Preliminary Placement Document Not for Circulation Serial Number

Transcription

1 Preliminary Placement Document Not for Circulation Serial Number The information in this Preliminary Placement Document is not complete and may be changed. This Preliminary Placement D ocument is not an offer to sell Equity Shares and is not soliciting an offer to subscribe to Equity Shares. It is being issued for the sole purpose of information or discussion on the Equity Shares that may be issued through the Placement Document. PTC INDIA LIMITED (incorporated in the Republic of India as a public company with limited liability under the Indian Companies Act, 1956 with CIN of 1999) PTC India Limited (the Company, Issuer or PTC ) is issuing equity shares of Rs. 10 each ( Equity Shares ) at a price of Rs. per Equity Share, including a premium of Rs. per Equity Share, aggregating to Rs. (this Issue ). ISSUE IN RELIANCE UPON CHAPTER XIII-A OF THE SEBI GUIDELINES THIS ISSUE AND THE DISTRIBUTION OF THIS PRELIMINARY PLACEMENT DOCUMENT IS BEING DONE IN RELIANCE UPON CHAPTER XIII-A OF THE SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000, AS AMENDED (THE SEBI GUIDELINES ). THIS PRELIMINARY PLACEMENT DOCUMENT IS PERSONAL TO EACH PROSPECTIVE INVESTOR AND DOES NOT CONSTITUTE AN OFFER OR INVITATION OR SOLICITATION OF AN OFFER TO THE PUBLIC OR TO ANY OTHER PERSON OR CLASS OF INVESTORS. Invitations, offers and sales of the Equity Shares shall only be made pursuant to this Preliminary Placement Document, the Confirmation of Allocation Note and the Application Form. See Issue Procedure. The distribution of this Preliminary Placement Document or the disclosure of its contents without our prior consent, to any person other than Qualified Institutional Buyers (as defined in the SEBI Guidelines) ( QIBs ) and persons retained by such QIBs to advise them with respect to their purchase of Equity Shares, is unauthorized and prohibited. Each prospective investor, by accepting delivery of this Preliminary Placement Document agrees to observe the foregoing restrictions, and to make no copies of this Preliminary Placement Document or any documents referred to in this Preliminary Placement Document. This Preliminary Placement Document has not been reviewed by the Securities and Exchange Board of India (the SEBI ), the Reserve Bank of India (the RBI ), the Bombay Stock Exchange Limited (the BSE ), the National Stock Exchange of India Limited (the NSE, and together with the BSE, the Stock Exchanges ) or any other regulatory or listing authority and is intended only for use by QIBs. This Preliminary Placement Document has not been and will not be registered as a prospectus with the Registrar of Companies in India, and will not be circulated or distributed to the public in India or any other jurisdiction and will not constitute a public offer in India or any other jurisdiction. Investments in the Equity Shares involve a degree of risk and prospective investors should not invest any funds in this Issue unless they are prepared to take the risk of losing all or part of their investment. Prospective investors are advised to read the risk factors carefully before taking an investment decision in this Issue. Each prospective investor is advised to consult its advisers about the particular consequences to it of an investment in the Equity Shares. The information on our website or any website directly or indirectly linked to such website does not form part of this Preliminary Placement Document and prospective investors should not rely on such information. All of the Company s outstanding equity shares are listed on the Stock Exchanges. On May 20, 2009, the closing prices as reported on BSE and NSE were Rs and 80.25, respectively. Applications shall be made for the listing of the Equity Shares on the BSE and the NSE. The Stock Exchanges assume no responsibility for the correctness of any statements made, opinions expressed or reports contained herein. Admission of the Equity Shares to trading on the Stock Exchanges should not be taken as an indication of the merits of the Company or the Equity Shares. YOU MAY NOT AND ARE NOT AUTHORIZED TO (1) DELIVER THE PRELIMINARY PLACEMENT DOCUMENT TO ANY OTHER PERSON OR (2) REPRODUCE SUCH PRELIMINARY PLACEMENT DOCUMENT IN ANY MANNER WHATSOEVER. ANY DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORIZED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SEBI GUIDELINES OR OTHER APPLICABLE LAWS OF INDIA AND OTHER JURISDICTIONS. A copy of this Preliminary Placement Document has been delivered to the Stock Exchanges. A copy of the Placement Document will be filed with the Stock Exchanges and will also be delivered to the SEBI for record purposes. This Preliminary Placement Document has been prepared by us solely for providing information in connection with the proposed issue of the Equity Shares described in this Preliminary Placement Document. The Equity Shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act ), and they may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Accordingly, the Equity Shares are being offered and sold (a) in the United States only to persons reasonably believed to be qualified institutional buyers (as defined in Rule 144A under the Securities Act) pursuant to Section 4(2) under the Securities Act who are also qualified purchasers pursuant to Section 2(a)(51) of the U.S. Investment Company Act of 1940, as amended (the Investment Company Act ), and (b) outside the United States in offshore transactions in reliance on Regulation S under the Securities Act. See Selling Restrictions. This Preliminary Placement Document is dated May 21, Joint Global Coordinators (In Alphabetical Order) DSP Merrill Lynch Limited Kotak Mahindra Capital Company Limited

2 TABLE OF CONTENTS Page NOTICE TO INVESTORS...i REPRESENTATION BY INVESTORS.ii PRESENTATION OF FINANCIAL AND OTHER INFORMATION...v FORWARD-LOOKING STATEMENTS...vi ENFORCEMENT OF CIVIL LIABILITIES...vii CERTAIN DEFINITIONS AND ABBREVIATIONS...1 SUMMARY...8 RECENT DEVELOPMENTS...13 SUMMARY OF THE ISSUE...16 RISK FACTORS...18 MARKET PRICE INFORMATION...29 USE OF PROCEEDS...31 CAPITALIZATION AND INDEBTEDNESS...32 DIVIDENDS AND DIVIDEND POLICY...33 SELECTED CONSOLIDATED FINANCIAL DATA...34 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...42 INDUSTRY OVERVIEW...58 OUR BUSINESS...69 BOARD OF DIRECTORS AND SENIOR MANAGEMENT...83 ORGANIZATIONAL STRUCTURE AND MAJOR SHAREHOLDERS...93 ISSUE PROCEDURE...96 PLACEMENT SELLING RESTRICTIONS TRANSFER RESTRICTIONS THE SECURITIES MARKET OF INDIA DESCRIPTION OF THE EQUITY SHARES TAXATION LEGAL PROCEEDINGS OUR ACCOUNTANTS GENERAL INFORMATION SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN INDIAN GAAP AND US GAAP PTC INDIA LIMITED FINANCIAL STATEMENTS...143

3 NOTICE TO INVESTORS We accept responsibility for the information contained in this Preliminary Placement Document and to the best of our knowledge and belief, having made all reasonable enquiries, confirm that this Preliminary Placement Document contains all information with respect to us and the Equity Shares which is material in the context of this Issue. The statements contained in this Preliminary Placement Document relating to us and the Equity Shares are, in every material respect, true and accurate and not misleading, the opinions and intentions expressed in this Preliminary Placement Document with regard to us and the Equity Shares are honestly held, have been reached after considering all relevant circumstances, are based on information presently available to the Company and are based on reasonable assumptions. There are no other facts in relation to us and the Equity Shares, the omission of which would, in the context of the Issue, make any statement in this Preliminary Placement Document misleading in any material respect. Further, all reasonable enquiries have been made by us to ascertain such facts and to verify the accuracy of all such information and statements. The JGCs have not separately verified all of the information (financial, legal or otherwise) contained in this Preliminary Placement Document. Accordingly, neither of the JGCs nor any member, employee, counsel, officer, director, representative, agent or affiliate of the JGCs makes any express or implied representation, warranty or undertaking, and no responsibility or liability is accepted, by the JGCs as to the accuracy or completeness of the information contained in this Preliminary Placement Document or any other information supplied in connection with the Equity Shares. Each person receiving this Preliminary Placement Document acknowledges that such person has not relied on the JGCs nor on any person affiliated with the JGCs in connection with its investigation of the accuracy of such information or its investment decision, and each such person must rely on its own examination of us and the merits and risks involved in investing in the Equity Shares. Prospective investors should not construe anything in this Preliminary Placement Document as legal, business, tax, accounting or investment advice. No person is authorized to give any information or to make any representation not contained in this Preliminary Placement Document and any information or representation not so contained must not be relied upon as having been authorized by or on behalf of us or the JGCs. The delivery of this Preliminary Placement Document at any time does not imply that the information contained in it is correct as at any time subsequent to its date. The Equity Shares have not been approved, disapproved or recommended by the U.S. Securities and Exchange Commission, any state securities commission in the United States or the securities commission of any non-u.s. jurisdiction or any other U.S. or non-u.s. regulatory authority or any other regulatory authority in any jurisdiction. None of these authorities has passed on or endorsed the merits of this Issue or the accuracy or adequacy of this Preliminary Placement Document. Any representation to the contrary is a criminal offence in the United States and may be a criminal offence in other jurisdictions. The distribution of this Preliminary Placement Document and the issue of the Equity Shares in certain jurisdictions may be restricted by law. As such, this Preliminary Placement Document does not constitute, and may not be used for or in connection with, an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation. In particular, no action has been taken by us and the JGCs which would permit an Issue of the Equity Shares or distribution of this Preliminary Placement Document in any jurisdiction, other than India, where action for that purpose is required. Accordingly, the Equity Shares may not be offered or sold, directly or indirectly, and neither this Preliminary Placement Document nor any Issue material in connection with the Equity Shares may be distributed or published in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction. In making an investment decision, investors must rely on their own examination of us and the terms of this Issue, including the merits and risks involved. Investors should not construe the contents of this Preliminary Placement Document as legal, tax, accounting or investment advice. Investors should consult their own counsel and advisors as to business, legal, tax, accounting and related matters concerning this Issue. In addition, neither we nor the JGCs are making any representation to any offeree or purchaser of the Equity Shares regarding the legality of an investment in the Equity Shares by such offeree or purchaser under applicable legal, investment or similar laws or regulations. Each purchaser of the Equity Shares in this Issue is deemed to have acknowledged, represented and agreed that it is a QIB eligible to invest in India and in the Company under Chapter XIII-A of the SEBI Guidelines and is not prohibited by the SEBI or any other regulatory authority from buying, selling or dealing in securities. Each purchaser of the Equity Shares in this Issue also acknowledges that it has been afforded an opportunity to request from us and review information relating to us and the Equity Shares. This Preliminary Placement Document contains summaries of certain terms of certain documents, which summaries are qualified in their entirety by the terms and conditions of such documents. i

4 REPRESENTATIONS BY INVESTORS By purchasing any Equity Shares under this Issue, you are deemed to have acknowledged and agreed as follows: you are a QIB and undertake to acquire, hold, manage or dispose of any of the Equity Shares that are allocated to you for the purposes of your business in accordance with the SEBI Guidelines; you have made, or will be deemed to have made, as applicable, the representations set forth under the Transfer Restrictions ; you are aware that the Equity Shares have not been and will not be registered under the SEBI regulations or under any other law in force in India. The Preliminary Placement Document has not been verified or affirmed by the SEBI or the Stock Exchanges and will not be filed with the Registrar of Companies. The Preliminary Placement Document will be filed with the Stock Exchanges for record purposes only and will be displayed on the websites of the Company and the Stock Exchanges; you are entitled to subscribe for and/or purchase the Equity Shares under the laws of all relevant jurisdictions which apply to you and that you have fully observed such laws and obtained all such governmental and other guarantees and other consents in either case which may be required thereunder and complied with all necessary formalities; you are entitled to acquire the Equity Shares under the laws of all relevant jurisdictions and that you have all necessary capacity and have obtained all necessary consents and authorities to enable you to commit to this participation in this Issue and to perform your obligations in relation thereto (including, without limitation, in the case of any person on whose behalf you are acting, all necessary consents and authorities to agree to the terms set out or referred to in the Preliminary Placement Document) and will honor such obligations; the JGCs are not making any recommendations to you or advising you regarding the suitability of any transactions you may enter into in connection with this Issue and that participation in this Issue is on the basis that you are not and will not be a client of the JGCs and that the JGCs do not have duties or responsibilities to you for providing the protections afforded to their clients or customers or for providing advice in relation to this Issue; you are aware and understand that the Equity Shares are being offered only to QIBs and are not being offered to the general public and the allotment of the same shall be on a discretionary basis; you were provided a serially numbered copy of the Preliminary Placement Document and have read the Preliminary Placement Document in its entirety; that in making your investment decision, (i) you have relied on your own examination of us and the terms of this Issue, including the merits and risks involved, (ii) you have made your own assessment of us, the terms of this Issue based on such information as is publicly available, (iii) you have consulted your own independent counsel and advisors or otherwise have satisfied yourself concerning, without limitation, the effects of local laws, and (iv) you have received all information that you believe is necessary or appropriate in order to make an investment decision in respect of us and the Equity Shares; you have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment in the Equity Shares and you and any accounts for which you are subscribing the Equity Shares (i) are each able to bear the economic risk of the investment in the Equity Shares, (ii) will not look to any of the JGCs, the Company and/or the officers of the Company for all or part of any such loss or losses that may be suffered, (iii) are able to sustain a complete loss on the investment in the Equity Shares, (iv) have no need for liquidity with respect to the investment in the Equity Shares, and (v) have no reason to anticipate any change in your or their circumstances, financial or otherwise, which may cause or require any sale or distribution by you or them of all or any part of the Equity Shares; that where you are acquiring the Equity Shares for one or more managed accounts, you represent and warrant that you are authorized in writing by each such managed account to acquire the Equity Shares for each managed account; you are not a Promoter or a person related to the Promoters of the Company, either directly or indirectly, and your bid does not, directly or indirectly, represent any Promoter or Promoter Group of the Company; you have no rights under a shareholders agreement or voting agreement with the Promoters or persons related to the Promoters, no veto rights or right to appoint any nominee Director on the Board other than that acquired in the capacity of a lender, which shall not be deemed to be a person related to the Promoters; you will have no right to withdraw your Bid after the Bid Closing Date; the Equity Shares will, when issued, be credited as fully paid and will rank pari passu in all respects with the existing equity shares of the Issuer including the right to receive all dividends and other distributions declared, made or paid in respect of such Equity Shares after the date of issue of the Equity Shares; if allotted the Equity Shares pursuant to this Issue, you shall not, for a period of one year from the date of Allotment, sell the Equity Shares so acquired except on the Stock Exchanges; you are eligible to bid for and hold the Equity Shares so allotted and together with any equity shares held by you prior to this Issue. You further confirm that your holding upon the issue of any of the Equity Shares shall not exceed the level permissible as per any applicable regulations; ii

5 the bids made by you would not eventually result in triggering a tender offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended (the Takeover Code ); to the best of your knowledge and belief together with other QIBs in this Issue that belong to the same group or are under common control as you, the allotment under the present Issue shall not exceed 50% of the size of this Issue. For the purposes of this statement: a. the expression belongs to the same group shall derive meaning from the concept of 'companies under the same group' as provided in sub-section (11) of Section 372 of the Companies Act, 1956; b. control shall have the same meaning as is assigned to it by clause (c) of Regulation 2 of the Takeover Code; you shall not undertake any trade in the Equity Shares credited to your depository participant account until such time that the final listing and trading approval for the Equity Shares is issued by the Stock Exchanges; you are aware that we have received from the Stock Exchanges in-principle approval for the listing and admission of the Equity Shares to trading on the Stock Exchanges' market for listed securities; you are aware and understand that the JGCs will enter into an agreement with the Company whereby the JGCs have, subject to the satisfaction of certain conditions set out therein, undertaken to use their reasonable endeavors as agents of the Company to seek to procure purchasers for the Equity Shares; that the content of the Preliminary Placement Document is exclusively our responsibility and that neither the JGCs nor any person acting on their behalf has or shall have any liability for any information, representation or statement contained in the Preliminary Placement Document or any information previously published by or on behalf of us and will not be liable for your decision to participate in this Issue based on any information, representation or statement contained in the Preliminary Placement Document or otherwise. By accepting a participation in this Issue, you agree to the same and confirm that you have neither received nor relied on any other information, representation, warranty, or statement made by or on behalf of the JGCs or us or any other person and that neither the JGCs nor we nor any other person will be liable for your decision to participate in this Issue based on any other information, representation, warranty or statement which you may have obtained or received; that the only information you are entitled to rely on and on which you have relied in committing yourself to acquire the Equity Shares is contained in the Preliminary Placement Document, such information being all that you deem necessary to make an investment decision in respect of the Equity Shares and that you have neither received nor relied on any other information given or representations, warranties or statements made by the JGCs or the Company and neither the JGCs nor the Company will be liable for your decision to accept an invitation to participate in this Issue based on any other information, representation, warranty or statement; certain statements other than statements of historical fact included in the Preliminary Placement Document, including, without limitation, those regarding the Company's financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the Company's products), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which we will operate in the future. You should not place undue reliance on forward-looking statements, which speak only as at the date of the Preliminary Placement Document. We assume no responsibility to update any of the forward-looking statements contained in the Preliminary Placement Document; that you are eligible to invest in India under applicable law, including the Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2000, as amended from time to time, and have not been prohibited by SEBI from buying, selling or dealing in securities; you agree to indemnify and hold us and the JGCs harmless from any and all costs, claims, liabilities and expenses (including legal fees and expenses) arising out of or in connection with any breach of your representations and warranties as contained herein. You agree that the indemnity set forth in this paragraph shall survive the resale of the Equity Shares including by or on behalf of the managed accounts; and that the Company, the JGCs and others will rely upon the truth and accuracy of your foregoing representations, warranties, acknowledgements and undertakings, each of which is given to the JGCs and the Company on your own behalf and each of which is irrevocable. OFFSHORE DERIVATIVE INSTRUMENTS Subject to compliance with all applicable Indian laws, rules, regulations, guidelines and approvals, Foreign Institutional Investors as defined under the SEBI Guidelines or their sub-accounts (together referred to as FIIs ), including FII affiliates of the JGCs, are permitted under Regulations 15A(1) of the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, as amended, to issue, deal in or hold, offshore derivative instruments such as participatory notes, equity linked notes or any other similar instruments against Equity Shares allocated in the Issue (all such offshore derivative instruments referred to herein as P-Notes ), listed or proposed to be listed on any stock exchange in India only in favour of those entities which are regulated by any relevant regulatory authorities in the countries of their incorporation or establishment ( Regulated Entities ) subject to compliance with know your client requirements. An FII or sub-account shall also ensure that no further downstream issue or transfer of any instrument referred to above is made to any person other than a Regulated Entity. P-Notes have not been and are not being offered or sold pursuant to this Preliminary Placement Document. This Preliminary Placement Document does not contain nor will it contain any information concerning P-Notes or the issuer(s) of any P-Notes, iii

6 including without limitation, any information regarding any risk factors relating thereto. Any P-Notes that may be issued are not securities of the Company and do not constitute any obligations of, claim on, or interest in the Company. The Company has not participated in any offer of any P-Notes. Any P-Notes that may be offered are issued by and are solely the obligations of, third parties that are unrelated to the Company. The Company and its affiliates do not make any recommendation as to any investment in P-Notes and do not accept any responsibility whatsoever in connection with any P- Notes. Any P-Notes that may be issued are not securities of the JGCs and do not constitute any obligations of, or claim on, the JGCs. FII affiliates of the JGCs may purchase, to the extent permissible under law, Equity Shares in the Issue, and may issue P-Notes in respect thereof. Prospective investors interested in purchasing any P-Notes have the responsibility to obtain adequate disclosure as to the issuer(s) of any P-Notes and the terms and conditions of any such P-Notes from the issuer(s) of such P-Notes. Neither SEBI nor any other regulatory authority has reviewed or approved any P-Notes or any disclosure related thereto. Prospective investors are urged to consult their own financial, legal, accounting and tax advisors regarding any contemplated investment in P-Notes, including whether P-Notes are issued in compliance with applicable laws and regulations. Affiliates of the JGCs who are registered as FIIs may issue P-Notes and earn commission on such issuance in accordance with applicable laws. NOTICE FOR NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES ( RSA 421-B ) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. DISCLAIMER CLAUSE OF THE STOCK EXCHANGES As required, a copy of this Preliminary Placement Document has been submitted to the Stock Exchanges. The Stock Exchanges do not in any manner: 1. warrant, certify or endorse the correctness or completeness of any of the contents of the Preliminary Placement Document; 2. warrant that the Company's equity shares (including the Equity Shares allotted in this Issue) will be listed or will continue to be listed on the Stock Exchange; or 3. take any responsibility for the financial or other soundness of the Company, its Promoters, its management or any scheme or project of the Company; and it should not for any reason be deemed or construed to mean that the Preliminary Placement Document has been cleared or approved by the Stock Exchanges. Every person who desires to apply for or otherwise acquire any securities of the Company may do so pursuant to an independent inquiry, investigation and analysis and shall not have any claim against the Stock Exchanges whatsoever by reason of any loss which may be suffered by such person consequent to or in connection with such subscription/acquisition whether by reason of anything stated or omitted to be stated herein or for any other reason whatsoever. iv

7 PRESENTATION OF FINANCIAL AND OTHER INFORMATION In this Preliminary Placement Document, 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 Issue, references to PTC, the Company or the Issuer are to PTC India Limited, references to we, our, us, are to PTC India Limited and its subsidiaries and associates on a consolidated basis. In this Preliminary Placement Document, references to US$ and U.S. Dollars are 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. Unless otherwise stated, references in this Preliminary Placement Document to a particular year are to the calendar year ended on December 31 and to a particular fiscal, fiscal year or FY are to the fiscal year ended on March 31. We publish our financial statements in Rupees. This Preliminary Placement Document contains translations of certain Rupee amounts into U.S. Dollar amounts at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Rupee amounts represent such U.S. Dollar amounts or could be, or could have been, converted into U.S. Dollars at the rates indicated, or at all. Unless otherwise indicated, all translations from Rupees to U.S. Dollars have been made on the basis of the number of Rupees for which one U.S. Dollar could be exchanged based on the noon buying rate in the City of New York for cable transfers in Rupees as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate ) on December 31, 2008, which was Rs = US$1.00. We prepare our financial statements in accordance with Indian GAAP. Indian GAAP differ significantly in certain respects from IFRS and U.S. GAAP. See Summary of Significant Differences between Indian GAAP and U.S. GAAP. We do not provide a reconciliation of our financial statements to IFRS or U.S. GAAP. See Risk Factors - Risks related to investments in an Indian company - Indian corporate and other disclosure and accounting standards differ from those in the United States, countries in the European Union and other jurisdictions, which may be material to the financial information prepared and presented in accordance with Indian GAAP contained in this Preliminary Placement Document. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding off. INDUSTRY AND MARKET DATA Information regarding market position, growth rates and other industry data pertaining to our businesses contained in this Preliminary Placement Document consists of estimates based on data reports compiled by professional organisations and analysts, data from other external sources and our knowledge of the markets in which we compete. The statistical information included in this Preliminary Placement Document relating to various industries in which we operate has been reproduced from various trade, industry and government publications and websites. Market share data has been determined from information available on the websites of Central Electricity Regulatory Commission ( CERC ), Regional Energy Account ( REA ) and trading licensees and it does not include power trades consummated on the power exchanges including Indian Energy Exchange Limited ( IEX ) and is limited to power trading licensees only. This data is subject to change and cannot be verified with complete certainty due to limits on the availability and reliability of the raw data and other limitations and uncertainties inherent in any statistical survey. In many cases, there is no readily available external information (whether from trade or industry associations, government bodies or other organisations) to validate market-related analyses and estimates, so we rely on internally developed estimates. While we have compiled, extracted and reproduced this data from external sources, including third parties, trade, industry or general publications, we accept responsibility for accurately reproducing such data. However, neither we nor the JGCs have independently verified this data and neither we nor the JGCs make any representation regarding the accuracy of such data. Similarly, while we believe our internal estimates to be reasonable, such estimates have not been verified by any independent sources and neither we nor the JGCs can assure potential investors as to their accuracy. v

