted by India since the Industries (Development and Regulation) Act, 1951 have laid stress on MSMEs as a means to improve the country s economic conditions. [Ministry of MSME Annual Report ] The MSME sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 % of the manufacturing output and 40 % of the total exports of the country. The sector is estimated to employ about 59 million persons in over 26 million units throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. [Ministry of MSME Annual Report ] In recognition of the contribution and vast potential of the MSME sector in the economy, provision of adequate credit to this sector continues to be an important element of banking policy, particularly after the initiation of structural reforms in The Government of India has from time to time taken economic policy initiatives to promote this sector and enhance credit to small and medium enterprises. Some of the initiatives of the Government towards MSME financing include setting up of credit guarantee fund trust for small industries, risk sharing facility, venture capital funding, micro credit, etc. 75

88 Performance of MSMEs - Units, Investment, Production, Employment & Exports SI. No. Year Total MSMEs (lakh numbers) Fixed Investment (` Crore) 76 Production (` crore) Current Prices Employment (lakh person) Exports (` crore) ,623 84, ,784 (4.07) (9.24) (4.71) (5.33) (28.10) ,795 98, ,307 (4.07) (5.63) (17.04) (4.46) (42.30) , , ,068 (4.07) (6.90) (23.64) (4.79) (14.86) , , ,470 (4.07) (1.58) (20.92) (3.42) (25.46) , , ,248 (4.07) (3.82) (13.60) (4.00) (7.62) , , ,112 (4.07) (2.05) (11.57) (3.55) (13.23) , , ,979 (4.07) (1.68) (12.41) (3.46) (10.21) , , ,200 (4.07) (3.32) (11.07) (3.88) (10.66) , , ,797 (4.07) (4.90) (11.78) (4.21) (28.78) , , ,244 (4.07) (5.11) (8.03) (4.44) (2.07) , , ,013 (4.07) (5.16) (11.54) (4.36) (20.73) , , ,644 (4.07) (4.87) (15.78) (4.31) (13.52) , , ,417 (4.07) (4.98) (17.90) (4.11) (27.42) , , ,242 (4.07) (5.27) (15.83) (4.37) (20.76) , , ,538 (111.48) (166.20) (42.49) (101.62) (21.50) 16** , , ,017 (4.51) (11.47) (11.47) (5.34) (10.67) 17** , , NA (4.53) (11.39) (11.39) (5.35)

89 SI. No. Year Total MSMEs (lakh numbers) Fixed Investment (` Crore) Production (` crore) Current Prices Employment (lakh person) Exports (` crore) 18** , , NA (4.53) (11.59) (11.59) (5.47) The figures in brackets show the percentage growth over the previous year. The data for the period up to is of small scale industries (SSl). Subsequent to , data with reference to micro, small and medium enterprises (MSME5) are being compiled. *Projected (Source: S&D Division Office of the DC (MSME)) Comparison of the MSME Sector with the Overall Industrial Growth in India The MSME sector has maintained a higher rate of growth vis-à-vis the overall industrial sector as would be clear from the comparative growth rates of production for both the sectors during last five years as incorporated in the following table: Growth rates of base IIP (%age) Over all Industrial Growth rates of sector (%age) # * Not Available Not Available *: Projected, IIP Index of industrial Production #: Source- M/o Statistics and P1 website The total employment from the MSME sector in the country as per the Fourth Census of MSMEs with reference year was lakh numbers. As per the estimates compiled for the year , the MSME sector employed lakh persons. Employment No. in lakh person Note 1. Projected data for the year to Data for pertain to small scale industries (SSI) only 77