8 FORWARD-LOOKING STATEMENTS Certain statements contained in this Preliminary Placement Document 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 expected financial condition and results of operations and business plans and prospects are forwardlooking statements. These forward-looking statements include statements as to our business strategy, our revenue and profitability, growth plans and other matters discussed in this Preliminary Placement Document that are not historical facts. These forward-looking statements and any other projections contained in this Preliminary Placement Document (whether made by us or any third party) are predictions and involve known and unknown risks, uncertainties, assumptions and other factors that may cause our 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 us that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from our expectations include, among others: General political economic and business conditions in India and other countries; The Company's ability to successfully implement its strategy, its growth and expansion plans, and technological changes; Cost overruns, delays and disruptions in completion and commissioning of the power projects of our suppliers and the power projects in which we have invested; Performance of industrial sectors in India: Potential mergers, acquisitions or restructurings; Performance of the Indian debt and equity markets; Occurrence of natural calamities or natural disasters affecting the areas in which we have operations; Changes in laws and regulations that apply to companies in India especially those resulting in caps or reduction in caps for trading margins; Changes in the foreign exchange control regulations in India; Breakdown in power transmission systems and Open access availability; Loss of our status as a GoI nominee in Bhutan or Nepal; and Other factors discussed in this Preliminary Placement Document, including under "Risk Factors". Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to, those discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Industry Overview" and "Our Business". The forward-looking statements contained in this Preliminary Placement Document are based on the beliefs of management, as well as the assumptions made by and information currently available to management. Although we believe that the expectations reflected in such forward-looking statements are reasonable at this time, we cannot assure investors that such expectations will prove to be correct. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements. If any of these risks and uncertainties materialize, or if any of our underlying assumptions prove to be incorrect, our 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 us are expressly qualified in their entirety by reference to these cautionary statements. vi

9 ENFORCEMENT OF CIVIL LIABILITIES The Company is a limited liability company incorporated under the laws of India. All of our Directors and executive officers named herein are residents of India and a substantial portion of assets of such persons are located in India. As a result, it may be difficult for investors to effect service of process upon the Company or such persons outside India or to enforce judgments obtained against such parties outside India. Recognition and enforcement of foreign judgments is provided for under Section 13 of the Code of Civil Procedure, 1908 (the CPC ) on a statutory basis. Section 13 and Section 44A of the CPC provide that a foreign judgment shall be conclusive regarding any matter directly adjudicated upon except: (i) where the judgment has not been pronounced by a court of competent jurisdiction, (ii) where the judgment has not been given on the merits of the case, (iii) where it appears on the face of the proceedings that the judgment is founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which such law is applicable, (iv) where the proceedings in which the judgment was obtained were opposed to natural justice, (v) where the judgment has been obtained by fraud, or (vi) where the judgment sustains a claim founded on a breach of any law in force in India. India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments. However, Section 44A of the CPC provides that where a foreign judgment has been rendered by a superior court within the meaning of that section in any country or territory outside India which the Government has by notification declared to be in a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India. However, Section 44A of the CPC is applicable only to monetary decrees not being in the nature of any amounts payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalties and does not include arbitration awards. The United Kingdom, Singapore and Hong Kong have been declared by the Government to be reciprocating territories for the purposes of Section 44A of the CPC but the United States has not been so declared. A judgment of a court in a jurisdiction which is not a reciprocating territory may be enforced only by a fresh suit upon the judgment and not by proceedings in execution. The suit must be brought in India within three years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive or inconsistent with public policy. Further, any judgment or award in a foreign currency would be converted into Rupees on the date of such judgment or award and not on the date of payment. A party seeking to enforce a foreign judgment in India is required to obtain approval from the RBI to repatriate outside India any amount recovered and any such amount may be subject to income tax in accordance with applicable laws. vii

10 CERTAIN DEFINITIONS AND ABBREVIATIONS In this Preliminary Placement Document, the following terms and abbreviations have the following meanings, unless the context otherwise permits or requires. Term Definition ABT.. Availability Based Tariff Allotment... Unless the context otherwise requires, the allotment of the Equity Shares to the successful investors pursuant to the Issue Application Form... The form completed by investors pursuant to which the QIBs would be allocated Equity Shares after the discovery of the Issue Price Articles... Articles of Association of the Company AS... Accounting standards issued by the Institute of Chartered Accountants of India AT&C... Aggregate technical and commercial ATE... Appellate Tribunal for Electricity Athena... Athena Energy Venture Private Limited AUC... Assets under control Auditors... The Statutory Auditors of the Company, T. R. Chadha & Company, Chartered Accountants Bank.. [ ] Bank Account The bank account opened by the Company with the Bank. BHEL. Bharat Heavy Electricals Limited Bid Closing Date... [ ], i.e., the date on which the Company (or the JGCs on behalf of the Company) shall cease the acceptance of duly completed Application Forms for the Issue. Bid Opening Date... May 21, 2009, i.e., the date on which the Company (or the JGCs on behalf of the Company) shall commence the acceptance of duly completed Application Forms for the Issue. Bid... An indication of a QIBs interest, including all revisions and modification of interest as provided in the Application Form, to subscribe for the Equity Shares of the Company under this Issue. Bidding Period.. The period between the Bid Opening Date and Bid Closing Date, inclusive of both dates, during which the QIBs may submit their Bids. Board of Directors/Board... Board of Directors of the Company BSE... Bombay Stock Exchange Limited CAN/Confirmation of Allocation Note... Note or advice or intimation to QIBs confirming the allocation of Equity Shares to such QIBs after discovery of the Issue Price 1

11 Captives.... Refers to power plants set up by industrial companies to generate power primarily for their own consumption CD.. Corporate Development CDSL... Central Depository Services Limited CEA... Central Electricity Authority CERC... Central Electricity Regulatory Commission CFO... Chief Financial Officer Chukha... Chukha hydro-electric power project in Bhutan Companies Act... The Companies Act, 1956 as amended from time to time Company CPC... CPL CTU PTC India Limited The Civil Procedure Code, 1908, as amended from time to time Corporate Power Limited Central Transmission Utility Cut-Off Price... The Issue Price which shall be finalized by the Company in consultation with the JGCs Delisting Guidelines.. SEBI (Delisting of Securities) Guidelines, 2003 Depositories Act... Depositories Act, 1996 as amended from time to time Depository... A depository registered with SEBI under the SEBI (Depositories and Participant) Regulations, 1996 as amended Designated Date... The probable designated date for the credit of the Equity Shares to the QIB s account Directors... The members of the Board of Directors EGM... Extraordinary General Meeting Electricity Act... The Electricity Act, 2003 and rules framed thereunder from time to time Electricity Trading Regulation... CERC (Procedure, Terms and Conditions for Grant of Trading License and Other Related Matters) Regulations, 2004 Equity Shares... [ ] equity shares of the Company of face value of Rs. 10 each being issued and allotted in this Issue ERP... Enterprise Resource Planning ESOP. Employee Stock Option Plan/Employee Stock Option FEMA... The Foreign Exchange Management Act, 1999, as amended, and the regulations framed thereunder FII... Foreign Institutional Investor and their sub-accounts (as defined under the SEBI (Foreign Institutional Investors) Regulations, 1995) registered with SEBI 2

12 Fiscal Year... under applicable laws in India The period of commencing on April 1 of a year and ending on March 31 of the following year. Floor Price... Rs calculated in accordance with Clause 13A.3 of the SEBI Guidelines FSMA... The Financial Services and Markets Act, 2000 GDP... Gross Domestic Product GoHP... Government of Himachal Pradesh Goldman Sachs. GS Strategic Investments Limited Government/GoI... The Government of the Republic of India Group Captives... A group of companies that join together to form their own Captive GW. Giga Watt GUVNL.. Gujarat Urja Vikas Nigam Limited HPSEB.. HT Consumers..... Himachal Pradesh State Electricity Board High tension consumers, such as corporations, that purchase power directly from Captives ICAI... The Institute of Chartered Accountants of India IEGC.... Indian Electricity Grid Code IEX..... Indian Energy Exchange Limited IFRS... International Financial Reporting Standards Income Tax Act or I.T. Act... The Income Tax Act, 1961, as amended from time to time Indian GAAP... Generally accepted accounting principles of India IPPs... Independent Power Producers IT... Information technology JGCs... Joint Global Co-ordinators and Joint Bookrunners, being DSP Merrill Lynch Limited and Kotak Mahindra Capital Company Limited JSERC Jharkhand State Electricity Regulatory Commission Kms Kilometers Krishna Godavari.... Krishna Godavari Power Utilities Limited Kurichhu... LAPPL.. Listing Agreement... Macquarie. MAT.. Kurichhu hydro-electric power project in Bhutan Lanco Amarkantak Power Private Limited The agreement entered into with each Stock Exchange for the listing of the Company s shares. Macquarie India Holdings Limited Minimum Alternate Tax 3

13 MCX... National Multi-Commodities Exchange Memorandum/Memorandum of Association... The Memorandum of Association of the Company MIS... Management Information System MoP... Ministry of Power MOU(s).. Memorandum of Understanding MPERC. Madhya Pradesh Electricity Regulatory Commission MPPTCL Madhya Pradesh Power Trading Corporation Limited MT. MFTG Metric Ton Market Facilitation and Transaction Group MU... Million Unit(s) MVA... Mega Volt Ampere MW... Mega Watt MYT... Multi Year Tariff National Grid... The synchronisation of all the five power regions in India, the same being, North, North-East, South, East and West National Investment Fund National Investment Fund set up by the GoI by way of resolution No. F. No. 2/3/2005-DDII dated November 23, 2005 of the GoI published in the Gazette of India NBFC.. Non-Banking Finance Company NEP... National Electricity Policy NHPC... NHPC Limited NLDC National Load Dispatch Center NSDL... National Securities Depository Limited NSE... National Stock Exchange of India Limited NSE Nifty.. The market index of the NSE called the Nifty NTP or National Tariff Policy National Tariff Policy, 2006 NTPC... NTPC Limited Order. Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 Open access... Under the Electricity Act, the non discrimination provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the appropriate commission such as CERC or SERC PAN... Permanent account number issued by the income tax department 4

14 Pay-in Date The date on which a QIB who has been allocated Equity Shares is required to pay in its subscription amount to the Bank Account PEL... PTC Energy Limited PFC... Power Finance Corporation Limited PFIC.. Passive Foreign Investment Company PFS... PTC India Financial Services Limited PFS ESOP Employee Stock Option Plan of PFS of 2008 Placement Document... Placement Document to be issued by the Company in accordance with Chapter XIII-A of the SEBI Guidelines POWERGRID... Power Grid Corporation of India Limited PPA... Power Purchase Agreement PPP... Public Private Partnership Preliminary Placement Document... This Preliminary Placement Document dated May 21, 2009 issued in accordance with Chapter XIII-A of the SEBI Guidelines Promoters and Promoter group... The Company s promoters identified in the section Organizational Structure and Major Shareholders being POWERGRID, NTPC, NHPC and PFC Prospectus Directive... PSA... Power Sale Agreement Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State PTC... PTC India Limited PTC ESOP 2008 Employee Stock Option Plan of PTC of 2008 QEF Qualified Electing Fund QIB... Qualified Institutional Buyer as defined in Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 as amended from time to time RBI... Reserve Bank of India REA... Regional Energy Account Relevant Member State Each Member State of the European Economic Area which has implemented the Prospectus Directive Reportable Transactions. Certain transactions that give rise to a loss in excess of certain thresholds required to be reported by United States taxpayers RLDC... Regional Load Dispatch Centre RPC... Regional Power Committee Rs./Rupees/INR... Indian Rupees 5

15 RSA 421-B... SARI/E.. Chapter 421-B of the New Hampshire Revised Statute South Asian Regional Initiative for Energy SAT... Securities Appellate Tribunal SEBI... Securities and Exchange Board of India SEBI ESOP Guidelines... Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 SEBI Guidelines... The SEBI (Disclosure and Investor Protection) Guidelines, 2000, as amended, including instructions and clarifications, issued by SEBI, from time to time SEBs... State Electricity Boards Securities Act... U.S. Securities Act of 1933 Securities and Futures Act.. Sensex Securities and Futures Act, Chapter 289 of Singapore BSE Sensitive Index SERC... State Electricity Regulatory Commissions SFO Securities and Futures Ordinance (Cap. 571) SICA... The Sick Industrial Companies (Special Provisions) Act, 1985 SLDC... State Load Dispatch Centre SPUs..... State Power Utilities means the SEBs or those entities that have succeeded to (in certain states) the functions of the SEBs following the unbundling of the power generation, transmission and distribution functions of the SEBs pursuant to the specific state reform acts and the Electricity Act STT... Securities Transaction Tax STU... State Transmission Utility Subsidiaries... PFS and PEL T&D... Transmission and distribution Takeover Code... The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended from time to time Tala Tala hydro-electric power project in Bhutan Teesta... Teesta Urja Limited U.A.E.. United Arab Emirates U.K. United Kingdom U.S.. United States U.S. GAAP... Generally accepted accounting principles of the United States Unit... Kilowatt hour 6

16 USAID..... USEA. WBSEB.... we, our and us..... United States Agency for International Development United States Energy Association West Bengal State Electricity Board PTC and its Subsidiaries on a consolidated basis 7

17 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Preliminary Placement Document. In addition to this summary, we urge you to read the entire Preliminary Placement Document carefully, especially the risks of investing in the Equity Shares discussed under Risk Factors before deciding whether to buy our Equity Shares. Overview We are a leading power trading company in India. For the nine months ended December 31, 2008, not including our trades of 864 MUs on the IEX, we had a market share of 46.5%. Our traded volumes have increased from 1,617 MUs in FY 2002 to 9,889 MUs in FY 2008 and for the nine month period ended December 31, 2008, we traded a total of 11,643 MUs. Our principal business is to undertake short, medium and long term trading of electricity. We also provide consultancy services and invest in and finance companies operating in the power sector and propose to develop and manage businesses in the energy sector such as wind power projects and enter into power tolling and fuel intermediation. We intend to expand our business operations towards becoming a leading integrated power company in India. We were established in 1999 at the initiative of the GoI to help implement its Mega Power Policy. Our Promoters are Power Grid Corporation of India Limited ( POWERGRID ), NTPC Limited ( NTPC ), Power Finance Corporation Limited ( PFC ) and NHPC Limited ( NHPC ). Support from the GoI and our Promoters have been important to our success, especially in our early years of operations. Prior to the consummation of this Issue, our Promoters each held 5.28% of our equity share capital and are important contributors to the development of India s power sector. They are: POWERGRID - India s largest central transmission utility, POWERGRID manages and operates the country s inter-state transmission system, NTPC - India s largest thermal power generator, PFC - a development financial institution dedicated to the power sector, and NHPC - a large hydro-electric power generator in India. Under the Mega Power Policy, the GoI developed a plan to generate more power across India through construction of new mega power projects, with additional private investment. Mega power projects are projects with a generation capacity of over 1,000 MW (for thermal projects) and 500 MW (for hydro-electric projects) that can be transmitted across states. Our mandate under the Mega Power Policy was to purchase power from Independent Power Producers ( IPPs ) and sell it to identified State Electricity Boards ( SEBs ) suffering from power deficits. As our business evolved, we also began to enable and arrange power trading between SEBs and, subsequently, SPUs. In FY 2000, we began our power trading business. Under the Electricity Act, 2003 ( Electricity Act ) licensing requirements for power traders were made mandatory, and we received our license in We were one of the first licensees to obtain what was earlier called a category F license (as defined under CERC s regulations), which allowed the highest volumes of trading. CERC has recently categorized the license into three categories, the highest being category I, which allows unlimited trading, which we currently maintain. In FY 2002, our first full year of operation, our trade volume totaled 1,617 MUs, and involved solely short term trading. For FY 2008, our total trade volume was 9,889 MUs. For the nine months ended December 31, 2008, our total trade volume was 11,643 MUs. Our historical short and medium and long term trade volumes and sales are set forth in the table below: Trading Volume (in MUs) Time period Short term Medium and Long term Sales (Rs. in million) Short term Medium and Long term FY FY , , FY , , FY , , , , FY , , , , FY , , , , FY , , , , FY , , , , Nine months ended December 31, ,063.97* 5, ,167.46* 10, * Includes 5.6 MUs (Rs million) of power generated by the Company through wind power project. For each Unit that we buy, our practice is to sell that Unit to a customer on identical terms and conditions, which we refer to 8

18 as back-to-back trading, subject to a margin that we retain. We believe that arranging back-to-back transactions is an important risk management practice. We also strive to limit our risk through a carefully developed set of risk management policies, including, among other things, receipt of security in the form of bank guarantees or letters of credit. For the nine month period ended December 31, 2008, short term trading of electricity (generally, trades having a term of less than one year) accounted for 52.1% of our trading volume and 79.9% of our sales, and medium term (terms of between one and 25 years in duration) and long term trading (for a period of 25 years and more) accounted for 47.9% of our trading volume and 20.1% of our sales. To date, all of our medium and long term trades have included cross border contracts for the purchase of hydro-electric power generated in Bhutan. We have seen more competition and increased regulation of short term trading over the past few years, including the imposition of a statutory cap of Rs per Unit on our short term trading margins and more recently, on cross border trades. For information about the regulatory framework affecting our business, see Industry Overview. While we plan to continue building on our successes in short term trading, we see more growth opportunities in the long term trading business, and our strategy is to increase the volume and mix of medium and long term trading contracts by entering into longer term off-take arrangements. We have worked on ways to increase long term access to power supplies by (i) entering into long term Power Purchase Agreements ( PPAs ) with new IPPs and Captives, which are industrial companies that produce the majority of their power for their own consumption (but also often have surplus capacity), (ii) developing fuel intermediation and tolling programs, through which we act as an aggregator of coal and sell such fuel to thermal power plants (intermediation) or provide power plants with fuel and sell the resulting power (tolling), (iii) pursuing our own investments in new power projects, through majority or minority holdings and (iv) developing relationships with producers in Nepal and building on existing trade relationships with producers in Bhutan, each of which have substantial hydro-electric power potential. Due to these efforts to increase available sources of supply, we believe that we are uniquely positioned for long term trading of power. We are constantly looking to develop different ways to capitalize on our industry experience and strong brand. We continue to evolve our strategies by matching our buyers and sellers needs with innovative products to ensure maximum scheduling at the highest tariff. This has allowed us to maintain our leadership position in terms of trade volumes sold by Indian power trading licensees. In FY 2007, we established our first subsidiary, PTC India Financial Services Limited ( PFS ), to be our investment vehicle and for providing financial solutions to a diverse range of companies in the energy sector. We also established a wholly owned subsidiary, PTC Energy Limited ( PEL ), in FY 2009 which will seek to develop and manage businesses in the energy sector such as power generation, power distribution, power transmission, power tolling, importing coal and taking up energy efficiency projects while also providing consultancy services. We also provide consultancy services to various clients in the energy sector, including on the developing regulatory regime, preparing financial models for IPPs, preparing market study reports, pre-feasibility reports and detailed project reports. In August 2007, CERC approved the establishment of India s first nationwide automated and online electricity trading platform IEX, in which PFS owns a 26% equity interest and is a co-promoter. IEX began operating in June IEX is run on the platform of OMX Exchanges, which includes seven other international exchanges, which has brought scalable technology solutions for nationwide energy trading. From the start of its operations through December 31, 2008, IEX trade volumes totaled 3,540 MUs (Source: IEX). Our Strengths Early mover in power trading in India and a strong brand Our business was established at the initiative of the GoI to facilitate power trading and private investments in power projects within India as part of its Mega Power Policy. This mandate shaped and directed our initial operations, and enabled us to be an early mover in the power trading business in India. We believe that we were one of the first power traders to offer various products, such as 24 hour power, evening or morning peak, afternoon or night time off-peak, morning or night and others. We developed our business plan, built our operations and formulated our trading strategy, including our risk management policies, with the long term view of being an enduring participant in the Indian power trading market. With this foundation, we have established a strong reputation and brand in the Indian power trading sector. In addition to power trading, we provide consulting services and invest in and finance companies operating in the power sector and propose to develop and manage businesses in the energy sector such as wind power projects. We also propose to enter into power tolling and fuel intermediation. We are a leading power trading company in India. For the nine months ended December 31, 2008, not including our trades of 864 MUs on the IEX, we had a market share of 46.5%. Such market share data has been determined from information available on the websites of CERC, REA and trading licensees and it does not include power trades consummated on the power exchanges including IEX and is limited to trading licensees only. Strong relationships with the GoI and SPUs We have a longstanding relationship with the GoI as a result of our formation under the GoI initiative in connection with the Mega Power Policy and our establishment by our Promoters, which are state-owned public sector undertakings. We also believe that we have built a number of strong relationships with power utilities by virtue of our positive performance record. 9

19 We have benefited from the guidance and expertise of our Promoters, which are experienced power sector participants. In addition, the Ministry of Power and the Ministry of External Affairs have each designated one representative to serve on our Board. We operate in a highly regulated industry, and we believe that our exposure to governmental and quasi-governmental entities as our shareholders, Board members and customers enables us to maximize our understanding of the industry and develop our commercial framework. Our knowledge of the Indian power industry and the market helps our success Knowledge of the power industry is important to our success. As power traders, the ability to match sellers of surplus power with appropriate buyers is fundamental to our business. Our marketing department continuously maps surplus and deficit power pockets in the country. Based on this research, marketing efforts are directed at relevant areas. We consider many aspects of each potential trading party, such as their generation capacity or demand on an annual, seasonal, weekly and daily basis. Such specific information allows us to pursue customers based on their particular needs, and our particular supply. For example, we can facilitate trades of electricity on specific days, such as weekends, or for specific times of the day, such as peak hours. Information about our customers allows us to offer diverse power products and increase our trading volumes. While knowledge of our customers is important, a thorough understanding of the power industry is also essential. Before a trade can occur, we analyze the parties locations, power requirements and price sensitivities. We then coordinate with state and regional transmission utilities to ensure that Open access is available for the power transfer to occur. We comprehend the complexities associated with power delivery in India. Providing competent delivery solutions to our trade customers is not only important to our reputation, it is critical to our sales, as we do not recognize sales until power is delivered to our buyers. We carefully manage our risks to minimize our exposure Our trading business involves managing several types of risk, including market risk, counterparty credit risk and risk associated with inadequate transmission systems. We adopted a set of risk management policies, which are monitored by a risk manager, to help manage and reduce our risk exposure. For example, our transactions are generally agreed on a back-toback basis with our sellers and buyers. For short term trades we do not undertake speculative trading by maintaining open positions, except in a few cases where we take open positions in case of tendering for the purchase of power. Further, we address counterparty credit risk by requiring bank guarantees or letters of credit from our buyers. Through our risk management policies, we did not have any bad debts as of December 31, See Our Business Risk Management. Experienced and qualified management team and employee base Our management team is drawn from various industries such as power, finance and business. This provides us with a blend of sector expertise at the highest levels. This team is responsible for our growth in our business operations. We believe that their experience, coupled with their client relationships and positive industry reputations, gives us a competitive edge in the power trading industry. In addition, we periodically recruit new graduates from business schools to train under our management team. This allows us to maintain a pool of talent that has exploited the knowledge base and experience of our existing personnel. Knowledge sharing partnerships PTC is an active partner of a joint Indo-Norwegian program to build an electricity market based on best global practices. As a part of this, PTC along with a Norwegian institution conducts workshops in India as well as in Norway with all major stake holders of the electricity markets of both the countries. The objective is to understand the present and evolving trends in each other s electricity market and to work towards a market design based on the relevant commercial principles. Business Strategy Explore strategic investments and new initiatives We intend to expand our business operations towards becoming a leading integrated power company in India. Our principal business is to undertake short, medium and long term trading of electricity. We also provide consulting services and invest in and finance companies operating in the power sector and propose to develop and manage businesses in the energy sector such as wind power projects and enter into power tolling and fuel intermediation. We established PFS in FY 2007 and PEL in FY 2009 in order to explore our strategic and investment initiatives. PFS will act as a strategic investor and financier while PEL will seek to develop and manage businesses involved in the energy sector. We have, either directly or indirectly, invested in, financed and are operating companies that are involved in developing power projects and related infrastructure, including companies that build, own and operate thermal power projects, renewable energy based power projects such as wind farms, biomass projects and solar projects and a wind turbine manufacturing plant. For further details on our investments see Our Business Key Business Areas Our Investments. Increase trade volumes of long term contracts by entering into long term PPAs and Power Sale Agreements ( PSAs ) with multiple power suppliers 10

20 We have entered into long term PPAs, PSAs and MOUs with SPUs, IPPs (both domestically and in Nepal), Captives and the government of Bhutan. Securing power supplies that we can sell on a short, medium and/or long term basis will reduce our dependence on short term trading. We look for multiple avenues to purchase power for the long term. In the private sector, we approach IPPs and Captives for long term purchase agreements. IPPs (generating over 1,000 MW for thermal projects and 500 MW for hydro-electric projects) are required to sell their power to purchasers in more than one state in order to obtain mega power project status, which affords them certain tax benefits. Initially we enter into an MOU with the IPP while the new power plant is in the planning or construction phase. Subsequent to the finalization of terms and conditions of the power purchase arrangement, we enter into PPAs. As of December 31, 2008, for the purchase of power, we had 28 PPAs signed for 10,415 MW and one PPA, agreed in-principle, for 750 MW, and 35 MOUs for 28,119 MW, as well as 27 PSAs signed for 4,789 MW and eight MOUs signed for 1,200 MW with SPUs to sell this supply. Continue to increase short term trading volumes and increase market share by identifying new products We strive to provide a diverse mix of products to our clients to retain our competitive edge and to increase our trade volumes. In our early operations, our short term trading contracts covered simply the delivery of power from an SPU or IPP with a 24 hour capacity surplus to an SPU with a deficit. Over time, we have identified trends to help tailor products to meet the specific needs of our trading partners. For example, we observed that the East and North-East regions enjoy a generation surplus throughout the year during off-peak hours, the South region has a surplus during part of the year in off-peak hours, and the West region has a surplus around the clock during the monsoon season only. We have also commenced energy banking where power is banked with another entity for its use and subsequently returned to the original supplier. We further identified daily and seasonal trends, and can arrange delivery on the following basis to give clients extra flexibility: around the clock evening or morning peak afternoon or night time off-peak morning or night only specific time blocks for six to 18 hours weekend or holiday power day-ahead power (arranging power transmission a day before it is required). Increase cross border operations by strengthening relationships with the governments of Nepal and Bhutan We have relationships with the governments of Nepal, which has untapped hydro-electric power resources, and Bhutan, which has a surplus of hydro-electric power that can be sold into India. By building on these existing relationships, we strive to be the choice power trader for public and private power generators in these countries. For the nine month period ended December 31, 2008, our sales of power purchased under long term PPAs with three power plants in Bhutan accounted for Rs. 10, million, or 20.1%, of our electricity sales for that period, and represented 47.9% of our trade volumes. We also have one PPA agreed in-principle in Nepal relating to the 750 MW West Seti power plant. Although Nepal has the potential to produce significant amounts of additional hydro-electricity, this potential has not been fully exploited due to, in part, a lack of transmission capacity and cross border links that would enable power producers to produce to capacity. We anticipate that both transmission and generation capacity in Nepal, will improve in the future. We are a member of the Indo-Nepal Power Exchange Committee which meets periodically to determine issues pertaining to the exchange of power and water between India and Nepal and makes recommendations to both governments for planning new power projects. Our strategy is to provide advice to these governments about the benefits of exporting their surplus power to India, and find ways to help them improve their transmission capacity. We maintain an active dialogue with the governments of both Nepal and Bhutan on power trading matters. This gives us the opportunity to share our vision and ideas about power trading between the countries. Participate actively in further developing the Indian power trading industry India suffers from a deficit of available power, and our business depends on our ability to identify surplus sources of power. The GoI developed the Mega Power Policy, a plan to generate more power across India through construction of new mega power projects. We were established at the initiative of the GoI to help implement this policy. We are one of the leading power trading companies in India, where, for the nine months ended December 31, 2008, not including our trades of 864 MUs on the IEX, we had a market share of 46.5%. Such market share data has been determined from information available on the websites of CERC, REA, trading licensees and it does not include power trades consummated on the power exchanges including IEX and is limited to power trading licensees only. We intend to expand our business operations and consolidate our leading position by securing power supplies that we can sell on a short, medium and/or long term basis. Towards this end we are actively involved in consulting services, developing, investing in and financing companies operating in the power sector and also propose to enter into power tolling and fuel intermediation. Our investments and financing activities seek to ensure that companies involved in the power sector in India will have adequate liquidity to implement their growth strategies and project development plans. See Key Business Areas Our Investments. We are continuously looking at multiple options for purchasing power for the long term, including by 11

21 approaching IPPs and Captives for long term agreements. We are also looking at strengthening our relationships with the governments of Nepal and Bhutan and intend to increase our cross border operations by becoming the trader of choice for them and by entering into additional PPAs with public and private power producers in those countries. 12

22 RECENT DEVELOPMENTS The selected unconsolidated interim financial results presented below are prepared in accordance with Indian GAAP. These selected unconsolidated interim financial results are not comparable to the audited consolidated financial results appearing elsewhere in this document. (Rs. in million, unless otherwise stated) Particulars Three Months Ended Year Ended March 31, March 31, March 31, March 31, (Unaudited) (Audited) (Unaudited) (Audited) Income from Operations 11, , , , Other Operating Income Total Income 11, , , , Expenditure -Purchases 11, , , , Employee Cost Depreciation/Amortisation of Intangible Assets Other Expenses (excluding interest) Amortisations Total Expenditure 11, , , , Profit from Operations before Other Income, Interest & Exceptional Items Other Income Profit Before Interest & Exceptional Items , Interest Profit after Interest but before Exceptional Items , Exceptional Items -Excess Provision written back Loss on sale of fixed Assets Profit from ordinary activities before tax , Tax Expenses - Current Tax (Including wealth tax) Deferred Tax Fringe Benefit Tax Adjustment of Taxes Relating to earlier years Net Profit from ordinary activities after tax Prior Period Adjustments Net Profit for the period/year before extra ordinary items Extraordinary Items (net of Tax Expenses) Net Profit for the period/year Other Data (MUs Traded) 2,182 1,223 13,825 9,889 Paid-up Equity Share Capital 2, , , , (Face value of Rs. 10 per share) Reserves excluding Revaluation Reserves 12, (As per Balance Sheet as at March 31, 2008) 13

23 Particulars Three Months Ended Year Ended March 31, 2009 March 31, 2008 March 31, 2009 March 31, 2008 (Unaudited) (Audited) (Unaudited) (Audited) Basic & Diluted EPS for the period (Not Annualised) (Rs.) Before extraordinary items After extraordinary items Public Shareholding: Number of Shares- 179,419, ,419, ,419, ,419,000 Percentage of Shareholding Promoters and promoter group Shareholding Pledged/ encumbered - Number of shares Percentage of share (as a % of the total shareholding of Promoter and Promoter Group) Percentage of shares (as a % of the total share capital of the Company) Non-encumbered - Number of shares 48,000,000 48,000,000 48,000,000 48,000,000 - Percentage of shares (as a % of the total shareholding of Promoters and Promoter Group) Percentage of shares (as a % of the total share capital of the Company) As of March 31, 2009, for the purchase of power we had signed PPAs for a total of 11,226 MW, and signed MoUs for a total of 25,907 MW. Since then we have entered into an additional PPA for 700 MW and three of the MOUs have been converted to PPAs for a total of 2,550 MW. We have also entered into one MOU for 300 MW. As of March 31, 2009, for the sale of power we had signed PSAs for a total of 4,789 MW, and signed MoUs for a total of 1,200 MW. We recognized service charges for Rs million on sale and purchase of electricity on the IEX, for the twelve months ended March 31, Other Developments Litigation The Company had participated in the competitive bids invited by Gujarat Urja Vikas Nigam Limited ( GUVNL ) and received a letter of intent for supply of 440 MW. However, GUVNL did not formally enter into a PPA with the Company. Therefore, the Company had filed a special civil application (No of 2008) in the Gujarat High Court, where through an order dated April 1, 2008, the Gujarat High Court directed GUVNL to enter into a PPA with the Company. GUVNL filed a special leave petition (No of 2008) before the Supreme Court. Further, in order to bid for supplying power to GUVNL, the Company had entered into a PPA with Corporate Power Limited ( CPL ). CPL filed a petition (No. 14 of 2008) before the Jharkhand State Electricity Regulatory Commission ( JSERC ) challenging the PPA with CPL as being invalid, inoperative and unenforceable. CPL also sought directions from JSERC to restrain the Company from invoking or encashing the corporate guarantee dated August 9, 2008 provided by Corporate Ispat Alloys Limited and the personal guarantee dated August 9, 2008 provided by Mr. Manoj Jayaswal. JSERC on December 5, 2008 passed an interim ex parte order directing CPL and the Company to maintain status quo as on that date. Subsequently, an out of-court settlement was reached initially with CPL and based on this, an out-of-court settlement was also reached with GUVNL. These out of court settlements were filed before the JSERC and the Supreme Court, respectively, by a joint application of the parties. The Company has been informed by its counsel that JSERC and the Supreme Court have approved of the respective settlements and have disposed of these matters. 14

24 Indebtedness As of March 31, 2009, the Company had borrowed under credit facilities in the aggregate amount of Rs. 3, million. The table below sets out the Company s significant financing arrangements as of March 31, 2009 and the amounts outstanding thereunder. Name of Lender Facility Amount Outstanding Indian Overseas Bank Non-fund based facility of up to Rs. 1,000 million. Rs million Union Bank of India Non-fund based facility of up to Rs. 1,000 million. Rs million State Bank of Hyderabad Non-fund based facility of up to Rs. 1,000 million. Rs million State Bank of Travancore Non-fund based facility of up to Rs. 1,000 million. Rs million Punjab & Sind Bank Non-fund based facility of up to Rs 1,000 million. Facility under renewal The Company has created charges over its receivables (present and future) to secure the above mentioned working capital facilities. PFS As of March 31, 2009, PFS had term loans in the principal amount of Rs million outstanding under a term loan facility of Rs. 1, million from the Punjab National Bank. PFS has created charges over its current assets (other than the assets created by the line of credit of other banks) present and future of the company. PFS Disbursements AA Energy Limited and PFS have entered into a common loan agreement on March 31, 2009, under which PFS has agreed to lend upto Rs million to AA Energy Limited. AA Energy Limited has borrowed Rs million in principal amount under the common loan agreement.further, PFS has subscribed to compulsorily convertible debentures issued by East Coast Energy Private Limited aggregating to Rs million on March 18, 2009 pursuant to a debenture subscription debenture subscription agreement dated March 16, In addition, as of March 31, 2009, Rs million had been drawndown by OCL India Limited under a Rupee term loan agreement dated March 27, 2009 between OCL India Limited and PFS. 15

25 SUMMARY OF THE ISSUE The following is a general summary of the terms of the Issue: Issuer PTC India Limited Issue Issue Price Eligible Investors Equity shares issued and outstanding immediately prior to and after the Issue Listing Lock-up equity shares of the Issuer of face value of Rs. 10 each ( Equity Shares ). Rs. per Equity Share. QIBs as defined in clause (xxiva) of the SEBI Guidelines. See Issue Procedure Qualified Institutional Buyers. 227,419,000 equity shares were issued and paid-up immediately prior to the Issue. Post the Issue, equity shares shall be issued and outstanding.* The Issuer has received in-principle approvals from the Stock Exchanges for the listing of the Equity Shares on the Stock Exchanges. On April 8, 1999, the then Promoters of the Company, namely, POWERGRID, NTPC and PFC entered into an agreement whereby each of them agreed that it will not sell, transfer, assign, mortgage, or otherwise encumber its shareholding in the Company for a period of 12 years from the date of incorporation of the Company; i.e., until April 15, This agreement was supplemented on November 29, 2002 whereby NHPC and the Company became parties to the agreement, and NHPC agreed to submit to the same lock up. See Risk Factors Any further issuance of equity shares by us or sales of our equity shares by any of our significant shareholders may adversely affect the trading price of the Equity Shares. The Issuer has agreed that the Issuer will not, for a period of 180 days from the date of pricing of the Equity Shares, without the prior written consent of the JGCs, directly or indirectly, (a) offer, pledge, issue, contract to issue, grant any option, right or warrant for the issuance and allotment, or otherwise dispose of or transfer, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position with respect to, any Equity Shares or securities convertible into or exchangeable or exercisable for such Equity Shares (including any warrants or other rights to subscribe for any Equity Shares), (b) enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of any Equity Shares, whether any such aforementioned transaction is to be settled by allotment of any Equity Shares or such other securities, in cash or otherwise, or (c) publicly disclose the intention to make any such offer, issuance and allotment or disposition, or to enter into any such transaction, swap, hedge or other arrangement; provided, however, that the Issuer may issue and allot equity shares of the Company pursuant to the exercise of any issued and outstanding stock options granted under the PTC ESOP 2008, subject to applicable laws. Transferability Restrictions Use of Proceeds Risk Factors Closing The Equity Shares being allotted pursuant to this Issue shall not be sold for a period of one year from the date of Allotment except on the Stock Exchanges. The net proceeds of the Issue (after deduction of fees, commissions and expenses) are expected to total approximately Rs. [ ] million. Subject to compliance with applicable laws and regulations, we currently intend to use the net proceeds of the Issue for investments in one or more businesses in the energy sector or the related energy infrastructure sector, directly or indirectly, including though various investment structures/vehicles that we may consider appropriate. We seek to pursue opportunities at various stages of the business growth cycle, including providing seed capital to businesses. We may invest in businesses with whom we have entered into, or may in the future enter into, PPAs. See Use of Proceeds. See Risk Factors on page 18 for a discussion of factors you should consider before deciding whether to buy the Equity Shares. The allotment of the Equity Shares is expected to be made on or about. 16

26 Ranking Security Codes for the Equity Shares The Equity Shares being issued shall be subject to the provisions of the Issuer s Memorandum and the Articles and shall rank pari passu in all respects with the existing equity shares including rights in respect of dividends. The shareholders will be entitled to participate in dividends and other corporate benefits, if any, declared by the Issuer after Allotment, in compliance with the Companies Act. Shareholders may attend and vote in shareholders meetings on the basis of one vote for every equity share held. See Description of the Equity Shares. ISIN INE877F01012 BSE Code NSE Code PTC * As of December 31, 2008, 4,508,380 options under the Company s stock option plan were outstanding. 17

27 RISK FACTORS This Preliminary Placement Document contains forward-looking statements that involve risks and uncertainties. Prospective investors should carefully consider the following risk factors as well as other information included in this Preliminary Placement Document prior to making any decision as to whether or not to invest in the Equity Shares. The risks described below and any additional risks and uncertainties not presently known to us or that currently are deemed immaterial could adversely affect our business, financial condition, liquidity or results of operations. As a result, the trading price of our Equity Shares could decline and investors may lose part or all of their investment. Prospective investors should pay particular attention to the fact that we are an Indian company and are subject to a legal and regulatory environment which may differ in certain respects from that of other countries. Risks related to our business Our business and our growth strategies are dependent on reliable power transmission systems and the availability of Open access. Our power trading business is dependent on the adequacy of transmission interconnections between surplus and deficit regions, and the availability of Open access. In India, the Central Transmission Utility ( CTU ) is POWERGRID, with respect to inter-state transmission, and is managed by SEBs/STUs, with respect to intra-state transmission. Our purchase and sales contracts provide that power under short term trading will be delivered subject to the availability of Open access. However, we recognize sales only when the power is successfully delivered to the relevant customer. Our sales and growth are therefore dependent upon the transmission system being stable, having sufficient excess capacity to meet market needs and providing us with Open access as may be required. We are exposed to credit risk from our customers under our trading contracts. Counterparty credit risk relates to our buyer s willingness or ability to make timely payments to us. Under our short term trade contracts, we require guarantees or irrevocable letters of credit from our customers to cover two billing cycles. However, this security may be insufficient to cover all of our losses in the event of a payment default by our customer. If our buyer defaults, we do not have the right to terminate the PPA with our supplier and may be exposed to risks if we cannot find another buyer to purchase the power on the same terms. This could affect our results of operations. See Management s Discussion and Analysis of Financial Condition and Results of Operations Contingent Liabilities and Contractual Obligations Contractual Obligations. Under our medium and long terms trade contracts, our customers provide an irrevocable letter of credit for three months, which is repeatedly renewed before the expiry of the earlier letter of credit for the duration of the contract. If our customer is unable to renew its letter of credit, it would generally be treated as an event of default under the PSA. However, in any such case there may still have been some power sold, for which we will have insufficient security to cover all of our losses. Such an event could have an adverse affect on our results of operations. Competition is increasing in our power trading business, which may affect our results of operations. The power trading market is a licensed but highly competitive business. As of February 16, 2009 there were 43 trading licensees in India, of which 17 held category I (earlier category F) licenses. For the nine months ended December 31, 2008, not including our trades of 864 MUs on the IEX, our trade volume represented 46.5% of the Indian market. Such market data has been determined from information available on the websites of CERC, REA and trading licensees and it does not include power trades consummated on the power exchanges including IEX and is limited to power trading licensees only. Our competitors include licensees and deemed licensees such as generators and distribution companies. As the number, capabilities, experience and qualifications of our competitors grow, our trade volumes and margins may be affected, which may adversely affect our results of operations. We have not entered into any definitive agreements to utilize a substantial portion of the net proceeds of this Issue and may require consents, approvals or waivers under our agreements with respect to certain applications of net proceeds. We will have broad discretion to use the net proceeds from this Issue, and investors will be relying on the judgment of our Board and management regarding the use and application of these proceeds. See Use of Proceeds. We have not entered into any definitive agreements to utilize the net proceeds, and our plans are based on management estimates and have not been appraised by any bank or financial institution or any other independent organization. Further, we currently intend to use the net proceeds of the Issue for investment in one or more businesses in the energy or related energy infrastructure sectors, directly or indirectly, including through various investment structures/vehicles that we may consider appropriate. All such investments by us will need to be made in compliance with the terms and conditions of the shareholders agreement with GS Strategic Investments Limited ( Goldman Sachs ) and Macquarie India Holdings Limited ( Macquarie ). If any consents, approvals or waivers are required under the shareholders agreement and are not provided, we would have the option to invest in the new business or businesses through PFS. However, as the Company 18

28 holds 77.6% of PFS, any investments made by the Company through PFS would accordingly result in PTC indirectly holding 77.6% of such investment, assuming the existing percentage holdings of each PFS shareholder remain unchanged. We have entered into a non-competition arrangement with PFS under the shareholders agreement with Goldman Sachs, Macquarie and PFS which could pose potential allegations of breach. We have entered into a non-competition arrangement with Goldman Sachs and Macquarie with respect to the business operations of PFS as part of the shareholders agreement which provides that PTC shall not and shall procure that none of its directly or indirectly owned subsidiaries and persons that are controlled by it, shall, either alone, jointly with, through or on behalf of any person, directly or indirectly, establish any other company, fund or partnership or enter into a joint venture which would compete with PFS business, without the express written consent of the parties to the shareholders agreement. For further details on the non-competition arrangement, see Our Business Our Investments Non-competition. The shareholders agreement also specifies certain procedures for dealing with situations where there is a conflict between PFS business and proposed investments by PTC. PTC has entered into a joint venture arrangement with Bharat Heavy Electricals Limited ( BHEL ) for establishing Barak Power Private Limited, a company which intends to build, own and operate a 250 MW coal based power plant and has established PEL, a wholly owned subsidiary, to develop and manage businesses in the energy sector such as power generation, power distribution, power transmission, power tolling, importing coal and taking up energy efficiency projects while also providing consultancy services. PEL has subscribed to a 48% equity stake, for a cost of Rs million, in RS India Global Energy Private Limited, a company proposing to acquire land to set up a wind farm and construct a wind turbine manufacturing plant. While we believe that such equity investments are not in conflict with the shareholders agreement, we cannot assure you that the other parties to the shareholders agreement will not allege a breach of the non-competition arrangement provided in the shareholders agreement. Any such allegation, if successfully determined against us, may adversely affect us. Competition from utilities on account of direct trading between the surplus and deficit parties could adversely affect our business operations and financial condition. Our power trading business focuses on identifying parties with a surplus of power and parties with a deficit of power. We facilitate the trading of power between these parties, and derive a margin on the sale price. When we enter into contracts, the transparency of our process results in revealing the identities of our trading parties to each other, as well as the contract terms. Identifying suitable trading parties requires resources to analyze the availability of power and transmission corridors. It also requires the trading parties to accept credit risk, which many utilities are unwilling to undertake. With enhanced market information, improved financial viability of the sector and increasing confidence and experience of market participants, the buyers and sellers may be willing to enter directly into bilateral agreements in the future instead of relying on intermediary services of traders. Any increase of such direct trading in the future could adversely affect our trading volumes and results of operations. Our net worth may not be sufficient to bid for the sale of a substantial amount of power on a competitive basis. We are required, under the terms of our license and under the terms of some tenders, to meet certain net worth or creditworthiness requirements. Depending on the net worth requirement under the bidding conditions, there may be instances where we may not be eligible to bid for the full quantum of power under certain very large projects. New power exchanges will likely be a competitor to our trading business. In August 2007, CERC granted approval for the establishment of India s first power exchange, the IEX, which began operating in June Another exchange, namely, Power Exchange of India, has also commenced operations this fiscal year and a third power exchange is also expected to be established in the near future. These power exchanges currently facilitate day-ahead trading of electricity and are in the process of introducing short term trading of higher duration such as week-ahead and month-ahead power trading and an application to this effect has been put before CERC. This may adversely affect our results of operations due to an increase in competition and also because we may be unable to facilitate such trades. Open access to transmission corridors is also granted to facilitate trades (called collective trading) on power exchanges at a higher priority, which may also reduce availability of Open access for our trades or cause congestion to the extent that our direct market share may be affected. Changes in power trading market practices, regulations and policies cannot be predicted and may have an adverse effect on our business. The power trading market in India has been growing since 2000 and thereafter with the enactment of the Electricity Act. Market practices, policies and regulations are continually evolving to stabilize power trading and increase confidence in the market. Changes in current Government policies or regulations having an impact on the generation, transmission and distribution, or trading of power or any other activities related to the power sector may result in uncertainties and may adversely affect our business activities. 19

29 A decrease in trading margin limits could adversely affect our results of operations. Under Section 79(1)(j) of the Electricity Act, CERC can fix the trading margins for inter-state trades of a trading licensee, if considered necessary. Under Chapter IV of the Electricity Trading Regulation, CERC declared that power trader licensees are subject to the trading margins for inter-state trading as fixed by the commission, from time to time. As of March 31, 2009, the trading margin on trades up to one year continues to be fixed by the commission at Rs per Unit. For the nine month period ended December 31, 2008, our short term trading business accounted for 52.1% of our trading volume and 79.9% of our sales. In addition, from April 1, 2009, cross-border trade margins are limited to Rs per Unit. Any action by CERC to further decrease margins could have an adverse affect on our results of operations and the continued capping of the trading margins could have an adverse effect on the increase in our profitability. Further, the imposition of any margin limits on medium and long trades in the future would harm our revenues and profit margins. There remains uncertainty on whether the Rs cap per Unit on trading margins is applicable to medium and long term trading transactions as well. In the event CERC decides that the cap is applicable to medium and long term trades, our trading margin on long term transactions will be capped and revenues may be restricted. If we take on open positions, we will be subject to additional risks. Most of our transactions for the purchase and sale of power are on a back-to-back basis with our sellers and buyers. For short term trades we do not undertake speculative trading by maintaining open positions. However, we may experience a delay in finding buyers and signing agreements with them following the award of PPAs won through competitive bidding for short term contracts. Our market risk of finding a suitable buyer increases during the period of the delay. Currently we have one open position on a long term contract, and may have more from time to time. We entered into an agreement with Kurichhu hydro-electric power project in Bhutan, to purchase power for a term of 25 years that expires on March 31, However, the sale agreement for the power has a term of only 15 years. There can be no assurance that we will find suitable purchasers that are willing to pay the tariff and that have available Open access for the balance of the term of the contract. If we are unable to find suitable purchasers, we may suffer losses under the agreement. If the terms of our purchase agreements and sale agreements in the future contain inconsistent terms, we may suffer losses. Most of our transactions are agreed on a back-to-back basis, with mirror terms and conditions. With the development of the power trading market and improved negotiating abilities of our customers, we may have to enter into agreements with the sellers of power that contain terms that differ from our contracts with our buyers of power. If there are inconsistencies between our sale agreements and purchase agreements, we may be exposed to additional risk. This could harm our financial condition either due to direct losses or loss of client relationships. We must maintain our license in order to continue our power trading business. Under the Electricity Act, we are required to maintain a license to undertake power trading in India. According to the latest CERC inter-state trading regulations, there are three categories of available licenses for power trading applicants, denominated as categories I through III, of which category I allows unlimited trading volumes. We currently hold a category I license, which expires in In order to maintain this level of permitted trading under our license, we must meet specific qualifications such as employing professionals experienced in the field of power system operations and finance. Further, we must meet a net worth requirement, which is currently Rs million for category I licensees. We are also required to make periodic reports to CERC, and are required to deposit an annual license fee to maintain our license. If we do not continue to retain these qualifications, or if the licensing requirements change in the future, and we were unable to meet such license requirements, or fail to comply with CERC orders or regulations, our license category may be downgraded or action could be initiated by CERC to revoke our license. Such actions could adversely affect our reputation, market position and business volumes. Delays in the development of power projects due to financial instability in Indian financial markets and other factors could affect our future trade volumes thereby adversely affecting our results of operations and financial condition. In general, construction of a new power project takes approximately three to five years. Our strategy is to trade power generated by these new projects pursuant to long term contracts once they are operational. Our ability to purchase the power generated by these projects may be delayed if these projects experience an inability to raise financing or construction delays or setbacks. This could delay our ability to add additional trading volumes within anticipated timelines. Further, if we have invested in new power projects that may experience financial shortfalls, construction delays and cost overruns, we may be required to pay additional capital to cover the additional costs, or consequently our equity stakes in the projects will be diluted to that extent. For details on our strategic investments in power projects see Our Business Key Business Areas Our Investments. Additionally, the Indian financial market and the Indian economy are influenced by economic and market conditions in other countries, particularly in Asian emerging market countries. Financial turmoil in Asia, the United States of America, Europe and elsewhere in the world in recent years has affected the Indian economy which may adversely affect the timely financial 20