90 The size of the registered MSME sector is estimated to be 1,563,974 of the total working enterprises. The total proportion by micro, small and medium enterprises were 94.94%, 4.89% and 0.17% respectively. About 45.23% (7.07 lakh) of the units were located in rural areas % of the enterprises in the registered MSME sector were engaged in manufacturing/ assembling/processing, whereas % of the units were engaged in services activities. The remaining % of the enterprises were engaged in the repair and maintenance. Distribution by Nature of Activity No. in lakh Manufacturing/ Assembling/ Processing (67.10%) Services 2.62 (16.78%) Repairing & Maintenance 2.52 (16.13%) Total (100%) The MSME industry envisions that the sector will have a healthy growth with a large number of enterprises being set up and their upward graduation into small and medium enterprises. This would be accompanied by enhancement of their contribution to the GDP, manufacturing output, employment and exports. The economic externalities which affect the MSME sector are the following: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Overall domestic and global growth trends; Domestic tax regime, particularly advent of Goods and Service Tax and Direct Tax Code; Policies governing the credit flow to the sector; Trade policies, including free trade agreements with other countries; Labour policies, particularly multiplicity of labour laws and procedures for compliance of various labour regulations; Availability of infrastructure facilities, including power, water, roads, etc.; Availability of critical raw material at competitive prices; Availability of skilled manpower for manufacturing, services, marketing, etc. Credit to the MSME sector Credit availability to MSMEs remains one of the major concerns. Although, the Government of India has taken several steps to increase the lending of this Sector, this remains even now the most difficult problem faced by the MSME. There is a cyclical nature of availability of funds to the MSME sector. This is determined by larger issues of international and domestic monetary policies, fiscal policies and other parameters beyond the pale of the sector. In times of a liquidity crunch, lack of liquidity in the financial system, even though caused by external factors, can quite dry up the flow of credit to the sector. The major dependence of the sector is working capital requirement which directly impacts the production cycle. As stated elsewhere, the tolerance threshold levels of this sector are very low. Hence, any liquidity crunch has an immediate and disastrous impact. During the last global economic crisis, this was seen to be a problem area, affecting the MSMEs for their day-today requirement of working capital. The MSME thus need to be insulated from such credit squeezes in times of adverse monetary conditions. Credit Guarantee Fund Scheme The Government of India launched the Credit Guarantee Fund Scheme for Micro and Small Enterprises in August, 2000, with the objective of making available credit to micro and small enterprises (MSEs), particularly micro enterprises, for loans up to ` 100 lakh without collateral/third party guarantees. The Scheme is being operated through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up jointly by the Government of India and Small Industries Development Bank of India (SIDBI). The Scheme covers collateral free credit facility (term loan and/ or working capital) extended by eligible member lending institutions (MLIs) to new and existing micro and small enterprises up to ` 100 lakh per borrowing unit. The guarantee cover provided is up to 75% of the credit facility up to `50 lakh with an incremental guarantee of 50% of the credit facility above `50 lakh and up to `100 lakh (85% for loans up to ` 5 lakh provided to micro enterprises, 80% for MSEs owned/ operated by 78

91 women and all loans to the North Eastern Region of India). As on 31st December 2010, there were 115 eligible lending institutions registered as MLIs of the Trust comprising 27 Public Sector Banks, 17 Private Sector Banks, 61 Regional Rural Banks (RRBs), 2 foreign banks and 8 other Institutions. Cumulatively 476,452 proposals have been approved for guarantee cover for a total sanctioned loan amount of ` 20, crore. In spite of various initiatives taken by the Government of India, banks and financial institutions, MSMEs face certain challenges. These problems relate to the issue of collaterals, cost of loans, delay in receivables, obsolete technology, marketing, etc. The MSME sector is still under banked to a large extent and barring certain public financial institutions and public sector banks, lending in this sector has traditionally been addressed by the unorganized players in most regions in India. Outstanding Bank Credit to Micro and Small Enterprises As on last reporting Friday of March 79 All Scheduled Commercial Banks Percentage of MSE Credit to Net Bank Credit Public Sector Banks Private Sector Banks Foreign Banks ,800 8,592 6,907 83, ,434 10,421 8,430 1,01, (21.6) (21.3) (22.1) (21.3) ,02,550 13,136 11,637 1,27, (24.4) (26.1) (38.0) (25.7) ,51,137 46,912 15,489 2,13, (47.7) (257.1) (33.1) (67.7) ,91,408 46,656 18,063 2,56, (26.6) 0.0 (16.6) (19.9) ,78,398 64,534 21,080 3,64, (Provisional) (45.4) (38.3) (16.7) (42.1) Source: Reserve Bank of India. Note: 1. Figure in parentheses indicates year-on-year growth. 2. The high growth witnessed during 2008 is on account of re-classification of MSEs as per MSMED Act, Firstly, the investment limit of small (manufacturing) was raised from `1 crore to `5 crore and small (services) was added to include enterprises with investment limit between `1 0 lakh to `2 crore. Secondly, the coverage of service enterprises was broadened to include small road and water transport operators, small business, professional and self-employed and all other service enterprises as per definition provided under MSMED Act, Vide circular RPC.CO.Plan.C.24/ / dated September 18, 2009, retail trade (credit limit not exceeding `20 lakh) has also been included under the ambit of MSE Sector. Role of NBFCs in the MSME finance sector Funding through banks requires extensive documentation; funding through unorganized sources is expensive. NBFC loans provide ideal mid way between bank lending and unorganized sector. The growth drivers for NBFCs engaged in MSME finance can be summarized as follows: Swift Loan Processing due to minimal documentation and flexibility of disbursement process; Customized repayment schedules, based on customer requirement at a lower interest rate than informal sources Huge untapped market and the lack of adequate penetration by banks Extensive network of branches which leads to better customer service