30 closure of various power projects. Although economic conditions are different in each country, investors reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. A loss in investor confidence in the financial systems of other markets may increase volatility in Indian financial markets and, indirectly, in the Indian economy in general. Our customers sometimes take a rebate that is not due to them. Under most of our short term PSAs, a rebate (cash discount) equal to 2.0% of the contracted price is granted to the customer when their payment is made on or before a specified date. There have been instances where some SPUs, while releasing part of the outstanding payment to us, have unilaterally and incorrectly taken rebates which were not due to them because payments were not made by the specified date. Recovery of such non-applicable rebates from the customer is difficult and we may have to settle these disputes so as to maintain good client relationships. This may adversely affect our results of operations. Our inability to effectively manage our growth or to successfully implement our business plan and growth strategy could have an adverse effect on our operations, results and financial condition. We expect that our growth strategy will place significant demands on our management, financial and other resources. We are currently involved in power trading, consulting services, investing in and financing companies engaged in the power sector and propose to develop and manage businesses in the energy sector as well as enter into power tolling arrangements and fuel intermediation. While we have had considerable focus on power trading in the last couple of years, our experience in making strategic investments in financing, investing, developing and managing new power projects is relatively limited. Additionally, we have made a significant number of investments in various companies involved in the power industry. For details on our investments in these companies see Our Business Key Business Areas Our Investments. Operating in new business areas may expose us to unanticipated risks, including financial, management and operational strain due to our limited experience in the area. These forays into new business streams and managing our investments in various companies increases the challenges involved in financial management, recruitment, training and retaining sufficient skilled management personnel, and developing and improving our internal administrative infrastructure. We intend to continue to expand our business in the foreseeable future. Our inability to manage our business plan effectively and execute our expansion strategy could have an adverse effect on our operations, results, and financial condition. In order to manage growth effectively, we must implement and improve operational systems, procedures and internal controls on a timely basis. If we fail to implement these systems, procedures and controls on a timely basis, or if there are weaknesses in our internal controls that would result in inconsistent internal standard operating procedures, fraud or inaccurate financial reporting, we may not be able to meet our customers needs, pursue new business, complete future strategic acquisitions or operate our business effectively. There can be no assurance that our existing or future management, operational and financial systems, procedures and controls will be adequate to support future operations or establish or develop business relationships beneficial to future operations. We may enter into new businesses in which we have little experience. There can be no assurance that we will be able to set up or operate our new businesses efficiently. As part of our growth strategy, we intend to explore strategic and financial investment initiatives in the energy sector. We have invested in, financed and are operating companies that are involved in developing power projects and related infrastructure. We have little or no experience with operating companies in the power generation business, with most of them not having been commissioned yet. We will continue to explore investments in new businesses in which we have little or no experience. While we have made these investments, in the past, directly, through PFS or through PEL, and may continue to do so in the future, we may consider establishing a fund for the purpose of investing in companies in the energy and energy infrastructure sectors. We do not currently have definitive plans to establish such a fund. If we were to do so, the establishment and operation of an energy investment fund would subject us to a number of risks, including: We have no experience in setting up or managing investment funds. There is no certainty that we will be able to locate co-investors in a timely fashion or at all. Fund formation entails having to deal with multi-jurisdiction legal issues, about which we have little or no experience. Funds are typically extremely dependent on an investment manager, certain key decision makers and the operation team. There can be no assurance that we will be able to hire and retain such persons for managing the proposed fund. The fund s ability to achieve investment objectives and attractive returns will depend on the fund s ability to grow its investment base and make a correct assessment as to future values that can be realized from the investments, which will depend, in turn, on its ability to invest in and monitor a suitable number of companies and implementing the various aspects of its investment strategy. A large portion of the investments that would be made by the fund would likely be in the form of investments for which market quotations are not readily available. Additionally, because valuations, and in particular valuations of investments for which market quotations are not readily available, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, determinations of fair value may differ from the values that would 21

31 have resulted if a ready market had existed. The investment management team at the fund will be required to make good faith determinations as to the fair value of these investments on a periodic basis. There is no single standard for determining fair value in good faith and, in many cases fair value is best expressed as a range of fair values from which a single estimate may be derived. We do not currently have a definitive investment or strategic plan, or any other fund documentation in place. Our due diligence process in connection with our investments may not reveal facts that may be relevant in connection with an investment, and may result in unanticipated liabilities. Before making an investment, we conduct due diligence to the extent we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. The objective of the due diligence process will be to identify attractive investment opportunities based on the facts and circumstances surrounding an investment and to prepare a framework that may be used from the date of investing to drive operational achievement and value creation. When conducting due diligence, we are expected to evaluate a number of important business, financial, tax, accounting, environmental and legal issues in determining whether or not to proceed with an investment. We will be required to rely on resources available to us, including information provided by the target of the investment and, in some cases, third party investigations. The due diligence process is subjective for newly organized companies for which only limited information is available. Accordingly we cannot assure you that the due diligence investigation that we will carry out with respect to an investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. We also cannot assure you that such an investigation will result in an investment being successful. As a result, unanticipated liabilities may arise and we may also be required to initiate or be involved in litigation to enforce our rights or otherwise in respect of facts that were not discovered at the time of our due diligence. This could have an adverse effect on our business and financial condition. Our Promoters have considerable voting power over our business. Prior to the consummation of this issue, our Promoters each held 5.28% of our equity share capital. Our Promoters have, and will continue to have collectively, considerable voting power over our business and may act in a manner that does not reflect the will or best interests of the other shareholders. Each Promoter may appoint a Director to our Board, and two of these four nominees must be present to constitute a quorum. Further, the chairman and managing director of each of the Promoter companies must consent to the appointment of the chairman/managing director, a managing director or a whole time director of our Company, which could result in a deadlock among the Promoters and affect our business. One of our Promoters has an equity stake in one of our competitors. NTPC, one of our Promoters currently holding 5.28% each of our paid up capital, is engaged in the business of trading in power through its wholly-owned subsidiary, NTPC Vidyut Vyapar Nigam Limited ( NVVN ). NVVN had inter state trade volumes of approximately 15.86% of the total volume traded for the calendar year NTPC, under our Promoters Agreement, is entitled to nominate one Director on our Board. Competition from NVVN and the possible conflicts of interest could affect our performance and competitiveness. We may face potential conflict of interest with our Promoters. In addition to competition from entities including banks, non-banking financial institutions and other funding agencies, we may face significant competition from entities including our Promoters and other Government companies or Government funded or promoted entities, whose business may also include evaluating and participating in investment opportunities in the energy and energy related infrastructure sectors in India and overseas. While we have, through the shareholders agreement among Goldman Sachs, Macquarie, PFS and PTC, sought to address potential conflicts of interest, we do not have any such mechanism for addressing potential conflicts of interest with our Promoters or any other Government companies or Government-funded or promoted entities. As we grow our business, we will face increasing competition from such other entities in the energy and energy related infrastructure investment business. Some of our competitors, including our Promoters which are directly promoted by the Government of India, may have greater financial, technical, marketing and other resources, and greater experience in operating an investment business, thus enabling them to manage their investments better or to be preferred over us, or causing pressure on our lending margins in cases where we have provided debt financing. Any further issuance of equity shares by us or sales of our equity shares by any of our significant shareholders may adversely affect the trading price of the Equity Shares. Any future issuance of our equity shares could dilute the shareholding of holders of the Equity Shares. We have instituted an employee stock option plan which provides for the allotment of options, exercisable into equity shares of our Company, to eligible employees of our Company and our Subsidiaries. Any future equity issuances by us, including in a primary offering or pursuant to a preferential allotment or issuances of stock options under employee stock option plans, or any perception by investors that such issuances or sales might occur may lead to the dilution of investor shareholding in our Company or affect the trading price of the Equity Shares and could affect our ability to raise capital through an offering of our securities. While we have entered into an agreement with the JGCs restricting us from, among other things, issuing new equity shares 22

32 for 180 days after the pricing date we are entitled to make issuances pursuant to the exercise of any issued and outstanding stock options granted under the PTC ESOP 2008 subject to applicable laws. Our Promoters have not entered into any agreement for a customary lock up of their equity shares with the JGCs in connection with the Issue. Our Promoters have entered into an agreement with us and with each other agreeing not to sell their equity shares for a period of 12 years from the date of the incorporation of the Company, i.e. until April 15, 2011, or until the Company attains a paid-up equity capital of Rs. 7, million (which currently is Rs. 2, million), whichever is earlier. See Summary of the Issue Lock Up. However, this agreement or our lock-up agreement with the JGCs will not be enforceable by you. Moreover, based on a revised understanding between the Promoters and the Company, subsequent amendments to the Articles of Association have been made, enabling the Promoters to either continue with the present level of their shareholding or to reduce it. Should any Promoter sell or transfer its shares it may adversely affect the trading price of our Equity Shares. We may be unable to convert MOUs related to long term purchase agreements into enforceable contracts. As of December 31, 2008 we have entered into 35 MOUs for 28,119 MW with various entities to purchase their power on a long term basis. MOUs are not definitive agreements, and their enforceability is less certain than definitive agreements. There can be no assurance that our counterparties will decide to convert their MOUs to PPAs, or whether they will decide to use another trader or sell to the buyer directly. During the period when the MOU is outstanding, market conditions may change, and the supplier may decide not to enter into a long term contract with us. Our growth strategy relies on these MOUs being converted to long term PPAs. If they are not, our future trade volumes and sales could be affected. We purchase power from a relatively small number of sellers, and sell to a relatively small number of purchasers. Our power trading activities generally require us to enter into relatively large contracts for the purchase and sale of power, with a relatively small number of sellers and purchasers. As a result, the loss of any particular seller or purchaser that accounts for a large volume of our purchases or sales of power could have an adverse effect on our power trading operations. In our medium and long term power trading, substantial concentration among our sellers and purchasers poses a different set of risks than in our short term trading. In longer term arrangements, we must be more concerned with both the ongoing financial and technological viability of our counterparties, as well as the size and number of contracts. In short term power trading, the ability of a seller or purchaser to complete its obligations under a particular contract is of relatively lesser concern, due to the shorter duration of the contracts. See Our Business Risk management. Our senior management team is important to our continued success and the loss of one or more members of our senior management team could harm our business. Our future success substantially depends on the continued services and performance of the members of our management team and other key employees possessing technical and business capabilities, including power industry expertise, that are difficult to replace. There is intense competition for experienced senior management and personnel with technical and industry expertise in the industry in which we operate, and we may not be able to retain these officers or key employees. One member of our senior management, Mr. Shashi Shekhar, who is our Director, has been deputed from a Government department to work for us for a limited period. We may not be able to locate an immediate replacement for him in case he returns to his Government department. In addition, we currently do not maintain key person insurance covering any member of our management team. The loss of any of our key employees, particularly to competitors, could have an adverse effect on our business. We are involved in various legal proceedings both as plaintiffs and defendants in which we may not prevail and which could have an adverse impact on us. We are parties to various legal proceedings incidental to our business and operations. These legal proceedings are pending at different levels of adjudication before various courts and tribunals. Such litigation could divert management time and attention, and consume financial resources in their defense or prosecution. No assurance can be given that we will prevail in the proceedings. In addition, should any new developments arise such as changes in Indian law or rulings against us by the regulators, appellate courts or tribunals, we may need to make provisions in our financial statements, which could increase our expenses and our current liabilities. See Legal Proceedings. There are certain legal proceedings against our Promoters and their group companies. Our Promoters, and their group companies, are parties to certain legal proceedings initiated by or against them. These proceedings are pending at different levels of adjudication before various courts, tribunals, enquiry officers, and appellate tribunals. Any adverse outcome in any such litigation in which any of our Promoters or Promoter group companies are involved which has an adverse impact on any of our Promoters could, as a consequence thereof, adversely affect us. Our Subsidiary PFS is subject to supervision and regulation by the RBI as a Non Banking Finance Company ( NBFC ). Changes in the applicable regulations could cause our business to suffer. Our Subsidiary PFS is subject to supervision and regulation by the RBI for certain activities. It is subject to the RBI's guidelines on financial regulation of NBFCs, including capital adequacy and exposure norms, as well as generally applicable 23

33 government regulations and policies and accounting norms. For instance, under currently applicable laws governing foreign investment in NBFCs, an NBFC s investment activities are restricted to 20% of its total net worth, and in the event its scope of investment activities increases, it will be required to either increase its net worth or curtail its investment activities. As our business expands, or in the event of any future change in the applicable regulations, we may be required to restructure our business or incur additional costs, which may adversely affect our business and our future financial performance. We may not maintain historical dividends in the future. While we have paid dividends in the past, there can be no assurance as to whether we will pay dividends in the future and, if so, the level of such future dividends. Our declaration, payment and amount of any future dividends is subject to the discretion of the Board, and will depend upon, among other factors, our earnings, financial position, cash requirements and availability of profits, as well as the provisions of relevant laws in India from time to time. We have contingent liabilities and our financial condition and profitability could be adversely affected if any of these contingent liabilities materialize. As on December 31, 2008, contingent liabilities disclosed in the notes to our consolidated financial statements aggregated to Rs million (US$ million). If any of these contingent liabilities materialize, our profitability may be adversely affected. See PTC India Limited Financial Statements Notes on consolidated accounts for nine months ended December 31, note 12 of Schedule K and Recent Developments. Increase in tariffs for cross border trade with Bhutan may affect our business volumes. We have signed medium and long term PPAs with the Department of Energy, Bhutan for three hydro-electric projects, namely Chukha, Kurichhu and Tala. The tariffs agreed in the PPAs for the respective projects are basically government to government negotiated tariffs. The PPAs have a provision for review of the tariff on regular intervals (three to five years duration) basis; and in the event the GoI and the government of Bhutan increase the tariffs beyond a certain level, it may pose problems for us in marketing the power. In such an event, our sales volumes and results of operations may be adversely affected. Political or economic developments in Bhutan and/or Nepal may adversely affect our business. In Bhutan, we have entered into three long term purchase agreements with power generators. These transactions accounted for approximately 47.91% of our total trade volume for the nine month period ended December 31, We have one PPA agreed in-principle in Nepal to purchase power on a long term basis from an upcoming hydro-electric power plant. Further, we are engaged in dialogue with the National Electricity Authority in Nepal to discuss improving transmission corridors between our countries. Any political instability in Nepal and/or Bhutan or an adverse change in the economic or regulatory policies of the governments of these countries could adversely affect our agreements and discussions and consequently could adversely affect the results of our operations and financial condition. We may lose our status as a GoI nominee in Bhutan and Nepal. Our business was introduced to the governments of Bhutan and Nepal by formal letter of introduction by the GoI. We are the single preferred point of contact for these foreign governments on matters related to power trading with India. However, we do not have an exclusive trading relationship with Nepal or Bhutan and there is no assurance that the GoI will not nominate one of our competitors as a preferred trading party. We may experience increased competition to access the available power sector in Nepal and Bhutan. We have not registered our trade name or logo. Our business logo is not registered either as a trademark or as a service mark, and we have not applied to register the logo as either. Such non-registration exposes us to the risk of the logo (or similar designs) being used by another entity, although we may have a claim on account of prior usage in such event. Our name was changed to PTC India Limited on July 21, 2004 from Power Trading Corporation of India Limited. It is possible for another entity to apply for and acquire our previous name, in which event it is possible that our name may be confused with the name of such other entity. Any unauthorized usage by a third party of our logo or use of our previous name may create confusion in the market as to our identity and/or may cause a loss of goodwill and erode business opportunities. Political instability or changes in the GoI could delay the liberalization of the Indian economy and adversely affect global conditions in India generally. In the nine month period ended December 31, 2008 we generated substantially all of our sales in India. Our business, and the 24

34 market price and liquidity of the Equity Shares, are therefore directly affected by the Indian market, which in turn may be affected by foreign exchange rates and controls, interest rates, changes in Government policy, taxation, social and civil unrest and other political, economic or other developments in or affecting India. Since 1991, successive Indian Governments have pursued policies of economic liberalization. Nevertheless, the role of the Indian central and state governments in the Indian economy as producers, consumers and regulators has remained significant. Since 1996, the Government has changed six times. The present Government, formed in May 2004, has announced policies and taken initiatives that support the continued economic liberalization policies that have been pursued by previous governments. We cannot assure you that these liberalization policies will continue in the future. The current Government is a coalition of several parties, the withdrawal of one or more of which could cause instability. The rate of economic liberalization could change, and specific laws and policies affecting the power sector, foreign investment, currency exchange and other matters affecting investment in our securities could change as well. Parliamentary elections have recently concluded in India, there can be no assurance that the next government will follow the same economic liberalization principles. Any change in India s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally. We are likely to be classified as a passive foreign investment company, which would result in adverse U.S. federal income tax consequences to U.S. holders of the Equity Shares. Due to the nature of our assets and operations, it is likely that we will be considered as a passive foreign investment company ( PFIC ), for the current taxable year and for future taxable years under applicable U.S. federal income tax regulations. A non-u.s. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income. However, the determination of whether or not we are classified as a PFIC is a factual determination based on the categories and amounts of income that we earn and the categories and valuation of our assets (including goodwill) for each taxable year, all of which are subject to change. If we are a PFIC, U.S. holders of the Equity Shares would likely be subject to an interest charge together with tax calculated at maximum ordinary income rates on excess distributions, which are defined to include gain on a sale or other disposition of the Equity Shares, unless a certain mark-to-market election is made (U.S. holders will not be able to make qualified electing fund elections, another means of limiting the adverse tax consequences, as we do not intend to provide the information required for U.S. holders to make such elections). See Taxation Certain U.S. Federal Income Tax Considerations. U.S. holders are urged to consult their own tax advisors as to the consequences of the application of the PFIC rules to your investment in the Equity Shares. Risks related to investment in Indian companies Indian corporate and other disclosure and accounting standards differ from those in the United States, countries in the European Union and other jurisdictions. Our financial statements are prepared in accordance with Indian GAAP, which differ in significant respects from both IFRS and U.S. GAAP. As a result, our financial statements and reported earnings could be significantly different from those which would be reported under IFRS or U.S. GAAP, which may be material to your consideration of the financial information prepared and presented in accordance with Indian GAAP contained in this Preliminary Placement Document. In particular, greater reliance may be placed by the auditors on representations made by our management and there may be less independent verification of information than would be the case in certain other countries. In making an investment decision, investors must rely upon their own examination of us, the terms of this Issue and the financial information contained in this Preliminary Placement Document. This Preliminary Placement Document does not contain any reconciliation of our financial statements to IFRS or U.S. GAAP. There is no assurance that the summary of differences between Indian GAAP and U.S. GAAP contained in this Preliminary Placement Document would reveal material differences. It may not be possible for you to enforce any judgment obtained outside India against us, our management or any of our respective affiliates in India, except by way of a suit in India on such judgment. We are incorporated under the laws of India and all of our Directors and executive officers reside in India. Nearly all of our assets, and the assets of our Directors and officers, are located in India. As a result, you may be unable to: effect service of process outside of India upon us and such other persons or entities; or enforce in courts outside of India judgments obtained in such courts against us and such other persons or entities. Section 44A of the CPC, as amended, provides that where a foreign judgment has been rendered by a court in any country or territory outside India, which the Government has by notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India. The United Kingdom has been declared by the Government to be a reciprocating territory for the purposes of Section 44A. However, the United States has not been declared by the Government to be a reciprocating territory for the purposes of Section 44A. A judgment of a court in the United States may be enforced in India only by a suit upon the judgment, subject to Section 13 of the CPC and not by proceedings in execution. The suit must be brought in India within three years from the date of the judgment in the same manner as any other suit filed 25

35 to enforce a civil liability in India. Generally, there are considerable delays in the disposal of suits by Indian courts. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive or inconsistent with Indian practice. A party seeking to enforce a foreign judgment in India is required to obtain prior approval from the RBI under Foreign Exchange Management Act, 1999 ( FEMA ) to repatriate any amount recovered. See Enforcement of Civil Liabilities. You may be restricted in your ability to exercise pre-emptive rights under Indian law and may be adversely affected by future dilution of your ownership position. Under the Companies Act, a company incorporated in India must offer its holders of equity shares pre-emptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages before the issuance of any new equity shares, unless the pre-emptive rights have been waived by adoption of a special resolution by holders of three-fourths of the shares which are voted on the resolution unless we have obtained Government approval to issue without such rights. However, if the law of the jurisdiction you are in does not permit you to exercise your pre-emptive rights without us filing an offering document or registration statement with the applicable authority in the jurisdiction you are in, you will be unable to exercise your pre-emptive rights unless we make such a filing. If we elect not to make such a filing, the new securities may be issued to a custodian, who may sell the securities for your benefit. The value such custodian would receive upon the sale of such securities, if any, and the related transaction costs cannot be predicted. To the extent that you are unable to exercise pre-emptive rights granted in respect of the Equity Shares held by you, your proportional interest in us would be reduced. The Indian economy has had sustained periods of high inflation. The majority of our direct costs are incurred in India. India has experienced high levels of inflation since 1980, with inflation peaking at an annual rate of 14.1% in In the event of a high rate of inflation, our costs, such as salaries, travel costs and related allowances, which are typically linked to general price level, may increase. However, we may not be able to increase the tariffs that we charge for our products and our services sufficiently to preserve operating margins. Accordingly, high rates of inflation in India could increase our employee costs and decrease our operating margins, which could have an adverse effect on our results of operations. The Equity Shares are subject to transfer restrictions under US securities laws. The Equity Shares are being offered in transactions not required to be registered under the Securities Act. Therefore, the Equity Shares may be transferred or resold only in a transaction registered under or exempt from the registration requirements of the Securities Act and in compliance with any other applicable securities laws. See Transfer Restrictions. A third party could be prevented from acquiring control of us because of the anti-takeover provisions under Indian law. There are provisions in Indian law that may discourage a third party from attempting to take control over us, even if a change in control would result in the purchase of your Equity Shares at a premium to the market price or would otherwise be beneficial to you. Under the takeover regulations an acquirer has been defined as any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights or control over a company, whether individually or acting in concert with others. These provisions may discourage or prevent certain types of transactions involving an actual or threatened change in control of us. See The Securities Market of India Takeover Code. Force majeure events, terrorist attacks or war or conflicts involving India, the United States or other countries could adversely affect the financial markets and adversely affect our business. Any major hostilities involving India, or other acts of violence including civil unrest or terrorist attacks, or events that are beyond our control, could have an adverse effect on the operations of services provided in India. The terrorist attacks on New York and Washington, D.C. on September 11, 2001, and their aftermath had an adverse effect on worldwide financial markets. Incidents such as the Mumbai terrorist attacks on November 28, 2008, the September 11, 2001 terrorist attacks, other recent incidents such as in Mumbai, India, Bali, Indonesia, Madrid, Spain and London, U.K., and other acts of violence may adversely affect global equity markets as well as the Indian economy and stock markets where our Equity Shares will trade. Such acts will negatively affect business sentiment as well as trade between countries, which could adversely affect our business and profitability. Also, India or the United States may enter into armed conflict or war with other countries. The consequences of any armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business. South Asia has, from time to time experienced instances of civil unrest and hostilities among neighboring countries. Military activity or terrorist attacks could adversely affect the Indian economy by disrupting communications and making travel more difficult. Such events could also create a perception that investments in Indian companies involve a higher degree of risk. This, in turn, could have an adverse effect on the market for securities of Indian companies, including the Equity Shares, and on the market for our services. 26

36 Risks related to our equity shares and the trading market An active market for our equity shares may not be sustained, which may cause the price of our equity shares to fall. While our equity shares have been traded on the BSE and the NSE since 2004, there can be no assurance regarding the continuity of the existing active or liquid market for our equity shares, the ability of investors to sell their Equity Shares or the prices at which investors may be able to sell their Equity Shares. In addition, the market for equity securities in emerging markets has been subject to disruptions that have caused volatility in the prices of securities similar to our equity shares. There can be no assurance that the market for our equity shares will not be subject to similar disruption. Any disruption in these markets may have an adverse effect on the market price of the Equity Shares. There is no guarantee that the Equity Shares will be listed on the BSE and the NSE in a timely manner or at all, and any trading closures at the BSE and the NSE may adversely affect the trading price of our equity shares. In accordance with Indian law and practice, permission for listing of the Equity Shares will not be granted until after the Equity Shares have been issued and allotted. Approval will require all other relevant documents authorizing the issuing of the Equity Shares to be submitted. There could be a failure or delay in listing the Equity Shares on the BSE and the NSE. Any failure or delay in obtaining the approval would restrict your ability to dispose of your Equity Shares. The regulation and monitoring of Indian securities markets and the activities of investors, brokers and other participants differ, in some cases significantly, from those in Europe and the U.S. The BSE and the NSE have in the past experienced problems, including temporary exchange closures, broker defaults, settlements delays and strikes by brokerage firm employees, which, if continuing or recurring, could affect the market price and liquidity of the securities of Indian companies, including our equity shares, in both domestic and international markets. A closure of, or trading stoppage on, either of the BSE and the NSE could adversely affect the trading price of our equity shares. Historical trading prices, therefore, may not be indicative of the prices at which the Equity Shares will trade in the future. You will not be able to sell immediately on an Indian stock exchange any of the Equity Shares you purchase in this Issue. In-principle approval has been received for the Equity Shares to be listed on the NSE and the BSE. Pursuant to Indian regulations, certain actions must be completed before the Equity Shares can be listed and trading may commence. Investors book entry, or demat, accounts with depository participants in India are expected to be credited within two working days of the date on which the allotment is made. Thereafter, upon receipt of final approval of the Stock Exchanges (if granted), trading in the Equity Shares is expected to commence within seven working days. There can be no assurance that the Equity Shares allocated earlier to investors will be credited to such investor s demat account, or that trading will commence, within the time periods specified above. There may be less information available about companies listed on Indian securities markets than companies listed on securities markets in other countries. There may be less publicly available information about Indian public companies, including us, than is regularly disclosed by public companies in other countries with more mature securities markets. There is a difference between the level of regulation and monitoring of the Indian securities markets and the activities of investors, brokers and other participants in those markets, and that of markets in other more developed economies. SEBI is responsible for setting standards for disclosure and other regulatory standards for the Indian securities markets. While SEBI has issued regulations and guidelines on disclosure requirements, insider trading and other matters, there may be less publicly available information about Indian companies than is regularly made available by public companies in many developed economies. As a result, you may have access to less information about our business, results of operations and financial condition, and those of our competitors that are listed on Indian stock exchanges, on an ongoing basis, than you may in the case of companies subject to the reporting requirements of other more developed countries. Conditions in the Indian securities market may affect the price or liquidity of our equity shares. The Indian securities markets are smaller and more volatile than securities markets in more developed economies. Indian stock exchanges have in the past experienced substantial fluctuations in the prices of listed securities. Indian stock exchanges have also experienced problems that have affected the market price and liquidity of the securities of Indian companies. These problems have included temporary exchange closures, broker defaults, settlement delays and strikes by brokers. In addition, the governing bodies of the Indian stock exchanges have from time to time restricted securities from trading, limited price movements and restricted margin requirements. Further, from time to time, disputes have occurred between listed companies and the Indian stock exchanges and other regulatory bodies that, in some cases, have had a negative effect on market sentiment. Similar problems could occur in the future and, if they do, they could harm the market price and liquidity of the Equity Shares. 27

37 Economic developments and volatility in securities markets in other countries may cause the price of our equity shares to decline. The Indian economy and its securities markets are influenced by economic developments and volatility in securities markets in other countries. Investors reactions to developments in one country may have adverse effects on the market price of securities of companies located in other countries, including India. For instance, the economic downturn globally has adversely affected market prices in the world s securities markets, including the Indian securities markets. Negative economic developments, such as rising fiscal or trade deficits, or a default on sovereign debt, in other emerging market countries may affect investor confidence and cause increased volatility in Indian securities markets and indirectly affect the Indian economy in general. Currency exchange rate fluctuations may affect the value of our equity shares. The exchange rate between the Indian Rupee and the U.S. Dollar has changed substantially in recent years and may fluctuate substantially in the future. Fluctuations in the exchange rate between the U.S. Dollar and the Indian Rupee may affect the value of your investment in the Equity Shares. Specifically, if there is a change in relative value of the Indian Rupee to the U.S. Dollar, each of the following values will also be affected: the U.S. Dollar equivalent of the Indian Rupee trading price of our equity shares in India; the U.S. Dollar equivalent of the proceeds that you would receive upon the sale in India of any of our equity shares; and the U.S. Dollar equivalent of cash dividends, if any, on our equity shares, which will be paid only in Indian Rupees. You may be unable to convert Indian Rupee proceeds into U.S. Dollars or any other currency or the rate at which any such conversion could occur could fluctuate. In addition, our market valuation could be seriously harmed by the devaluation of the Indian Rupee, if U.S. investors analyze our value based on the U.S. Dollar equivalent of our financial condition and results of operations. 28

38 MARKET PRICE INFORMATION The equity shares of the Company have been listed on the BSE and the NSE since The tables below set forth, for the periods indicated, the high and low prices and the average daily trading volume on the BSE and the NSE for the Company s equity shares. As of the date of this Preliminary Placement Document, 227,419,000 equity shares were issued and outstanding. equity shares would be issued and outstanding immediately after the Issue. The high and low prices recorded on the BSE and the NSE and the number of our equity shares traded on the days such high and low prices were recorded, for Fiscal Years 2007, 2008 and 2009 are stated below: BSE Year ending March 31 High (Rs.) Date of High May 10, January 4, May 5, 2008 * Average of the daily closing prices NSE Year ending March 31 High (Rs.) Date of High May 10, January 4, May 5, 2008 * Average of the daily closing prices No. of equity shares traded on date of High Total Volume of equity shares traded on date of high (Rs. in million) Low (Rs.) Date of Low 4,994, June 9, ,255,509 1, Apr 17, , October 24, 2008 No. of equity shares traded on date of High Total Volume of equity shares traded on date of high (Rs. in million) Low (Rs.) Date of Low 9,708, June 9, ,231,464 1, April 17, ,117, October 27, 2008 No. of equity shares traded on date of Low Total Volume of equity shares traded on date of low (Rs. in million) *Average price for the year (Rs.) 39, , , No. of equity shares traded on date of Low Total Volume of equity shares traded on date of low (Rs. in million) *Average price for the year (Rs.) 76, , , The high and low prices recorded on the BSE and the NSE and the number of equity shares traded on the days such high and low prices were recorded, during the last six months, are stated below: BSE Month, Year High (Rs.) November December January February March Date of High Total number of equity shares traded as on date of High Total volume on date of High (Rs. in million) Low (Rs.) November 10, , December 16, , January 5, , February 4, , March 27, , Date of Low Total number of equity shares traded as on date of Low Total volume on date of Low (Rs. in million) Average price for the month (Rs.) * Total volume of Securities traded in the month (no. of equity shares) Total volume of securities traded in the month (Rs. in million) November 3, , ,111, December 2, , ,999, January 23, , ,996, February 26, , ,947, March 4, , ,835,

39 April May April 6, , May 18, , April 8, , ,617, May 14, , ,545, * Average of the daily closing prices Updated through May 19, 2009 Source: BSE Website NSE Month, Year High (Rs.) Date of High Total number of equity shares traded as on date of High Total volume on date of High (Rs. in million) Low (Rs.) Date of Low Total number of equity shares traded as on date of Low Total volume on date of Low (Rs. in million) Average price for the month (Rs.) * Total volume of Securities traded in the month (no. of equity shares) Total volume of securities traded in the month (Rs. in million) November 2008 December 2008 January 2009 February 2009 March 2009 April 2009 May November 7, , November 3, , ,173, December 990, December 102, ,181, , , January 5, 346, January 124, ,766, , February 795, February 119, ,706, , , March 30, 1,550, March 4, 395, ,517, April 6, 912, April 8, 664, ,033, May 19, May 14, ,566, , ,915, * Average of the daily closing prices Updated through May 19, 2009 Source: NSE Website The closing prices of our equity shares on BSE and NSE on April , the trading day immediately following the day on which the resolution of the Board to approve this Issue was passed, were Rs and Rs per equity share of par value of Rs. 10 each, respectively. 30

40 USE OF PROCEEDS The total proceeds of the Issue will be up to Rs. 5, million. After deducting the Issue expenses of approximately Rs., the net proceeds of the Issue will be approximately Rs.. We currently intend to use the net proceeds of the Issue for investments in one or more businesses in the energy sector or the related energy infrastructure sector, directly or indirectly, including though various investment structures/vehicles that we may consider appropriate. We seek to pursue opportunities at various stages of the business growth cycle, including providing seed capital to businesses. We may invest in businesses with whom we have entered into, or may in the future enter into, PPAs. Pending utilization for the purposes described above, we may invest the funds in interest or dividend bearing liquid instruments including money market mutual funds and term deposits with banks or financial institutions. Such investments will be in accordance with the investment policies approved by the Board from time to time. 31

41 CAPITALIZATION AND INDEBTEDNESS The following table sets forth our capitalization and debt on a consolidated basis as of December 31, 2008 and as adjusted to give effect to the issuance of Equity Shares under this Issue. This table should be read in conjunction with our financial statements as of December 31, 2008 and the related notes and the other financial information contained elsewhere in this Preliminary Placement Document. (in millions) As of December 31, 2008 As adjusted for this Issue Short-term borrowings Actual Rs. US$ Rs. US$ Secured. Unsecured... Total short-term borrowings... Long-term borrowings Secured Unsecured... Total long-term borrowings... Shareholders funds 15, Share capital Authorized capital: 750 million equity shares, face value Rs. 10 each 7, Issued capital: 227,419,000 equity shares, face value Rs. 10 each, all paid up fully* Other reserves (excluding revaluation reserves) Total shareholders funds (excluding revaluation reserve) 2, , , As of December 31, 2008, 4,508,380 options under the Company s stock option plan were outstanding. See Recent Developments for indebtedness post-december 31, 2008 of the Company and PFS. 32

42 DIVIDENDS AND DIVIDEND POLICY Under the Companies Act and as per the Articles, our Board recommends the payment of a dividend and the shareholders approve of the same at a general meeting. The shareholders at a general meeting may declare a lower, but not a higher dividend than that recommended by the Board. In India, dividends are generally declared as a percentage of the face value. The dividend recommended by the Board and approved by the shareholders at a general meeting is distributed and paid to shareholders in proportion to the paid-up value of their shares as on the record date for which such dividend is payable. In addition, as is permitted by our Articles, the Board may declare and pay interim dividends. Under the Companies Act, dividends can only be paid in cash to shareholders listed on the register of shareholders or those persons whose names are entered as beneficial owner in the record of the depositary on the date specified as the record date or book closure date. The declaration and payment of dividends will be recommended by the Board and approved by the Company s shareholders, at their discretion, and will depend on a number of factors, including but not limited to the Company s profits, capital requirements and overall financial condition. The Equity Shares to be issued in connection with this Issue shall qualify for any dividend that is declared in respect of the financial year in which they have been allotted. For the fiscal year 2008, a dividend at the rate of 10%, i.e., Rs. 1 per equity share has been declared and paid. The amounts paid as dividends in the past are not necessarily indicative of the Company s dividend policy in the future. There is no guarantee that any future dividends will be declared or paid or that the amount thereof will not be decreased. 33

43 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial information is derived from our audited consolidated financial statements as of and for the years ended March 31, 2006, March 31, 2007 and March 31, 2008, and the nine months ended December 31, 2008, as well as the unaudited profit and loss statement for the nine months ended December 31, 2007, subjected to a limited review by the Auditors. The consolidated financial statements have been prepared in accordance with Indian GAAP, the AS and the Companies Act. The following information should also be read in conjunction with the "Management s Discussion and Analysis of Financial Condition and Results of Operations" section of this Preliminary Placement Document and in conjunction with the financial statements, and the notes thereto, included in "PTC India Limited Financial Statements. 34

44 CONSOLIDATED BALANCE SHEET As at (Rs. in million) As at As at (US$ in million) As At SOURCES OF FUNDS Shareholders' Funds Share Capital 1, , , Reserves and Surplus , , , , , Minority Interest Loan Funds Secured Loans Unsecured Loans Deferred Tax Liabilities Total 2, , , APPLICATION OF FUNDS Fixed Assets Gross Block Less: Depreciation Net Block Capital Work-in-Progress Investments 1, , , Deferred Tax Assets Current Assets, Loans and Advances Sundry Debtors , , Cash and Bank Balances , Other Current Assets Loans & Advances , , , Less: Current Liabilities & Provisions Current Liabilities 1, , , Provisions , , , Net Current Assets , Miscellaneous Expenditure (To the extent not written off or adjusted) Total 2, , , Notes to the Accounts 35

45 CONSOLIDATED PROFIT & LOSS ACCOUNT For the year ended (Rs. in million) For the year ended For the year ended (US$ in million) year ended INCOME Sales - Electricity 30, , , Coal (imported) Service Charges Rebate on Purchase of Power Surcharge on Sale of Power Other Income Profit on Sale of Investments (Net) Foreign Currency Fluctuation (Net) (0.05) (0.22) Excess Provisions Written Back , , , EXPENDITURE Purchases - Electricity 29, , , Coal (imported) Rebate on Sale of Power Handling & Scheduling Charges Loss on Sale of Derivatives (Net) Employee Cost Other Expenses Loss on sale of fixed assets (net) Provision for diminution in value of Investments Contingencies , , , Profit/(Loss) before Amortisation, Depreciation & Prior Period Items 0.00 Amortization & Write Off Deferred Revenue Expenditure- Increase in Authorised Capital Deferred Revenue Expenditure- Developmental Expenditure on Potential Depreciation/Amortisation of Intangible Assets Prior Period Adjustments (net) Profit Before Tax Provision for Taxation - Current Tax Deferred Tax Expenditure/(Income) (7.38) (6.01) Wealth Tax Fringe Benefit Tax Profit After Tax Adjustment of Taxes relating to earlier year (0.49) 0.98 (0.88) Net Profit for the year Profit/(Loss) of Associate Balance as per Last Account Add: Minority Interest in Loss/(Profit)

46 CONSOLIDATED PROFIT & LOSS ACCOUNT (Cont.d) (Rs. in million) (US$ in million) For the year ended For the year ended For the year ended For the year ended Balance Available for Appropriations Less: Appropriations/Adjustments - Dividend Dividend Tax Transfer to General Reserve Balance carried to Balance Sheet Consolidated Notes to the Accounts Earning Per Share-Basic and Diluted

47 CONSOLIDATED CASH FLOW STATEMENT For the year ended (Rs. in million) For the year ended For the year ended (US$ in million) For the year ended CASH FLOW FROM OPERATING ACTIVITIES Net Profit Before Tax Adjustment for: Depreciation Amortised Expenditure Loss on sale of fixed assets Excess Provision written back (1.69) (2.31) Foreign Exchange Fluctuation (0.05) Interest-Others Goodwill on Consolidation Share in Associates Other Income (57.58) (93.49) (326.17) (6.71) Profit on Sale of Investment (57.70) (86.08) (93.25) (1.92) Provision for Contingencies Operating Profit before Working Capital Changes Adjustment for: Sundry Debtors (425.49) (634.79) (168.60) (3.47) Loans & Advances (148.93) (55.95) (1.15) Other Current Assets (2.78) 1.81 (1.39) (0.03) Current Liabilities Provisions 6.23 (1.21) Cash Generated from Operating Activities Direct Taxes Paid (Net) (182.96) (116.69) (117.52) (2.42) Net Cash from Operating Activities (A) CASH FLOW FROM INVESTING ACTIVITIES Other Income Purchase of fixed assets (3.25) (5.81) (386.21) (7.95) Sale of fixed assets Sale/Purchase of investments (157.92) (11,750.88) (241.89) Profit on Sale of Investment Interest-Others (13.06) (19.57) (16.53) (0.34) Loans & Advances - (0.37) Other Current Assets - (0.69) Current Liabilities Provisions Preliminary Expenses - (17.67) Pre-Operative Income Net Cash used/generated in Investing Activities (B) (21.43) (11,733.93) (241.54) CASH FLOW FROM FINANCING ACTIVITES Proceeds from issue of additional shares , Public Issue Expenses Dividend Paid (Including Dividend Tax) (136.83) (171.04) (175.49) (3.61) Cash flow from Financing Activities (C) (135.38) (171.04) 12, Net increase/use in cash and cash equivalent (A+B+C) (71.22) Cash and Cash equivalent (Opening Balance) Cash and Cash equivalent (Closing Balance) ,

48 CONSOLIDATED BALANCE SHEET (Rs. in million) As at As at (US$ in million) As at SOURCES OF FUNDS Shareholders' Funds Share Capital 2, , Reserves and Surplus 12, , , , Minority Interest , Loan Funds Secured Loans Unsecured Loans Deferred Tax Liabilities Total 15, , APPLICATION OF FUNDS Fixed Assets Gross Block Less: Depreciation Net Block Capital Work-in-Progress Investments 13, , Deferred Tax Assets Current Assets, Loans and Advances Sundry Debtors 1, , Cash and Bank Balances 1, , Other Current Assets Loans & Advances , , Less: Current Liabilities & Provisions Current Liabilities 1, , Provisions , , Net Current Assets 1, , Total 15, , Notes to the Accounts 39

49 CONSOLIDATED PROFIT & LOSS ACCOUNT (Rs. in million) For the period ended (US$ in million) For the For the period ended period ended (Audited) (Unaudited) INCOME Sales of Electricity 33, , , Service Charges Rebate on Purchase of Power Surcharge on Sale of Power Other Income Profit on Sale of Investments (Net) Foreign Currency Fluctuation (Net) - (0.05) 0.00 Excess Provisions Written Back , , , EXPENDITURE Purchase of Electricity 32, , , Rebate on Sale of Power Handling & Scheduling Charges Loss on Sale of Derivatives (Net) Employee Cost Other Expenses Loss on sale of fixed assets (net) Provision for diminution in value of Investments 4.36 (3.43) Contingencies , , , Profit/(Loss) before Amortisation, Depreciation & , Prior Period Items 0.00 Amortization & Write Off Deferred Revenue Expenditure-Increase in Authorised Capital Deferred Revenue Expenditure-Developmental Expenditure on Potential Depreciation/Amortisation of Intangible Assets Prior Period Adjustments (net) Profit Before Tax , Provision for Taxation -Current Tax Deferred Tax Expenditure/(Income) (9.82) Wealth Tax Fringe Benefit Tax Profit After Tax Adjustment of Taxes relating to earlier year (1.00) Net Profit for the year Profit/(Loss) of Associate (0.05) (7.98) Balance as per Last Account Add: Monority Interest in Loss/(Profit) - (27.57) Add: Adjustment for pre acquisition profit Balance Available for Appropriations , Less: Appropriations/Adjustments -Transfer to Contingency Reserve Balance carried to Balance Sheet , Consolidated Notes to the Accounts Earning Per Share-Basic and Diluted

50 CONSOLIDATED CASH FLOW STATEMENT For the period ended (Rs. In million) For the period ended (US$ in million) For the period ended CASH FLOW FROM OPERATING ACTIVITIES Net Profit Before Tax , Adjustment for: Depreciation ESOP Expenses Written Off Amortised Expenditure Loss on sale of fixed assets Excess Provision written back (0.09) (10.67) (0.22) Foreign Exchange Fluctuation - (0.05) 0.00 Interest-Others Goodwill on Consolidation Adjustment of Pre-acquisition profit Share in Associates (0.05) (7.98) (0.16) Other Income (138.47) (754.76) (15.54) Profit on Sale of Investment (96.96) (90.43) (1.86) Operating Profit before Working Capital Changes Adjustment for: Sundry Debtors (361.40) (2,178.28) (44.84) Loans & Advances (191.18) (0.88) (0.02) Other Current Assets (7.29) (16.86) (0.35) Current Liabilities , Provisions CashGenerated from Operating Activities (154.05) (3.18) Direct Taxes Paid (Net) (46.58) (107.59) (2.21) Net Cash from Operating Activities (A) (261.64) (5.39) CASH FLOW FROM INVESTING ACTIVITIES Other Income Purchase of fixed assets (24.09) (4.77) (0.10) Sale of fixed assets Sale/Purchase of investments , Profit on Sale of Investment Interest-Others (15.22) (23.67) (0.49) Net Cash used in Investing Activities (B) , CASH FLOW FROM FINANCING ACTIVITES Proceeds from issue of additional shares Public Issue Expenses (6.14) - - Dividend Paid (Including Dividend Tax) (175.49) (266.07) (5.48) Cash flow from Financing Activities (C) (181.63) Net increase/use in cash and cash equivalent (A+B+C) , Cash and Cash equivalent (Opening Balance) , Cash and Cash equivalent (Closing Balance) ,

51 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements as of and for the years ended March 31, 2006, 2007 and 2008, and the nine months ended December 31, 2007 and 2008, including the notes thereto and reports thereon, and our summary unconsolidated profit and loss statement and other financial information as of and for the three months and twelve months ended March 31, 2009 and March 31, 2008 provided under the section titled Recent Developments, each included in this Preliminary Placement Document. You should also read the sections titled Risk Factors and Forward Looking Statements included in this Preliminary Placement Document which discuss a number of factors and contingencies that could affect our financial conditions and results of operations. The financial statements included in this Preliminary Placement Document are prepared in accordance with Indian GAAP, which differs in certain material respects from U.S. GAAP and IFRS. Overview We are a leading power trading company in India. For the nine months ended December 31, 2008, not including our trades of 864 MUs on the IEX, we had a market share of 46.5%. Our traded volumes have increased from 1,617 MUs in FY 2002 to 9,889 MUs in FY 2008 and for the nine month period ended December 31, 2008, we traded a total of 11,643 MUs. Our principal business is to undertake short, medium and long term trading of electricity. We also provide consulting services and invest in and finance companies operating in the power sector and propose to develop and manage businesses in the energy sector such as wind power projects and enter into power tolling and fuel intermediation. We intend to expand our business operations towards becoming a leading integrated power company in India. We were established in 1999 at the initiative of the GoI to help implement its Mega Power Policy. Our Promoters are POWERGRID, NTPC, PFC and NHPC. Support from the GoI and our Promoters has been important to our success, especially in our early years of operations. As on March 2009, our Promoters each held 5.28% of our equity share capital and are important contributors to the development of India s power sector. They are: POWERGRID - India s largest central transmission utility, POWERGRID manages and operates the country s inter-state transmission system; NTPC - India s largest thermal power generator; PFC - a development financial institution dedicated to the power sector; and NHPC - a large hydro-electric power generator in India. Under the Mega Power Policy, the GoI developed a plan to generate more power across India through construction of new mega power projects, with additional private investment. Mega power projects are projects with a capacity of over 1,000 MW (for thermal) and 500 MW (for hydro-electric) that can be transmitted across states. We were created under this policy, and our mandate was to purchase power from IPPs and sell it to identified SEBs suffering from power deficits. As our business evolved, we also began to enable and arrange power trading between SEBs and, subsequently, SPUs. In FY 2000, we began our power trading business. Under the Electricity Act, licensing requirements for power traders were made mandatory, and we received our license in We were one of the first licensees to obtain what was earlier called a category F license (as defined under CERC s regulations), which allowed the highest volumes of trading. CERC has recently categorized the license into three categories, the highest being category I, which allows unlimited trading, which we currently maintain. In FY 2002, our first full year of operation, our trade volume totaled 1,617 MUs, and involved solely short term trading. For FY 2008, our total trade volume was 9,889 MUs. For the nine months ended December 31, 2008, our total trade volume was 11,643 MUs. Our historical short and medium and long term trade volumes and sales are set forth in the table below: Trading Volume (in MUs) Time period Short term Medium and Long term Sales (Rs. in million) Short term Medium and Long term FY FY , , FY , , FY , , , , FY , , , , FY , , , , FY , , , , FY , , , , Nine months ended December 31, ,063.97* 5, ,167.46* 10, * Includes 5.6 MUs (Rs million) of power generated by the Company through wind power project. 42