92 [Source: Analysis of MSME Loan Markets for NBFCs Frost & Sullivan July 2011] Most of the loans given to MSME sectors by NBFCs have a tenure of 2-3 years and it is only since 2008 the market has witnessed significant size and growth. While loans to MSMEs are considered relatively risky (mostly unsecured and to under-banked community), there is no concrete data to validate it due to the young life of this market. MSME LOAN MARKET FOR NBFCS: Source: Analysis of MSME Loan Markets for NBFCs Frost & Sullivan July 2011 NBFCs loan disbursals to MSMEs have grown at 75.8 % CAGR from Fiscal 2009 to Fiscal MSME loan market is expected to increase at a CAGR of over 50.0% from 2011 to 2013 and further continue growing at per cent from 2013 to Thereafter growth in this segment is expected to stabilise post 2015 around 20 % per year for the next five years. [Source: Analysis of MSME Loan Markets for NBFCs Frost & Sullivan July 2011] Loans Against Gold India is one of the largest markets for gold and accounts for around 10% of total world gold stock with an annual demand of around 700 tonnes. [Source: Gold Loans Market in India IMaCS Research and Analytics]. Gold Loans have continued emerging as a key gold based financial product and as of Fiscal 2010, the organised gold loans market in India is estimated at around ` billion with a compounded annual growth of around 40% during Fiscal At this level, the gold loans portfolio translates into a marginal 1.2% of the value of total gold stock in India. The market is significantly under-penetrated and is expected to continue growing at the rate of 35-45% going forward. Gold loans in India have largely been concentrated in South India, which holds the largest proportion of gold portfolio and is typically more open to borrowing against gold as compared to consumers in Northern and Western India, which are averse to pledging their gold holdings - considered as a symbol of family pride and honour. As of Fiscal 2010, the gold loans market is largely concentrated between two categories of lenders; south based NBFCs specialised in gold loans accounting for around 32 % of total market and scheduled commercial banks holding another 58% of the market. The rest of the gold loans portfolio is constituted by several small co-operative banks. [Source: Gold Loans Market in India IMaCS Research and Analytics] Role of NBFCs in the Gold Loan Market Due to their ability to service the customer requirements, the specialised NBFCs command superior yields (20-24%) as compared to their banking competitors (at 8-12%). [Source: Gold Loans Market in India IMaCS Research and Analytics]. Even with attractive yields in the gold loans segment, banks typically lack adequate focus on the 80

93 segment and the ability to provide flexible service offerings such as quick disbursal and low levels of documentation to meet the requirements of gold loans customers. Given these limitations, banks find it difficult to service the demand of non-agriculture client base which is largely un-organised and are hesitant of going through the processes and formalities of banks, even if it means getting loans at significantly lower rates of interest. [Source: Gold Loans Market in India IMaCS Research and Analytics] Several large pan-india NBFCs have marked their entry into the segment. These NBFCs are currently in a very cautious and preparatory mode and are expected to take a few years to ramp up their capabilities in gold loans segment. A few of these NBFCs have strong knowledge of local market conditions in South India, brand presence and an ability to replicate the business model and service offerings of large specialised NBFCs and are to be closely watched at in this space. [Source: Gold Loans Market in India IMaCS Research and Analytics] IMaCS Research and Analytics believe gold loans market holds immense potential in India and specialised NBFCs will continue to be a leading force in the segment over the next 4-5 years. These NBFCs are expected to be able to maintain their commanding position in the space, work aggressively to increase their branch presence and brand image, establish operations beyond South India and develop alternate product and fee based offerings for the large customer franchise. The following chart illustrates gold demand trends in India since 1991: Lending against gold is one of the popular instruments based on gold and it works well with Indian rural household s mindset, which typically view gold as an important saving instrument that is liquid and can be into converted into cash instantly to meet any urgent expense needs. The market is very well established in the Southern states of India, which account for the highest accumulated gold stock. Further, traditionally gold holders in Southern India are more open to accept and exercise the option of pledging gold as compared to other regions in the country which are reluctant to pledge jewellery or ornaments for borrowing money. Size and Potential of Gold Loans Market in India The organised gold loans market in India is estimated at around ` billion in Fiscal At this size, the organised gold loans market translates into 1.2% of the value of total gold stock in India and signifies a hugely under penetrated market with a large potential. The organised segment has registered a growth of 35-45% and is expected to continue growing at the same rate over the next few years and reach a portfolio size of ` billion by Fiscal [Source: Gold Loans Market in India IMaCS Research and Analytics] 81