52 For each Unit that we buy, our practice is to sell that Unit to a customer on identical terms and conditions, which we refer to as back-to-back trading, subject to a margin that we retain. We believe that arranging back-to-back transactions is an important risk management practice. We also strive to limit our risk through a carefully developed set of risk management policies, including, among other things, receipt of security in the form of bank guarantees or letters of credit. For the nine month period ended December 31, 2008, short term trading of electricity (generally, trades having a term of less than one year) accounted for 52.1% of our trading volume and 79.9% of our sales, and medium term (terms of between one and 25 years in duration) and long term trading (for a period of 25 years and more) accounted for 47.9% of our trading volume and 20.1% of our sales. To date, all of our medium and long term trades have included cross border contracts for the purchase of hydro-electric power generated in Bhutan. We have seen more competition and increased regulation of short term trading over the past few years, including the imposition of a statutory cap of Rs per Unit on our short term trading margins and more recently, on cross border trades. For information about the regulatory framework affecting our business, see Industry Overview. While we plan to continue building on our successes in short term trading, we see more growth opportunities in the long term trading business, and our strategy is to increase the volume and mix of medium and long term trading contracts by entering into longer term off-take arrangements. We have worked on ways to increase long term access to power supplies by (i) entering into long term PPAs with new IPPs and Captives, which are industrial companies that produce the majority of their power for their own consumption (but also often have surplus capacity), (ii) developing fuel intermediation and tolling programs, through which we act as an aggregator of coal and sell such fuel to thermal power plants (intermediation) or provide power plants with fuel and sell the resulting power (tolling), (iii) pursuing our own investments in new power projects, through majority or minority holdings and (iv) developing relationships with producers in Nepal and building on existing trade relationships with producers in Bhutan, each of which have substantial hydro-electric power potential. Due to these efforts to increase available sources of supply, we believe that we are uniquely positioned for long term trading of power. We are constantly looking to develop different ways to capitalize on our industry experience and strong brand. We continue to evolve our strategies by matching our buyers and sellers needs with innovative products to ensure maximum scheduling at the highest tariff. This has allowed us to maintain our leadership position in terms of trade volumes sold by Indian power trading licensees. In FY 2007, we established our first subsidiary, PFS to be our investment vehicle and for providing financial solutions to a diverse range of companies in the energy sector. We also established a wholly owned subsidiary, PEL in FY 2009 which will seek to develop and manage businesses in the energy sector such as power generation, power distribution, power transmission, power tolling, importing coal and taking up energy efficiency projects while also providing consultancy services. We also provide consultancy services to various clients in the energy sector, including on the developing regulatory regime, preparing financial models for IPPs, preparing market study reports, pre-feasibility reports and detailed project reports. In August 2007, CERC approved the establishment of India s first nationwide automated and online electricity trading platform IEX, in which PFS owns a 26% equity interest and is a co-promoter. IEX began operating in June IEX is run on the platform of OMX Exchanges, which includes seven other international exchanges, which has brought scalable technology solutions for nationwide energy trading. From the start of its operations through December 31, 2008, IEX trade volumes totaled 3,540 MUs (Source: IEX). Critical Accounting Policies Critical accounting policies are those policies that require the application of management s most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sensitive to results under different assumptions and conditions. We believe that our most critical accounting policies are those described below. Revenue from sale of power is accounted for based on rates agreed with the counterparties, excluding service charges wherever separately agreed. Consultancy income is recognized proportionately with the degree of completion of services. Management and success fee revenues for services rendered in connection with the development of power projects is recognized when such fee is assured and determinable under the contract. Fixed assets are stated at their original cost less accumulated depreciation. The cost of the acquisition of a fixed asset is inclusive of freight, duties, taxes and other incidental expenses related to acquisition, installation and commissioning. Expenses incurred from tangible and intangible assets are carried forward as capital work in progress at cost until the same are ready for use. Capital expenditure on assets not owned by us is reflected as a distinct item under capital work-in-progress until the period of completion and thereafter under fixed assets and is amortized over a period of three years. No amortization is provided for leasehold land on perpectual lease. Other leasehold land is amortized over the lease period. Computer software recognized as an intangible asset is amortized on a straight line method on a pro rata basis over a period of three years. Employee stock option based compensation: The excess of the market price of underlying equity shares as of the date of the grant of the options over the exercise price of the options given to employees under the employee stock option plan is recognized as deferred stock compensation cost and amortized over the vesting period, on a straight line basis. 43

53 Depreciation is provided on the written down value method as per the rates and in the manner prescribed in Schedule XIV to the Companies Act. Assets costing up to Rs. 5, are fully depreciated in the year of capitalization. Long term investments are carried at cost less provision, if any, for permanent diminution in the value of such investments. Short term investments are carried at lower of cost or fair value. Securities held as stock for trade are valued at lower of cost or market value. Equity stock futures are recognized at the end of the period in the books to the extent of initial/mark to market margin paid or received. Equity stock futures are carried at cost where they are used as an instrument for hedging and independent open positions of equity stock futures are being carried at lower of cost or fair value. Equity indices/stock options are recognized at the end of the period in the books to the extent of premium paid. Equity indices/stock options are carried at cost where they are used as an instrument for hedging and independent open positions of equity indices/stock options are being carried at lower of cost or fair value. The surcharge on late or non-payment of dues by sundry debtors for the sale of energy is not treated as accrued due to the uncertainty of its realization and is, therefore, accounted for on a receipt basis. Prepaid and prior period items up to Rs. 5, are accounted to natural heads of accounts. A deferred revenue expenditure incurred up to March 31, 2003, is written off equally in the five years beginning with the year of its incidence. Preliminary expenses and pre-operative expenses (net of pre-operative incomes) are charged off to the profit and loss account in the year of commencement of business. Factors Affecting Our Results of Operations Our financial condition and results of operations are affected by numerous factors and the following are of particular importance: The importance of Open access to transmission corridors. The Electricity Act mandated that Open access to transmission corridors be made available on a non-discriminatory basis. In 2004, CERC adopted regulations to govern the availability of Open access. The availability of Open access is fundamental to the sale of electricity, as a sale is not deemed complete until the electricity is delivered to the buyer. Prior to the implementation of Open access regulations, parties were not able to predict the transmission capacity availability in a meaningful way, leading to congestion or underutilization of the transmission corridors. Open access has helped to reduce these inefficiencies. Under the regulations, Open access requests for long term trades are given priority over short term requests. Since the adoption of the Open access regulations, we have not had significant problems arranging transmission for our traded power. Within India, certain states experience a surplus in power generation while other states experience a deficit at different times during the year. However inter-regional Open access remains problematic due to poor quality inter-regional transmission. See Industry Overview. This is largely due to a lack of synchronization of the inter-regional transmission corridors. As traders, we facilitate the transfer of power from surplus to deficit states. Once a seller and buyer are identified, we analyze the parties locations, power requirements and price sensitivities. We apply for Open access to the relevant regional RLDC by submitting an application and copies of our purchase and sale contracts. For short term trades, applications can be made up to three months in advance of the first scheduled transmission. The sale of electricity accounted for 97.4% and 97.1% of our total income for the year ended March 31, 2008, and for the nine months ended December 31, 2008, respectively, making Open access one of the key factors in our business. Regulatory framework. Under the Electricity Act, since January 2006, our margins related to short term trades have been restricted to a maximum of Rs per Unit. For our cross border trades, which are currently solely with suppliers in Bhutan, the tariffs under our PPAs are negotiated by the GoI generally based on market rates and, from April 1, 2009, margins are fixed at Rs per Unit. Prior to April 1, 2009, cross border trade margins generally ranged between Rs and Rs per Unit. Any change in these margin limits affects our results of operations. The NTP requires that the procurement of power on a medium or long term basis be subject to transparent negotiation, including competitive bidding. Competition. With the enactment of the Electricity Act, other power trading entities have successfully applied for and received trading licenses. As of December 31, 2008, there were 43 trading licenses issued, of which 17 were category I licenses, the category of licence we hold. Our trading volumes and margins could be affected as more competitors increase their focus on power trading. In addition, the commissioning of IEX and other exchanges on which power can be traded is likely to affect the industry and our margins and results of operations. Pursuing our business strategies, particularly long term trading. We are pursuing different business opportunities within the power sector to diversify our revenue streams. As new projects are commissioned, we will have opportunities to purchase more power on long term contracts with these new generators. We will also seek other sources of surplus power, either through investment in the development of new power plants, or becoming a co-developer, through our fuel intermediation and tolling arrangements, or by entering into long term contracts with IPPs and Captives. For the nine months ended December 31, 2008 and the year ended March 31, 2008, our sales of power purchased under medium and long term PPAs with three power plants in Bhutan accounted for Rs. 10, million (US$ million) and Rs. 9, million (US$ million), or 20.1% and 26.0% of our sales, and represented 47.9% and 52.9% of our trading volumes, respectively. In the year ended March 31, 2007, we established PFS to be our investment vehicle for providing financial solutions to a diverse range of companies in the energy sector. We also established a wholly owned subsidiary, PEL in the year ended 44

54 March 31, 2009, which will seek to develop and manage businesses in the energy sector such as power generation, power distribution, power transmission, power tolling, importing coal and taking up energy efficiency projects while also providing consultancy services. We also provide consultancy services to various clients in the energy sector, including on the developing regulatory regime, preparing financial models for IPPs, preparing market study reports, pre-feasibility reports and detailed project reports. Managing our risks, particularly our credit risks. Our risk management policies address, among other things, significant risks associated with power trading, including (i) market risk, (ii) counterparty credit risk and (iii) transmission risk. Counterparty credit risk relates to our buyer s willingness or ability to make timely payments. To manage this risk, our billing cycle is on a weekly basis. In our experience, it is a good strategy to seek smaller payments from our customers more frequently, rather than larger payments on a monthly basis. We also require bank guarantees or letters of credit to cover two billing cycles. To date, we have not experienced any significant counterparty payment defaults, although sometimes there are disputes over the entitlement of a counterparty to a rebate. Description of Income and Expenditure Items Income Our income includes: (i) sales of electricity and coal (imported), (ii) rebates on our purchase of power, (iii) service charges, (iv) surcharges on the sale of power to customers, (v) profits on the sale of investments (net), (vi) excess provisions written back, (vii) foreign currency fluctuation (net) and (vi) other income. Sales of electricity and coal (imported). Short term (includes sales on IEX) and medium and long term sales of electricity is the main source of our income. Sales represent tariffs for the electricity, which are fixed on medium and long term trades but may vary from period to period in short term trading, as well as our margins, which are fixed at Rs per Unit for short term trading. For our cross border trades, which are currently solely with suppliers in Bhutan, the tariffs under our PPAs are negotiated by the GoI. Buyers of this power imported to India agree to tariffs at the market rate, which prior to April 1, 2009, generally resulted in margins that ranged between Rs and Rs per Unit. From April 1, 2009, margins for cross border trades are fixed at Rs per Unit. Prior to April 1, 2007, we also engaged in the on-spot sale of coal. Rebates on the purchase of power. We are generally entitled to a rebate (cash discount) of 2.0% of the purchase price of electricity when we make timely payments under our purchase agreements. We strive to receive these rebate payments, which we pass on to our buyers when they make timely payment to us. In the case of cross border trades, we are not entitled to rebates under our purchase agreements, although counterparties purchasing this power from us are entitled to rebates for timely payment. This has had an effect on our effective margins for cross border trades. Service Charges. Service charges are our margins generated from the trading of power on IEX, the Indian power exchange. Surcharges on the sale of power. Surcharges on the sale of power are late payment penalties that we charge our customers. Surcharges are 1.5% per month of the outstanding amount each month and are recognized as income only after receipt. Profits on the sale of investments (net). This is the amount of net profit realized on liquidation of our long or short term investments, which are undertaken as a part of our treasury operations. Excess provisions written back. We make provision for expected liabilities such as employee benefits and administrative expenses. To the extent that the provisions exceed the actual liability incurred, the difference is recognized as income. Other income. Other income includes interest earned on fixed deposit accounts, dividends received from our investments, rental income received from leasing of our property, consultancy service fees received, and miscellaneous income. Expenditure Our expenditure includes (i) purchases of electricity and coal (imported), (ii) rebates paid under our power sales agreements, (iii) handling and scheduling charges, (iv) employee costs, (v) foreign currency fluctuations (net), (vi) losses on the sale of fixed assets (net), (vii) losses on sale of derivatives (net) and (vii) other expenses. Purchase of electricity and coal (imported). The purchase of electricity is the main source of our expenditure. Prior to April 1, 2007, we also engaged in the on-spot purchase of coal. Rebates on the sale of power. All of our power purchasing customers are in India, and, except for power supplied to us from Bhutan, there is a general entitlement of our power purchasing customers under our sales agreements to a rebate (cash discount) of 2.0% of the purchase price for timely payments to us. For power supplied from our cross border purchases, a rebate of Rs per Unit is applicable for power sourced from the Tala power project and Rs per Unit is applicable for power sourced from the Chukha and Kurichhu power projects. We record these rebates as our expenditures. While we receive similar rebates ourselves when we make domestic purchases, we do not receive such rebates on our cross border purchases. Handling and scheduling charges. The transmission of electricity results in handling and scheduling charges, as well as Open access application fees, imposed by RLDC. Historically, we paid the charges and application fees to the RLDC on 45

55 behalf of our customers, and increased our sales price proportionately to be reimbursed. We changed this practice after January 2006, when our short term trading margins became restricted under the NTP. Although some of our older contracts are still subject to this arrangement, our contracts entered into after January 2006 stipulate that the buyer of the electricity bears handling and scheduling charges directly. We continue to pay the application fees. Therefore, we expect expenditures for handling and scheduling charges to continue to decrease as the contracts under the former arrangement expire. Employee costs. Employee costs include salaries, allowances, employment compensation expense towards our employee stock option plan and other related benefits paid to employees. Each of the Company and PFS have adopted employee stock option plans in The Company s employee stock option plan adopted on August 21, 2008, is for a total of 4,548,380 stock options, each exercisable for one equity share. As of December 31, 2008, 4,508,380 stock options remained outstanding under such employee stock option plan. These stock options shall vest in four tranches over a period of four years from the date of the grant. As of the date of this Preliminary Placement Document, no stock options have vested. The exercise price for these stock options vary from Rs to Rs per stock option. We recognize the excess of market price of the underlying equity shares as of the date of the grant of the stock options over the exercise price as deferred stock compensation cost. We amortize this cost over the vesting period on a straight line basis. As a result, in the nine months ended December 31, 2008, we incurred an employee compensation cost of Rs million (US$0.91 million) relating to our employee stock option plan. See Note 9 - Consolidated Notes to the Accounts. Foreign currency fluctuations (net). Foreign currency fluctuations arise from, among other things, transactions pertaining to the purchase of imported coal in currencies other than Rupees, such as U.S. Dollars, foreign travel and payments to foreign consultants. Other expenses. Other expenses comprise among other things, administrative expenses, legal and audit fees, consultancy expenses, communication, business development, travel and conveyance expenses, building maintenance, bank charges and others. Segment Information From April 1, 2007, our financial results are prepared and presented in three business segments power trading, investment and unallocated. The table below shows our segment revenue and profit before tax for the periods indicated. Particulars Year ended March 31, Nine months ended December 31, (Rs. in million) (US$ in million) (Rs. in million) (Rs. in million) (US$ in million) Revenue: Power Trading 39, , , , Investment Unallocated Net Revenue From 39, , , , Operations Profit/(Loss) Before Tax: Power Trading Investment (9.57) (0.20) Unallocated Profit Before Tax ,

56 Results of Operations The following table sets forth selected financial data from our consolidated profit and loss accounts, the components of which are also expressed as a percentage of total income for the periods indicated: Year ended March 31, Nine months ended December 31, Particulars Income: (Rs. in million) (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) (US$ in million) (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) (US$ in million) (% of Total Income) Sales - Electricity 30, % 36, % 38, % 33, % 52, , % - Coal (Imported) % % Rebate on Purchase of Power % % % % % Surcharge of Sale of Power Other Income % % % % % Profit on Sale of Investments (Net) % % % % % Foreign Currency Fluctuation (Net) (0.05) (0.22) 0.14 (0.05) Excess Provisions Written Back Service Charges % Total Income 31, % 37, % 39, , % 54, , % 47

57 Particulars Expenditure: Purchases (Rs. in million) Year ended March 31, Nine months ended December 31, (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) - Electricity 29, % 36, % 38, % 32, % 52, , % - Coal (Imported) % % Rebate on Sale of Power % % % % % Handling and Scheduling Charges (US$ in million) (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) (US$ in million) (% of Total Income) % Employee Cost % % % % % Other Expenses % % % % % Loss on Sale of Fixed Assets (Net) Loss on Sale of Derivatives (Net) Provision - For Diminution in Value of Investments % 4.36 (3.43) (0.07) - For Contingencies Total Expenditure 30, % 37, % 38, % 33, % 53, , % 48

58 Particulars Profit/(Loss) Before Amortization, Depreciation and Prior Period Items Amortization and Write Off - Deferred Revenue Expenditure Increase in Authorized Capital - Deferred Revenue Expenditure Developmental Expenditure in Potential Power Projects Depreciation/ Amortization of Intangible Assets Prior Period Adjustments (Net) (Rs. in million) Year ended March 31, Nine months ended December 31, (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) (US$ in million) (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) (US$ in million) (% of Total Income) % % % % 1, % % % % % Profit Before Tax % % % % 1, % 49

59 Particulars Provision for Taxation (Rs. in million) Year ended March 31, Nine months ended December 31, (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) - Current Tax % % % % % - Deferred Tax Expenditure/(Income) (US$ in million) (% of Total Income) (Rs. in million) (% of Total Income) (Rs. in million) (US$ in million) (% of Total Income) (7.38) (6.01) % (9.82) % - Wealth Tax Fringe Benefit Tax Profit After Tax % % % % % Adjustment of Taxes Relating to Earlier Year 0.49 (0.98) Profit/(Loss) of Associates (0.05) (7.98) (0.16) Minority Interest (27.57) (0.57) (0.1%) Net Profit % % % % % 50

60 Nine months ended December 31, 2008 compared to nine months ended December 31, 2007 Income Sales of electricity. Our sales of electricity increased by 59.3% from Rs. 33, million in the nine months ended December 31, 2007 to Rs. 52, million (US$1, million) in the nine months ended December 31, 2008, primarily as a result of an increase in our short term and medium and long term trade volumes, and also as a result of increased tariffs on short term trades. The increase in medium and long term trade volumes was as a result of the increase in supply of power from the power producers in Bhutan. In addition, our sales also increased as a result of sales of power generated from our wind power project. Rebates on the purchase of power. Our total rebates on the purchase of power increased by 47.2% from Rs million in the nine months ended December 31, 2007 to Rs million (US$13.71 million) in the nine months ended December 31, 2008, as a result of an increase in short term trade sales, leading to more rebates being received by us. Our rebates increased less rapidly than our purchases of electricity due to increased cross border purchases on which we are not entitled to rebates. Service charges. We recorded service charges of Rs million (US$0.62 million) for the first time in the nine months ended December 31, 2008 as a result of power traded on the IEX, which commenced operations in June, Surcharges on the sale of power. Our realized surcharges on the sale of power increased from Rs million in the nine months ended December 31, 2007 to Rs million (US$0.27 million) in the nine months ended December 31, Other income. Our other income increased from Rs million in the nine months ended December 31, 2007 to Rs million (US$15.94 million) in the nine months ended December 31, 2008, primarily as a result of an increase in dividend income from our mutual fund investments and interest on term deposit accounts. We had an increase in principal amount of investments and deposits as a result of our investing a substantial portion of the net proceeds from the sale of 77,419,000 equity shares in our qualified institutional placement that was completed in January Profits on the sale of investments (net). Our profits on the sale of investments decreased by 6.7% from Rs million in the nine months ended December 31, 2007 to Rs million (US$1.86 million) in the nine months ended December 31, 2008, as a result of a change in composition of investments. Excess provisions written back. Our excess provisions written back increased from Rs million in the nine months ended December 31, 2007 to Rs million (US$0.22 million) in the nine months ended December 31, Expenditure Purchase of electricity. Our purchase of electricity increased by 59.7% from Rs. 32, million in the nine months ended December 31, 2007 to Rs. 52, million (US$1, million) in the nine months ended December 31, 2008, primarily as a result of increases in our short term and medium and long term trade volumes, and also as a result of increased tariffs on short term trades. Rebate on sale of power. Our total rebates paid on sale of power increased by 40.5% from Rs million in the nine months ended December 31, 2007 to Rs million (US$15.18 million) in the nine months ended December 31, 2008, primarily as a result of increases in the volume of short term and medium and long term trades. Employee costs. Our employee costs increased by 70.4% from Rs million in the nine months ended December 31, 2007 to Rs million (US$2.21 million) in the nine months ended December 31, 2008, primarily as a result of Rs million of employee compensation expense incurred in connection with grants under our 2008 employee stock option plan. See Board of Directors and Senior Management Employee Stock Option Plan 2008 and Note 9 Consolidated Notes to the Accounts. Other expenses. Our other expenses increased by 76.5% from Rs million in the nine months ended December 31, 2007 to Rs million (US$3.09 million) in the nine months ended December 31, 2008, primarily as a result of an increase in legal and professional fees and consultancy expenses. Profit before tax ( PBT ). Our PBT increased from Rs million in the nine months ended December 31, 2007 to Rs. 1, million (US$20.76 million) in the nine months ended December 31, Our PBT for the nine months ended December 31, 2007 and 2008 as a percentage of total income was 1.1% and 1.9%, respectively. Provision for taxation. Our provision for taxation increased from Rs million in the nine months ended December 31, 2007 to Rs (US$3.60 million) million in the nine months ended December 31, This resulted from a 64.6% increase in our current tax from Rs million paid in the nine months ended December 31, 2007 to Rs million (US$2.82 million) paid in the nine months ended December 31, 2008 as a result of the increase in taxable income. The current tax was partially offset by income from deferred tax in the amount of Rs million in the nine months ended December 31, 2007, and we incurred deferred tax expenditure of Rs million (US$0.73 million) in the nine months ended December 31, We incurred fringe benefit tax in the amounts of Rs million and Rs million (US$0.05 million) for the nine months ended December 31, 2007 and 51

61 2008, respectively. Our effective tax rates (inclusive of deferred tax and fringe benefit tax, and net of any provision written back) for the nine months ended December 31, 2007 and 2008 were 20.3% and 17.4%, respectively. Profit after tax ( PAT ). Our PAT increased from Rs million in the nine months ended December 31, 2007 to Rs million (US$17.15 million) in the nine months ended December 31, Net profit. As a result of the factors described above, our net profit increased from Rs million in the nine months ended December 31, 2007 to Rs million (US$16.42 million) in the nine months ended December 31, Our net profit as a percentage of total income for the nine months ended December 31, 2007 and 2008 was 0.9% and 1.5%, respectively. Year ended March 31, 2008 compared to year ended March 31, 2007 Income Sales of electricity. Our sales of electricity increased by 4.3% from Rs. 36, million in the year ended March 31, 2007 to Rs. 38, million (US$ million) in the year ended March 31, 2008, primarily as a result of an increase in short term tariffs and medium and long term term trade volumes, partially offset by a decrease in short term trade volumes. Sales of coal (imported). Our on-spot sales of coal decreased from Rs million in the year ended March 31, 2007 to nil in the year ended March 31, Rebates on the purchase of power. Our total rebates on the purchase of power decreased by 11.4% from Rs million in the year ended March 31, 2007 to Rs million (US$11.24 million) in the year ended March 31, 2008, primarily as a result of a decrease in short term trade volume. Surcharges on the sale of power. Our realized surcharges on the sale of power decreased by 77.9% from Rs million in the year ended March 31, 2007 to Rs million (US$0.01 million) in the year ended March 31, Other income. Our other income increased from Rs million in the year ended March 31, 2007 to Rs million (US$7.54 million) in the year ended March 31, 2008, primarily as a result of increases in dividend income principally attributable to additional investments in and increases in yields from, dividend option mutual funds and increases in revenues generated from our consultancy business. Our other income also increased as a result of an increase in interest income from term deposits. Profits on the sale of investments (net). Our profits on the sale of investments increased by 8.3% from Rs million in the year ended March 31, 2007 to Rs million (US$1.92 million) in the year ended March 31, 2008, primarily as a result of capital gains on liquidation on maturity of certain of our investments in fixed income mutual funds and sales of our investments in growth option mutual funds. Excess provisions written back. Our excess provisions written back increased by 25.1% from Rs million in the year ended March 31, 2007 to Rs million (US$0.06 million) in the year ended March 31, Expenditure Purchase of electricity. Our purchase of electricity increased by 4.4% from Rs. 36, million in the year ended March 31, 2007 to Rs. 38, million (US$ million) in the year ended March 31, 2008, primarily as a result of an increase in short term tariffs and medium and long term term trade volumes, partially offset by a decrease in short term trade volumes. Purchase of coal (imported). Our purchase of coal decreased from Rs million in the year ended March 31, 2007 to nil in the year ended March 31, Rebates on the sale of power. Our total rebates on the sale of power increased by 1.8% from Rs million in the year ended March 31, 2007 to Rs million (US$12.72 million) in the year ended March 31, 2008, primarily as a result of increases in the volume of medium and long term trades. Handling and scheduling charges. The handling and scheduling charges incurred by us on the purchase of power decreased by 84.9% from Rs million in the year ended March 31, 2007 to Rs million (US$0.01 million) in the year ended March 31, 2008, reflecting the change in the manner we deal with these charges after January See Description of Income and Expenditure Items Expenditure Handling and scheduling charges. Employee costs. Our employee costs increased by 44.8% from Rs million in the year ended March 31, 2007 to Rs million (US$1.70 million) in the year ended March 31, 2008, primarily as a result of increases in the salaries paid to our employees as well as the number of employees. Other expenses. Our other expenses increased by 13.5% from Rs million in the year ended March 31, 2007 to Rs million (US$2.05 million) in the year ended March 31, 2008, primarily as a result of an increase in consultancy expenses. 52

62 Loss on sale of derivatives. We incurred a loss of Rs million in the year ended March 31, 2008 primarily as a result of the sale of an investment made by PFS. Provisions for diminution in value of investments Our provision for diminution in value of investments increased from Rs million in the year ended March 31, 2007 to Rs million (US$0.54 million) in the year ended March 31, 2008, as a result of a change in the composition of our investment portfolio. Profit before tax. Our PBT increased by 26.2% from Rs million in the year ended March 31, 2007 to Rs million (US$11.87 million) in the year ended March 31, Our PBT as a percentage of total income for the years ended March 31, 2007 and 2008 was 1.2% and 1.5%, respectively. Provision for taxation. Our provision for taxation decreased by 6.8% from Rs million in the year ended March 31, 2007 to Rs million (US$2.02 million) in the year ended March 31, Our current tax decreased from Rs million paid in the year ended March 31, 2007 to Rs million (US$1.23 million) paid in the year ended March 31, 2008 as a result of depreciation benefit available to us with respect to our wind energy power plant which was commissioned in the year ended March 31, The current tax was partially offset by income from deferred tax in the amount of Rs million in the year ended March 31, 2007 and we incurred deferred tax expenditure of Rs million (US$0.75 million) in the year ended March 31, We incurred fringe benefit tax in the amounts of Rs million and Rs million (US$0.04 million) for the years ended March 31, 2007 and 2008, respectively. Our effective tax rates (inclusive of deferred tax and fringe benefit tax, and net of any provision written back) for the years ended March 31, 2007 and 2008 were 23.0% and 17.0%, respectively. Profit after tax. Our PAT increased by 36.0% from Rs million in the year ended March 31, 2007 to Rs million (US$9.85 million) in the year ended March 31, Net profit. As a result of the factors described above, our net profit increased by 37.6% from Rs million in the year ended March 31, 2007 to Rs million (US$9.94 million) in the year ended March 31, Our net profit as a percentage of total income for the years ended March 31, 2007 and 2008 was 0.9% and 1.2%, respectively. Year ended March 31, 2007 compared to year ended March 31, 2006 Income Sales of electricity and coal (imported). Our sales of electricity increased by 21.5% from Rs. 30, million in the year ended March 31, 2006 to Rs. 36, million in the year ended March 31, 2007, primarily as a result of an increase in tariffs on short term trades, which was partially offset by a decrease in short term trade volumes. Our on-spot sales of coal, which we began to engage in on a trial basis in the year ended March 31, 2006, decreased by 24.7% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007 due to the winding down of our trial activity. Rebates on the purchase of power. Our total rebates on the purchase of power increased by 19.8% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007, primarily due to an increase in electricity tariffs, which correspondingly increased the amount of the rebates received by us when we made timely payment. Surcharges on the sale of power. Our surcharges received on the sale of power decreased by 90.4% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, Profits on the sale of investments (net). Our profits on the sale of investments increased by 49.2% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007, primarily as a result of liquidation on maturity of certain of our investments in fixed income mutual funds and sales of our investments in growth option mutual funds. Excess provisions written back. Our excess provisions written back increased by 36.7% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, Other income. Our other income increased by 72.4% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007, primarily as a result of an increase in dividend income from dividend option mutual funds as a result of increased dividend yields, partially offset in part by decreases in investments in such funds, and an increase in fees received from our consultancy business. Expenditure Purchase of electricity and coal (imported). Our purchase of electricity increased by 22.6% from Rs. 29, million in the year ended March 31, 2006 to Rs. 36, million in the year ended March 31, 2007, primarily as a result of an increase in tariffs on short term power purchases, which was partially offset by a decrease in short term trade volumes. Our purchase of coal decreased by 23.7% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007 as a result of the winding down of our trial activity of purchasing and selling imported coal. 53

63 Rebates on the sale of power. Our total rebates on the sale of power increased by 17.2% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007, primarily as a result of the increase in tariff which resulted in an increase in the amount of rebates paid by us when we receive timely payments. Handling and scheduling charges. The handling and scheduling charges incurred by us on the purchase of power decreased by 85.0% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007, reflecting the change in the manner we deal with these charges after January See Description of Income and Expenditure Items Expenditure Handling and scheduling charges. Employee costs. Our employee costs increased by 0.9% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, Other expenses. Our other expenses increased by 25.6% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, 2007, primarily as a result of additional business activity leading to an increase in legal expenses, travel and conveyance expenses and bank charges. Profit before tax. Our PBT decreased by 19.9% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, Our PBT as a percentage of total income for the year ended March 31, 2006 and 2007 was 1.8% and 1.2%, respectively. Provision for taxation. Our provision for taxation decreased by 36.0% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, This resulted primarily from a 35.6% decrease in our current tax from Rs million paid in the year ended March 31, 2006 to Rs million paid in the year ended March 31, 2007 as a result of a decrease in our PBT. Taxable income decreased more significantly than PBT, owing to our increase in non-taxable dividend income. The current tax was partially offset by income from deferred tax in the amount of Rs million and Rs million in the years ended March 31, 2006 and 2007, respectively. Fringe benefit tax was Rs million and Rs million for the years ended March 31, 2006 and 2007, respectively. Our effective tax rates (inclusive of deferred tax and fringe benefit tax, and net of any provision written back) for the years ended March 31, 2006 and 2007 were 28.8% and 23.2%, respectively. Profit after tax. Our PAT decreased by 13.3% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, Net profit. As a result of the factors described above, our net profit decreased by 13.6% from Rs million in the year ended March 31, 2006 to Rs million in the year ended March 31, Our net profit as a percentage of total income for the years March 31, 2006 and 2007 was 1.3% and 0.9%, respectively. Liquidity and Capital Resources Liquidity and Capital Adequacy Historically, our primary liquidity requirements have been for meeting any temporary mismatch between our receivables and payables, for which we have relied on cash flows from operations. Generally, it is important to our business to have sufficient liquidity to demonstrate our creditworthiness and net worth. Our capital adequacy is measured by the amount of our cash and cash equivalents. Our Board determines the appropriate level of our capital adequacy for each of our short term and medium and long term trades from time to time. Having sufficient capital is important to (i) maintain our net worth, as required by the terms of our license and (ii) meet the capital requirements in tenders in which we want to bid. In the tender process, demonstrating creditworthiness is an important aspect of pre-qualification. We generally set our capital adequacy at a higher level than is required strictly for our day to day operations, in order to meet the financial requirements to be eligible to bid on larger tenders. Cash Flows The table below summarizes our cash flows in the nine months ended December 31, 2008 and the years ended March 31, 2008, 2007 and 2006: 2006 (Rs. in million) Year ended March 31, 2007 (Rs. in million) 2008 (Rs. in million) 2008 (US$ in million) Nine months ended December 31, 2008 (Rs. in million) (US$ in million) Net cash generated from / (261.64) (5.39) (used in) operating activities Net cash generated from / (21.43) (11,733.93) (241.54) 4, (used in) investing activities Net cash generated from / (135.38) (171.04) 12, (used in) financing activities Net increase /(decrease) in (71.22) ,

64 2006 (Rs. in million) Year ended March 31, 2007 (Rs. in million) 2008 (Rs. in million) 2008 (US$ in million) Nine months ended December 31, 2008 (Rs. in million) (US$ in million) cash and cash equivalents Cash and cash equivalents - opening balance Cash and cash equivalents - closing balance , , , Operating Activities Net cash used in operating activities for the nine months ended December 31, 2008 was Rs million (US$5.39 million), consisting of our net profit before tax of Rs. 1, million (US$20.76 million) increased by, among other things, increases in current liabilities of Rs. 1, million (US$36.40 million) relating to the purchase of power and reduced by, among other things, increases in amounts due from sundry debtors of Rs. 2, million (US$44.84 million), attributable to our increased short and medium and long term trade volumes, other income of Rs million (US$15.54 million), which is a non-operating activity, and payment of direct taxes of Rs million (US$2.21 million). Net cash generated from operating activities for the year ended March 31, 2008 was Rs million (US$2.85 million), consisting of our net profit before tax of Rs million (US$11.87 million) increased by, among other things, increases in current liabilities of Rs million (US$5.21 million) relating to the purchase of power, and reduced by, among other things, increases in amounts due from sundry debtors of Rs million (US$3.47 million), attributable to our increased medium and long term trade volumes, other income of Rs million (US$6.71 million), which is a non-operating activity, and payment of direct taxes of Rs million (US$2.42 million). Net cash generated from operating activities for the year ended March 31, 2007 was Rs million, consisting of our net profit before tax of Rs million increased by, among other things, increases in current liabilities of Rs million relating to sundry creditors, loans and advances of Rs million, and reduced by, among other things, increases in sundry debtors of Rs million, direct taxes of Rs million, increase of other income of Rs million and profits on the sale of investments of Rs million. Net cash generated from operating activities for the year ended March 31, 2006 was Rs million, consisting of our net profit before tax of Rs million increased by, among other things, increases in current liabilities of Rs million relating to the purchase of power, and reduced by, among other things, increases in sundry debtors of Rs million, loans and advances of Rs million and direct taxes of Rs million. Investing Activities Net cash generated from investing activities for the nine months ended December 31, 2008 was Rs. 4, million (US$96.50 million) primarily related to the sale of investments of Rs. 3, million (US$79.69 million) and other income of Rs million (US$15.54 million). We have limited our investment portfolio primarily to fixed income mutual funds and term deposits. Net cash used in investing activities for the year ended March 31, 2008 was Rs. 11, million (US$ million) primarily related to the purchase of investments of Rs. 11, million (US$ million) and purchase of fixed assets of Rs million (US$7.95 million) and partially offset by other income of Rs million (US$6.71 million). Net cash used in investing activities for the year ended March 31, 2007 was Rs million, primarily related to the purchase of investments of Rs million, and partially offset by profit on the sale of investments in mutual funds of Rs million and other income from investments and interest income of Rs million. Net cash generated from investing activities for the year ended March 31, 2006 was Rs million, primarily related to the sale of investments in mutual funds of Rs million, profit on the sale of investments in mutual funds of Rs million and other income from dividends from investments of Rs million, and partially offset by interest payments of Rs million and the purchase of fixed assets consisting of office equipment and computers of Rs million. Financing Activities Net cash generated from financing activities in the nine months ended December 31, 2008 was Rs million consisting of Rs million (US$20.20 million) from the proceeds of issue of additional equity shares of PFS to other shareholders partially offset by dividend payments (including dividend tax) of Rs million (US$5.48 million). 55

65 Net cash generated from financing activities in the year ended March 31, 2008 was Rs. 12, million consisting of Rs. 12, million (US$ million) from the proceeds of issue of additional shares pursuant to the qualified institutional placement undertaken by us in January 2008 and issue of additional shares of PFS to other shareholders, partially offset by dividend paid (including dividend tax) of Rs million (US$3.61 million). Net cash used in financing activities in the year ended March 31, 2007 was Rs million, comprising Rs million of dividend payments. Net cash used in financing activities in the year ended March 31, 2006 was Rs million, comprising Rs million of dividend payments and offset by Rs million of public issue expenses. Historical Capital Expenditures For the nine months ended December 31, 2008 and the years ended March 31, 2008 and 2007, we spent Rs million (US$0.15 million), Rs million (US$7.79 million), and Rs million, respectively, on capital expenditures. Our capital expenditures for the nine months ended December 31, 2008 were principally on purchases of vehicles, computers, office equipment and furniture as well as plant and machinery for the wind energy power plant, for the year ended March 31, 2008 were principally on purchases of plant and machinery for our wind energy power plant in Maharashtra and vehicles, office equipment and furniture and for the year ended March 31, 2007 were principally on purchases of vehicles, computers, office equipment and furniture. Indebtedness As of December 31, 2008, we have no outstanding indebtedness. The State Bank of Hyderabad has sanctioned a non-fund based working capital credit facility of Rs. 1, million, the State Bank of Travancore has sanctioned a non-fund based credit facility of Rs. 1, million, the Indian Overseas Bank has sanctioned a non-fund based working capital facility of Rs. 1, million, the Union Bank of India has sanctioned a non-fund based working capital facility of Rs. 1, million and the Punjab and Sind Bank is considering renewing the non-fund based working capital facility of Rs. 1, million. In addition, our wholly owned subsidiary, PFS has entered into a term loan agreement, dated March 23, 2009, with the Punjab National Bank for a principal amount of Rs. 1, million at an interest of 11.5% per annum. Since then we have incurred indebtedness. See Recent Developments. Contingent Liabilities and Contractual Obligations Contingent liabilities Our contingent liabilities as of December 31, 2008 totaled Rs million (US$17.62 million). See Recent Developments. Contractual obligations Our short term PPAs may contain either take-or-pay provisions or minimum purchase requirements. In the former case, the agreements require us to either purchase the specified quantity of power, or pay the supplier as if we had taken the entire amount. In the latter case, we are obligated to purchase at least a minimum amount of power calculated as a percentage of the contract s specified quantity, multiplied by a percentage reflecting the availability of Open access. Because we generally enter into short term PPAs and PSAs on a back-to-back basis, as a practical matter our contractual exposure under these provisions is limited to situations where a buyer does not fulfill its payment obligations to us and we are unable to collect amounts owed to us. Short term PPAs and PSAs are limited to a maximum duration of one year. Our medium and long terms PPAs do not contain provisions similar to short term PPAs, but due to the much longer contractual durations, our exposure to the credit risk of our buyers could be substantial. To manage this risk, we try to ensure that our PPAs may be terminated by us subject to a few months penalty. The following table summarises our contractual obligations and commercial commitments as of March 31, 2009 (not including any obligations under PPAs and PSAs) and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future periods: Particulars Investment obligations of the Company pursuant to definitive agreements... As of March 31, 2009 (Rs. in millions) Less than 2 years 6, , Investment obligations of PFS pursuant to definitive agreements 1, , Market Risks Market risk is the risk of loss related to adverse changes in market prices, including interest rate risk, credit risk and inflation risk. 56

66 Interest rate and dividend risk Part of our other income includes interest income from our deposit accounts and dividends received. Because interest rates fluctuate, our interest income will vary from time to time. Similarly, there is no assurance that the dividend options in which we invest will continue to pay dividends at the same rates. Credit risk We are exposed to significant counterparty credit risk. Counterparty credit risk relates to our buyer s willingness or ability to make timely payments for power that we have sold and delivered. To manage this risk, our billing cycle is on a weekly basis, whereas our payment cycle is generally ten days. In our experience, it is a good strategy to seek smaller payments from our customers more frequently, rather than larger payments on a monthly basis. We also require bank guarantees or letters of credit to cover two billing cycles for short term trades. Under our medium term and long term trades contracts, our customers provide an irrevocable letter of credit for three months which is repeatedly renewed before the expiry of the earlier letter of credit for the duration of the contracts. To date, we have not experienced any significant counterparty payment defaults, although sometimes there are disputes over the entitlement of a counterparty to a rebate. Inflation risk The viability of a trading transaction depends on the pricing level. Pricing of power in a trading transaction depends on several factors including the price at which a utility is willing to sell power, the number of transmission corridors involved and the price at which the buyer is willing to purchase the power. While costs such as fuel charges and operating and maintenance costs for power plants are affected by inflation, tariffs under short term trades track marginal costs related to producing power, rather than full costs, and as a result, short term trades do not have any material inflation risk. 57

67 Introduction INDUSTRY OVERVIEW The GoI s stated mission is to provide Power for All by Its objectives for power sector development include providing sufficient, reliable and inexpensive power. The per capita consumption of energy in India is one of the lowest in the world. For , per capita consumption of electricity was 612 Units per year, as compared with China with 1,802 Units per year and a world average of 2,596 Units per year. (Source: Ministry of Power, Key World Energy Statistics 2007) The table set forth below illustrates per capita consumption for 2007: (kwh/year) 10,000 7,500 5,000 2,500 8,365 2,980 1,802 1, ,596 0 OECD Middle Countries East China Latin America Asia India Africa World Average Source: CEA, Ministry of Power, Provisional Figures 2007 Continued economic development, lifestyle changes and a growing population are increasing the demand for energy in India. The economy has posted a compounded growth rate of 8.5% per annum in the last five years. (Source: Planning Commission of India website) The Ministry of Power estimates that the electricity sector will have to increase supply by more than 7% annually. As per the integrated energy policy of the Planning Commission of India, in order to deliver a sustained growth rate of 8% through , India needs to increase its electricity generation capacity by at least five to six times based on levels. The current power supply position in India is characterized by persistent shortages, unreliability and high prices for individual consumers. In , the country experienced power shortages due to an energy deficit of 9.9%, with a peak deficit of 16.6%. There has been significant improvement in the growth in actual generation over the last few years. As compared to an annual growth rate of about 3.1% at the end of the 9 th Five Year Plan and initial years of the 10 th Five Year Plan, the growth in installed capacity during the 9 th and 10 th Five Year Plan was 22% and 26%, respectively. (Source: White Paper on Strategy for 11 th Plan, prepared by the CEA and the Confederation of Indian Industry, August 2007) The table set forth below illustrates India s energy shortages since 2002: (billion units) 1, % 1, % 7.1% % % % % % 8.0% 6.0% % % Energy Requirement (BUs) Energy Availability (BUs) Shortage (%) 0.0% Source: CEA, Ministry of Power, Provisional Figures 2007 Electricity In India, the central and state legislatures have concurrent jurisdiction over the regulation of electricity. In most states in India, the sector consists of SEBs, most of which are now unbundled into SPUs that continue to be state owned. As of March 31, 2009, the state sector accounted for 51.3% of the total installed generation capacity, the central sector accounted for 33%, and the private sector accounted for 15%. In a few states, licenses for power distribution are being granted to private companies. Distribution is privatized in the State of Orissa and some cities such as Delhi, Kolkata, parts of Mumbai, and some parts in the State of Gujarat. 58

68 (Source: CEA, Power Scenario at a Glance, April 2009) Key Issues Facing the Electricity Sector High level of network and financial losses The power utilities in India suffer from a high level of transmission and distribution losses (estimated at 26.9% for ) largely due to network losses including theft and technical problems, and financial losses from non collection. (Source: CEA) This has led to financial degradation and worsening performance of the public power utilities and has also resulted in inadequate financial resources for capacity augmentation. Inadequate generation and transmission capacity Inadequate sources of investment has led to a generation capacity shortfall, which has resulted in less than optimal quality of supply. Likewise, inadequate transmission capacity in the country has led to regional surpluses being inefficiently utilized to meet deficits elsewhere. There has been some improvement in these parameters in recent years owing to reform and regulatory initiatives. However, availability of fuel for power generation is a constraint. Coal and gas shortages may prevent plants from operating at full capacity. Generation Capacity The Indian power sector is the third largest in Asia after China and Japan with a total installed capacity of 147,966 MW as of March 31, Electricity generation capacity has experienced steady growth in the past few years with electricity availability growing from 624,495 MU during to 666,007 MU during , an overall growth rate of 6.65 %. The electricity target for is 794,561 MU. (Source: 17th EPS Report) The table below illustrates the installed capacity by fuel type across the state, private and central sectors up to March 31, 2009: Sector Hydro Installed capacity as of March 31, 2009 Thermal Nuclear Renewable Energy Sources Coal Gas Diesel Total (Figures in MW) State 27, , , , , ,975.7 Private 1, , , , , ,878.7 Central 8, , , , , ,111.0 Total 36, , , , , , , ,965.4 Source: CEA, Power Scenario at a Glance April 2009 Despite significant achievement in the electricity sector, India continues to face a considerable gap between demand and supply. The electricity sector is divided into five power regions, which are North, North East, West, East and South. The North East region faced the highest peak deficit of 25.4% and the Western region faced the highest energy deficit of 16.0% among all the regions for the period The table below illustrates the actual available power supply in each region. Total Actual Power Supply (Figures in net MU) Region Requirement (MU) March 2009 April 2008 to March 2009 Availability Surplus/ Deficit (-) (MU) (MU) (%) Requirement (MU) Availability Surplus/ Deficit(-) (MU) (MU) (%) Northern 16,394 14,978-1, , ,928-24, Western 22,681 19,341-3, , ,724-40, Southern 19,505 17,885-1, , ,865-15, Eastern 7,585 7, ,127 78,370-3, North- Eastern ,407 8,134-1,

69 All India 66,880 59,980-6, , ,021-85, Source: CEA, Power Scenario at a Glance, April 2009 Electricity is generated from thermal power, hydro-electricity, nuclear power and other renewable sources. As of March 31, 2009, thermal generation from fossil fuels such as coal, gas and oil is the predominant source of electricity generation in India, with an installed capacity of 93,725 MW, followed by hydro-electricity with an installed capacity of 36,877 MW, and nuclear energy with 4,120 MW of installed capacity. As of March 31, 2009, other renewable energy sources such as solar, wind and biomass contribute 13,242 MW to capacity. There was slow progress in adding new capacity during the 8 th, 9 th and 10 th Five Year Plans. The actual capacity addition during this period was about 50% of the target. The 10 th Five Year Plan ( ) capacity addition target was 41,110 MW, whereas the actual capacity addition was 21,180 MW. (Source: CEA: White Paper on Strategy for the 11 th Plan) 11 th and 12 th Five Year Plan Projections According to the Planning Commission s IEP Report, a GDP growth rate of 8% to 9% has been projected during the 11 th Five Year Plan ( ). The 11 th Five Year Plan generation capacity addition targets are set forth in the table below. 11 th Five Year Plan capacity addition target Sector Hydro Thermal (coal, lignite, gas) Nuclear Figures in MW Total Central 8,654 24,840 3,380 36,874 State 3,482 23,301-26,783 Private 3,491 11,552-15,043 All India 15,627 59,693 3,380 78,700 (Source: CEA) During the 12 th Five Year Plan, the generation capacity addition target is 82,200 MW. Assuming a GDP growth rate of 9% per annum and an elasticity of 0.8 due to energy efficient technologies and other energy conservation and demand side management measures, electricity demand is likely to grow at the rate of 7.2% per annum. Keeping this in view, the energy generation would need to increase to a level of 1,470,000 MU by from a level of 1,038,000 MU in to service the increased demand. (Source: CEA) Projected Installed Capacity As set forth below, the GoI has projected the required support level of installed capacity and electricity generation by as 962 GW and 1,207 GW, based on growth rates of 8% and 9%, respectively. 60

70 Installed Capacity Projection GW Year Source: Planning Commission IEP Report August 2006 Cross Border Exchange of Power 8% GDP Growth 9% GDP Growth There is a regular exchange of electric power between India and its neighboring countries for the supply of surplus power and meeting power requirements in the border areas. Development of hydro-electric projects along the common rivers of India and Nepal and Bhutan is under way. In Bhutan, the Chukha, Kurichhu and Tala hydro-electric projects were implemented with Indian financial and technical assistance. Some estimates have put Bhutan s potential hydro-power resources as high as 30,000 MW. An umbrella agreement between the GoI and government of Bhutan executed in July 2006 calls for long term cooperation for developing hydro-electric projects and associated transmission links, including importing 5,000 MW into India by (Source: Ministry of Power, Country Presentation Bhutan, October 2006) Nepal has economically viable hydro potential of approximately 43,000 MW. (Source: Ministry of Power, BIMSTEC Conference October 2005) The GoI has provided financial and technical assistance for the development of four hydro-electric projects in Nepal, and potential new projects are being considered. Joint technical expert groups have been formed to work on these projects, including providing guidance for carrying out investigations and preparation of detailed project reports. Nepal s current installed generation capacity is approximately 600 MW, which is only 1.5% of its total hydro-electric potential. Nepal s undeveloped hydroelectric potential presents it with a significant commercial opportunity to develop its capacity for export to India. Currently, the power exchange takes place between the Nepal Electricity Authority and utilities on the Indian side, namely, Bihar State Electricity Board, Uttar Pradesh Power Corporation Limited and Uttarakhand Power Corporation Limited. India also supplies 10 million Units of free power from Tanakpur hydro-electric project to Nepal as per a 1991 treaty. A number of projects, such as the 750 MW SMEC West Seti, 402 MW Arun III, 309 MW Lower Arun, 300 MW Upper Karnali and 600 MW Budhi Gandaki among others, are being developed to cater to domestic demand as well as for export. India and Nepal are also collaborating on strengthening the transmission inter-connection between the two countries to meet the future exchange of power between the two countries. India, due to its large economy and growing power demand, is a major potential export market for these neighboring countries. Transmission Formation of the National Grid India s plan for improving transmission involves creating a national grid to facilitate transmission of electricity among the five regions. This task has been assigned to POWERGRID, which is India s central transmission utility that manages the national grid. The transmission and distribution system is a three tier structure consisting of regional grids, state grids and distribution networks. The five regional grids, structured on a geographical contiguity basis, facilitate transfer of power from a power surplus state to a power deficit state. The regional grids also facilitate the optimal scheduling of maintenance outages and better co-ordination between the power plants. The regional grids are to be gradually integrated to form a national grid, whereby surplus power from a region could be transferred to another region facing power deficits, thereby facilitating a more optimal utilization of national generating capacity. To augment the transmission of power, the Ministry of Power has targeted an expansion of the power transmission network to 293,372 circuit kms during the 11 th Plan from 198,089 circuit kms in the 10 th Plan. The Ministry of Power has also targeted substation capacity to increase to 428,000 MVA by the end of the 11 th Plan, from 251,439 MVA as at the end of 10 th Plan. 61