94 There are no official estimates available on the size of this market which is marked with the presence of numerous pawnbrokers, money lenders and cooperative societies operating on a local level. These players are quite active in rural areas of India and provide loans against jewellery to families at interest rates in excess of 30 %. These operators have a strong understanding of the local customer base and offer an advantage of immediate liquidity to customers in need, without requirements of any elaborate formalities and documentation. However, these players are largely un-regulated leaving the customers vulnerable to exploitation at the hands of these moneylenders and pawnbrokers. Going forward, we believe that as organised players, particularly NBFCs, become more aggressive in the gold loans market, a significant part of the gold loans should shift from the un-organised lenders to the organised lenders, thus fuelling a strong growth in the organised market. Further, the growth would be even higher if the customer attitude towards gold pledging becomes more positive aided by government regulations and aggressive promotion by banks and finance companies. [Source: Gold Loans Market in India IMaCS Research and Analytics] A typical Gold Loan customer expects high loan-to-value ratios, easy access, low levels of documentation and formalities, quick approval and disbursal of loans, lockers to ensure safety of their pledged gold and a team of expert valuers. Specialized NBFCs have created a niche in the Gold Loans capabilities by meeting these requirements of the typical gold loan customers, who require Gold Loans primarily to meet their urgent cash requirements[source: Gold Loans Market in India IMaCS Research and Analytics] NBFCs specializing in Gold Loans continue to perform strongly in the Gold Loans market and the overall statistics demonstrate that the relative share of traditional gold finance NBFCs in the market has not changed significantly over the last three years. In fiscal 2010, the Gold Loans market was largely concentrated between two categories of lenders: south Indian based NBFCs specializing in Gold Loans which held approximately 32% and SCBs which held 58% of the total market. The rest of the Gold Loans portfolio was held by several small co-operative banks. [Source: Gold Loans Market in India IMaCS Research and Analytics] Outlook of the Gold Loans Market in India As the market is currently under-penetrated, it is expected that the Gold Loans market will offer enough opportunities for portfolio expansion and retain attractive margins for all existing specialised NBFCs, banks and new entrants [Source: Gold Loans Market in India IMaCS Research and Analytics] The branch expansion and marketing initiatives of various specialized NBFCs are anticipated to give a strong boost to the acceptability of gold loans and lead to further growth in the gold loans market. [Source: Gold Loans Market in India IMaCS Research and Analytics] 82

95 NBFCs in the Indian gold loans market Source: Gold Loans Market in India IMaCS Research and Analytics In addition, it is anticipated that the large public sector banks in southern India will continue to be amongst the leading lenders, but considering the various regulatory and operational processes, it would be challenging for the banks to match the flexible service regime of the specialised NBFCs (Source: Gold Loans Market in India IMaCS Research and Analytics). New NBFC entrants in the market are currently in a cautious preparatory mode to enter the Gold Loans market but it will take some time for these NBFCs to emerge as formidable competitors to specialized existing NBFCs. [Source: Gold Loans Market in India IMaCS Research and Analytics] This is because it will take time for these new NBFCs to build the requisite focus, infrastructure (valuers, lockers, etc,) and branch network (Source: IMaCS Industry Report 2009). Specialized NBFCs are expected to continue to hold their share of the Gold Loans market with their ability to provide superior and niche servicing capabilities to their existing and future customers. The following factors will be crucial in contributing to the continued growth of specialized NBFCs: ability to maintain their strong hold in the southern India markets in terms of reach and customer services; strengthening brand image in the target customer segments with a special emphasis on markets beyond the southern region in India; developing related products such as education loans and offering fee based services such as money transfers or financial products distribution; and capturing a strong market position in other regions of India, including in the northern and western regions Source: Gold Loans Market in India IMaCS Research and Analytics 83

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