71 Most inter-regional and inter-state transmission links are owned and operated by POWERGRID although some are jointly owned with SEBs. POWERGRID is the central transmission utility of India and possesses one of the largest transmission networks in the world. POWERGRID has a pan India network presence of 71,500 circuit kms of transmission network, 120 extra high voltage alternation current and high voltage direct current substations, and a total transformation capacity of 79,500 MVA. About 45% of the total generating capacity in India is transmitted through POWERGRID s system. (Source: and POWERGRID is working towards the establishment of an integrated national power grid in order to strengthen the regional grids and to support the generation capacity addition program of approximately 80,000 MW during the 11 th Five Year Plan period. The existing inter-regional power transfer capacity of approximately 17,000 MW in FY is expected to be enhanced to approximately 37,000 MW by 2012 through the creation of Transmission Super Highways. Based on expected generation capacity addition in the 11 th Five Year Plan, an investment of approximately Rs. 750 billion is in the central sector and approximately Rs. 650 billion is in the state sector. (Source: State grids and distribution networks are primarily owned and operated by the respective SEBs or state governments (through state electricity departments). State distribution networks are managed at the state level and continue to be affected by high aggregate technical and commercial ( AT&C ) losses estimated to be approximately 32.1% (provisionally) for FY2007, which implies that 32.1% of power entering the system was lost during distribution. (Source: CEA) A direct consequence of the high AT&C losses is the sub par financial condition of many of the SEBs, thereby constraining the SEBs from making optimal investments in generation and in upgrading the transmission and distribution ( T&D ) network. Power Reform and Restructuring To attract private investment, power sector reforms were initiated in 1991, to encourage competition in power generation and transmission and distribution under an independent and transparent regulatory regime. As a result, CERC, at the national level, and SERCs, at the state level, were established. The GoI s intent is to provide a conducive policy environment to encourage free and fair competition in each area of the power industry and to attract capital from all sources, public and private, domestic and foreign, which it has deemed important for India to meet its energy needs. These power reforms include, among other things, deregulation of the price of commercial energy resources, an increase of competition through institutional, legislative and regulatory reforms and reduced subsidies to state owned producers. Legal, policy and regulatory framework Regulators Under the Indian constitution, electricity is in the concurrent list, which means that both the central and state legislatures have jurisdiction and can adopt regulations. Under the Electricity Act 2003, the intra-state power sector (transmission, distribution, and trading) is regulated by SERCs and the inter-state power sector is regulated by CERC. The regulatory system consists of: CERC regulating all matters where more than one state is involved including fixing the tariffs of generating plants, inter-state transmission of electricity, adjudicating disputes for distribution companies and transmission licensees that fall within its jurisdiction and to specify a National Grid code; SERC regulating generation and distribution of electricity within a state; and an appellate tribunal (being the court of appeal against the orders of the appropriate regulatory commission). In addition, the CEA is responsible for power planning for the country, advising the GoI and regulatory commissions, and specifying technical specifications for establishing new installations and grid safety. The legislative framework is governed by the Electricity Act. This along with subsequent policies, including the NTP and the NEP, broadly defines the policy landscape. Electricity Act, 2003 Given the GoI s focus on attracting more private investment to the power sector, the Electricity Act was enacted on June 10, 2003, which consolidated the laws relating to generation, transmission, distribution, trading and use of electricity and replaced the earlier electricity acts. The intent of the Electricity Act is to provide for the reforms agenda to proceed on all fronts. The Electricity Act envisaged altering the market structure to be conducive to greater competition and availability of choice to consumers. The Electricity Act attempts to move the market to a more efficient and demand-supply determined outcome by enabling competition under a strong and predictable regulatory regime. In connection with the trading of power, trading was recognized as a distinct activity for the first time, and a restriction was imposed on transmission companies being allowed to engage in trading. Some notable features of the Electricity Act are as follows: The GoI is to prepare a NEP in consultation with state governments. Provision for license free generation and distribution in rural areas. 62

72 De-licensing of generation and permitting generation by Captives. Hydro-electric projects would, however, need clearance from the CEA. Transmission utilities established at the central and state levels. Provision for private licensees in transmission and entry into distribution through an independent network. Open access in transmission. Open access in distribution to be introduced in phases, with surcharges for current level of cross subsidy to be gradually phased out along with cross subsidies and obligations to supply. SERCs to frame regulations within one year regarding phasing of Open access. From January 2004 Open access is required to be granted on the distribution network (subject to capacity constraints) to consumers with loads above 1 MW. Distribution licensees would be free to undertake generation and generating companies would be free to take up distribution businesses. SERCs must be established by each state government. Trading as an activity is recognized as distinct from transmission and distribution with the safeguard of CERC and SERCs being authorized to restrict trading margins, if necessary. Provision for reorganization or continuance of SEBs. Metering of all electricity supplied made mandatory. An appellate tribunal is established to hear appeals against decisions of CERC and SERCs. The Electricity (Amendment) Act was enacted on June 15, The amendments broadly relate to: the term elimination has been omitted in relation to cross subsidies; Captive units will not require a license to supply power to any user; strict action against unauthorized usage of power; and power theft has been recognized as a criminal offense, punishable under Section 173 of the Code of Criminal Procedure, Earlier, the Electricity Act stated that the cross subsidy surcharge and cross subsidies would be progressively reduced and eliminated. In the tariff policy issued in January 2006, the Government suggested that by the end of , tariffs should be +/- 20% of the cost of supply, in conjunction to the Electricity Act, which envisaged a complete elimination of cross subsidies. For this, the policy suggested that SERCs prepare a road map to achieve this target. However, the amendment suggests that cross subsidies would be reduced gradually, and not completely eliminated, in accordance with the earlier provision of elimination of cross subsidy. Therefore, the amendment is likely to make states more lenient in setting targets for cross subsidy reduction. Consequently, this may act as a setback to the reformation process, since elimination of cross subsidies is an important prerequisite for tariff rationalization and improving the financial condition and results of state utilities. The amendments related to penalties for unauthorized usage of power and recognition of power theft as an offences punishable under Section 173 of the Code of Criminal Procedure, 1973, are to ensure strict action against power theft. These amendments simplify the process of identifying those consumers stealing power, as well as increase the assessment amount, which is intended to help curb losses in the system. This is expected to further strengthen the drive by respective state utilities to eliminate power theft and improve operational efficiencies. According to the CEA, India faced T&D losses of 26.9% in , which implies that approximately one third of the power is lost due to theft, pilferage and technical inefficiencies. A large part of the power lost is through theft and unaccounted agricultural consumption. Therefore, focused efforts towards eliminating theft of power can help reduce distribution losses substantially. Policy Initiatives From time to time, the Ministry of Power has made key policy announcements in an effort to stimulate the sector and attract private sector participation. Some of the key policy initiatives are as follows: National Electricity Policy, 2005 In 2005, the GoI announced the National Electricity Policy for the power sector, as per the mandate of Section 3 of the Electricity Act. The NEP, while establishing guidelines for the accelerated development of the electricity sector, aims at providing reliable supply of electricity to all by 2012, and at the same time promises to protect the interest of all consumers and other stake holders. Some key features of the NEP are as follows: Creation of adequate generation capacity with a spinning reserve (additional capacity utilized only under certain circumstances and generally deriving revenues in excess of ordinary tariffs) of at least 5% by 2012, with availability of installed capacity at 85%. To promote power market development, a part of new generating capacity could be sold outside of long term purchase agreements. Full development of hydro-electricity potential. Choice of fuel for thermal generation to be based on economics and supply of electricity. Development of the National Grid. Availability Based Tariff ( ABT ) to be extended to the state level for better grid discipline through economic signaling. 63

73 Special emphasis on time reduction of transmission and distribution losses. Reliability and quality of power supply to be monitored by SERCs. Exploitation of non-conventional energy sources such as small hydro-electricity, solar, biomass and wind for additional power generation capacity. Adoption of a technology system for ensuring correct billing to consumers. Efficient implementation of stringent measures against theft of electricity. Transmission capacity to have redundancy level and margins as per international standards. Adequate transitional financial support for reforming power utilities. Encouragement for private sector participation in distribution. National Tariff Policy On January 6, 2006, the GoI announced the NTP as directed by Section 3 of the Electricity Act, and in continuation of the NEP. The NTP stipulates that all future power requirements should be procured competitively by distribution licensees except in cases of expansion of existing projects or where there is a state controlled or state owned developer involved, in which case regulators will need to resort to tariffs determined by reference to standards of CERC, provided that expansion of generating capacity by private developers for this purpose will be restricted to a one-time addition of not more than 50% of the existing capacity. Under the NTP tariffs for all new generation and transmission projects, including public sector projects, will be decided on the basis of competitive bidding after five years. Competition Part of the GoI s objective in implementing the policies described above was to encourage competition in the power sector. The policies directly affect competition due to the following: All future procurement of power has to be contracted through competitive bidding by distribution licensees, even in the case of the public sector, where competitive bidding should be utilized by Regulated pricing applies when competitive bidding has not been adopted. Open access on the common carrier principle is allowed on transmission networks, and since January 2009 is mandated by law to be phased in on distribution networks. This enables competition in procurement of bulk power as well as in retail supply to large consumers who will soon be able to contract supply on their own. The policy allows 100% foreign direct investment in power generation (except nuclear), transmission, distribution and trading. There is no limit on the project cost and quantum. Also as a result of the Electricity Act and policies, some state utilities are being unbundled, or in some cases privatized to achieve commercialization and to efficiently handle different aspects of generation, transmission and distribution. Captives and IPPs are being encouraged to trade their surplus power and source competitive power respectively. Currently, Captives account for approximately 15% (approximately 22,100 MW) of total combined capacity. The GoI plans to bring 5,000 MW of capacity into the mainstream in the next few years for which Open access and Group Captive status have been permitted under recent policy announcements. The Government merchant power plant policy calls for an addition of 15 GW of capacity by Fuel Options Coal The majority of the energy requirement in India is met by coal, largely mined in the East and Central regions of the country. India possesses approximately 8.6% of the total world recoverable coal reserves and contributes approximately 7.5% to the total world coal production. It also ranks third on a tonnage basis after China and the United States. Coal is the key contributor to India s energy scenario with 55% of the current total commercial energy needs being met by coal. (Source: Ministry of Coal) Despite efforts to diversify the fuel mix, coal will likely continue to play the major role in sustaining the growth momentum of India. Based on estimates, consumption of coal is projected to rise by nearly 40% over the next five years and almost to double by The coal sector in the country has come under pressure over its inability to meet demand (both planned and unplanned) of the user industries. By the GoI s own estimates, coal production will lag behind demand by approximately 100 million MT as of 2012 and by 250 million MT by Deregulation and the opening of the sector to private participation is aimed at encouraging state owned coal utilities to improve performance and attract investments to upgrade and open new mines. The GoI also decided to offer access to state owned mining blocks to investors, which is likely to encourage private investment. 64

74 Natural gas Natural gas is relatively a minor fuel in India s primary energy consumption. However, it is expected to become a preferred fuel. Natural gas is estimated to rise to 20% of Indian fuel sources by 2025 due to its ease of use, and less polluting nature. The power sector consumes 46% of the total available natural gas and is anticipated to contribute to more than 50% of natural gas demand by Need for Large Investments The NEP anticipates an increase in per capita consumption from 606 Units at present to 1,000 Units by In order to meet both energy and peak demand by 2012, there is a need to create an adequate reserve capacity margin. In addition to enhancing the overall availability of installed capacity to 85%, a spinning reserve (additional capacity utilized only under certain circumstances and generally deriving revenues in excess of ordinary tariffs) of at least 5% at the national level should be created to ensure grid security as well as quality and reliability of power supply. It is estimated that a capacity addition of over 100,000 MW is required by 2012 to bridge the supply deficit. (Source: Ministry of Power: Investment Opportunities in Power Sector) The total investment required in capacity creation, along with necessary investments in transmission and distribution segments, is estimated at US$ 200 billion, out of which US$ 100 billion is required for generation projects alone. The GoI recognized in its 1999 Mega Power Policy the importance of private sector participation and investment in the energy sector. As per the report of the Committee on Financing the Power Sector during 10 th and 11 th Five Year Plans, the funding requirement through 2012 (sector wise) is as follows: Power Trading (US$ in billion) Central 77.6 State 82.5 Private 27.4 Total The Evolution of the Power Market The development of the power market is gradually taking place in India. This has raised commercialization among private and public power utilities and opportunities for private investors to consider the power sector with renewed interest. The Indian electricity market is at a nascent stage of development. Recognition as a Separate Licensed Activity The Electricity Act recognized trading as a separate licensed activity. Trading can be inter-state or intra-state and CERC and SERCs establish the eligibility criteria for a trader. CERC issued its order and regulations regarding the grant of license for interstate trading in January The trading regulations provide for procedures for granting a license and specify the technical requirements, capital adequacy requirements and creditworthiness for being an electricity trader. Applicants must have power system expertise, a minimum asset base and pay an annual license fee to CERC. Private or state entities can apply for a trading license, and the state governments and the distribution licensees can undertake trading without obtaining a separate license. A transmission utility, however, cannot undertake trading and a trading licensee cannot undertake transmission. CERC has also issued orders for Open access in transmission which is likely to promote trading and facilitate better utilization of generation capacity. Open access will also facilitate transmission from Captives if the sale rate of their power is attractive. It is anticipated that in a country that faces huge peak load shortages, trading 15% of total generation as proposed under the NEP should bring improved utilization of resources and efficiency gains, in addition to adding competitive pressure on both pricing and quality of service. In the coming years, the additional capacity from new generation projects could be sold using the services of traders. This may increase the depth of the power market and provide alternatives for both generators and licensees. Increasing Competition There has been interest from private entities to enter the power trading business in India. Licensed traders are not only engaged in opportunities for optimal dispatch of generation through identification of temporary surpluses and corresponding deficits, but also competing among themselves for the limited opportunities available in the transmission corridors available through Open access. Recently, power trading has commenced on the National Multi-Commodity Exchange ( MCX ) platform. MCX is a national multi-commodity exchange which facilitates futures and forward contracts in all goods designated by the GoI. It is increasingly recognized that the promotion of power trading in India would help reduce the imbalance of power in the surplus and the deficit regions. Trading of power would help in more efficient utilization of existing generation and transmission capacities as well as assisting in the assessment of investment requirements in generation capacities in deficit regions. 65

75 Trade Volumes Power trading volumes in India, though small, have been growing steadily over the years. According to CERC s website, in FY , volume of electricity traded by the trading licensees accounted for approximately 3.2% of the total energy generation in India. 66 (Figures in million of Units) Volume of Electricity Traded Volume of Trade % to total Volume of % to total (MUs) volume Trade (MUs) volume PTC India Limited 6, , NTPC Vidyut Vyapar Nigam Limited 2, , Adani Enterprises Limited 1, , Tata Power Trading Company (P) Limited 1, , Reliance Energy Trading (P) Limited Subhash Kabini Powor Corporation Limited Lanco Electric Utility Limited , JSW Power Trading Company Limited , Karam Chand Thapar & Bros Limited Vinergy International Private Limited Visa Power Limited Kalyani Power Development (P) Limited Patni Projects Private Limited Total 15, , Annual Growth in Volume of Trade 40% Volume of Electricity Traded (MUs) 15, ,000.0 Total Electricity Generation (MUs)* 624, ,000.0 % of Trading to Total Generation 2.4% 3.2% Source: CEA, Grid Management Division. The Generation for (Revised) Emerging Market Mechanism: Creation of IEX IEX is India s first nationwide automated and online electricity trading platform. IEX seeks to modernize electricity trading in India through a technology enabled platform. On June 9, 2008, IEX received CERC approval for commencing operations. IEX is a demutualised exchange that enables efficient price discovery and price risk management in the power trading market. IEX offers a broader choice to generators and distribution licensees for the sale and purchase of power. IEX also enables participants to precisely adjust their portfolio as a function of consumption or generation. (Source: Participants for Trading The Electricity Act excludes several entities from engaging in the trading activity, namely NLDC, RLDC, SLDC, CTU, STU and transmission licensees. The Electricity Act enumerates several entities which would be deemed holders of a trading license, and hence are not obliged to apply for a trading license even when undertaking a trading activity. First, if a government company or a company referred in the Electricity Act for this purpose undertakes trading in electricity, whether before or after the commencement of the Electricity Act, it is deemed to be a licensee. Second, the Electricity Act also states that a distribution licensee will not require a license to undertake trading in electricity. Third, the Electricity Act enables CERC, on the recommendation of the GoI, to direct by notification (subject to such conditions and restrictions, if any, and for such period as may be specified) that no trading license is required for any local authority, panchayat institution, users association, co-operative societies, non-governmental organizations, or franchisees. The Electricity Act mandates CTU to provide non-discriminatory Open access to its transmission system for use by any licensee or generating company (on payment of the transmission charges), and any consumer as and when such Open access is provided by the SERC (on payment of the transmission charges and a surcharge thereon), as may be specified by CERC. The Electricity Act enables SERCs to introduce Open access, or the non-discriminatory provision for the use of the distribution system with such lines by any licensee, consumer or generator, to the distribution system. A brief description of the Electricity Act s impact on participants in the downstream segments is as follows: Open access to facilities of transmission and distribution utilities allowed, with a definite time frame. Distribution licensees do not require a separate trading license and are allowed to give franchises for distribution, as well as enter into generation. Multiple licensees have been allowed in each distribution area.

76 Distribution and transmission licensees are allowed to use their assets for different businesses. Private sector participation would be permitted in transmission. Similarly, the Electricity Act s effect on participation in the upstream segment has included the following: Thermal generation de-licensed, which may encourage additional capacity addition. Captive generation and supply freely permitted. Generation from renewable sources is promoted. Trading Regulations CERC (Procedure, Terms and Conditions for grant of Trading License and other related matters) Regulations, 2009 The regulations, notified on February 16, 2009, are applicable to trading carried out bilaterally between a generating company, including a Captive, distribution licensee and electricity trader on the one hand and an electricity trader and distribution licensee on the other hand. There are various categories of license, from I to III, depending on the volume of electricity proposed to be traded in a given year. For example, a category I licensee is given to a trader who wants to trade more than 1,000 MUs in a year. Additionally each category of license has to a have prescribed net worth. A category I license requires a net worth of Rs million. The licensee cannot engage in the business of transmission of electricity. The definition of inter-state trading has been expanded to include cross-border trading of power. CERC (Fixation of Trading Margin) Regulations 2005 CERC can fix the trading margin in the inter-state trading of electricity. As per CERC s January 23, 2006, notification, licensees may not charge a trading margin exceeding Rs per Unit on electricity traded for duration of less than one year. This trading margin of Rs Unit is over and above the transmission charges, application fees, unscheduled interchange charges and transmission losses. The Company had filed an appeal against an order of CERC given on December 19, 2008, whereby CERC directed the Company to revise its PPAs with the utilities in the Eastern Region of India and fix the trading margin at Rs per Unit as provided in these regulations. On February 18, 2009, the ATE dismissed the appeal and directed the Company to follow the trading margin of Rs per Unit in the future. The Company challenged the decision of the ATE in the Supreme Court. On March 20, 2009, the Supreme Court dismissed the appeal and upheld the decision of ATE. At present, pursuant to the direction of the ATE, the Company is required to maintain a trading margin of Rs per Unit in all its future cross border trades as well. Guidelines for tariff based competitive bidding for procurement of electricity by distribution licensees Section 62 of the Electricity Act provides that CERC or SERCs shall determine tariffs in accordance with the provisions of the Electricity Act for: supply of electricity by a generating company to a distribution licensee (except in case of shortage where CERC or SERCs may fix minimum and maximum tariffs for a period not exceeding one year to ensure a reasonable price of electricity); transmission of electricity; wheeling of electricity; and retail sale of electricity. Further, Section 63 of the Electricity Act provides that notwithstanding anything contained in Section 62, CERC or SERCs shall adopt a tariff if such tariff has been determined through a transparent process of bidding in accordance with guidelines issued by the GoI. The Ministry of Power published guidelines on January 19, 2005, for tariff based competitive bidding for procurement of electricity by distribution licensees with the objective to promote competitive procurement. Sections 62(1)(a) and 63 of the Electricity Act provide for two options available to the concerned party. Under Section 62(1)(a), the appropriate commission (CERC or a SERC, as the case may be) shall determine the tariff for supply of electricity by a generating company to distribution licensees; and under Section 63, tariff shall be determined by competitive bidding. CERC (Terms and Conditions of Tariff) Regulations, 2004 These regulations provide that where a tariff has been determined through a transparent process of bidding in accordance with the guidelines issued by the Central Government, the commission shall adopt such a tariff. The regulations shall also be applied by CERC where a capital cost-based tariff is to be determined. CERC (Open Access in Inter-State Transmission) Regulations, 2008 These regulations for access to inter-state transmission systems categorize customers into two categories of long term customer and short term customer. Long term Open access is to be allowed in accordance with the transmission planning criteria stipulated in the Indian Electricity Grid Code; however short term Open access will be allowed if the request can be accommodated by utilizing 67

77 inherent design margins, margins available due to variation in power flows, and margins available due to spare transmission capacity created to cater to future load growth. The long term customer has priority over a short term customer; however within a category there shall be no discrimination. The nodal agency for arranging long term transmission access shall be the CTU if its system is used or else it shall be the transmission licensee in whose system the withdrawl point is located and the nodal agency for short term transmission access shall be the RLDC or the region where point of withdrawl of electricity is located. Electricity Rules, 2005 as they relate to Captives The GoI, under Section 176 of the Electricity Act, promulgated the Electricity Rules, Rule 3 of the Electricity Rules, 2005 mandates that an industrial unit must use for its own consumption at least 51% of the aggregate electricity generated by the Captive, determined on an annual basis. Therefore, the balance of 49% of the power from a Captive can be sold to other parties and thus can be brought into the trading markets. 68

78 OUR BUSINESS Overview We are a leading power trading company in India. For the nine months ended December 31, 2008, not including our trades of 864 MUs on the IEX, we had a market share of 46.5%. Our traded volumes have increased from 1,617 MUs in FY 2002 to 9,889 MUs in FY 2008 and for the nine month period ended December 31, 2008, we traded a total of 11,643 MUs. Our principal business is to undertake short, medium and long term trading of electricity. We also provide consulting services and invest in and finance companies operating in the power sector and propose to develop and manage businesses in the energy sector such as wind power projects and enter into power tolling and fuel intermediation. We intend to expand our business operations towards becoming a leading integrated power company in India. We were established in 1999 at the initiative of the GoI to help implement its Mega Power Policy. Our Promoters are POWERGRID, NTPC, PFC and NHPC. Support from the GoI and our Promoters have been important to our success, especially in our early years of operations. Prior to the consummation of this Issue, our Promoters each held 5.28% of our equity share capital and are important contributors to the development of India s power sector. They are: POWERGRID - India s largest central transmission utility, POWERGRID manages and operates the country s inter-state transmission system; NTPC - India s largest thermal power generator; PFC - a development financial institution dedicated to the power sector; and NHPC - a large hydro-electric power generator in India. Under the Mega Power Policy, the GoI developed a plan to generate more power across India through construction of new mega power projects, with additional private investment. Mega power projects are projects with a generation capacity of over 1,000 MW (for thermal projects) and 500 MW (for hydro-electric projects) that can be transmitted across states. Our mandate under the Mega Power Policy was to purchase power from IPPs and sell it to identified SEBs suffering from power deficits. As our business evolved, we also began to enable and arrange power trading between SEBs and, subsequently, SPUs. In FY 2000, we began our power trading business. Under the Electricity Act, licensing requirements for power traders were made mandatory, and we received our license in We were one of the first licensees to obtain what was earlier called a category F license (as defined under CERC s regulations), which allowed the highest volumes of trading. CERC has recently categorized the license into three categories, the highest being category I, which allows unlimited trading, which we currently maintain. In FY 2002, our first full year of operation, our trade volume totaled 1,617 MUs, and involved solely short term trading. For FY 2008, our total trade volume was 9,889 MUs. For the nine months ended December 31, 2008, our total trade volume was 11,643 MUs. Our historical short and medium and long term trade volumes and sales are set forth in the table below: Trading Volume (in MUs) Time period Short term Medium and Long term Sales (Rs. in million) Short term Medium and Long term FY FY , , FY , , FY , , , , FY , , , , FY , , , , FY , , , , FY , , , , Nine months ended December 31, ,063.97* 5, ,167.46* 10, * Includes 5.6 MUs (Rs million) of power generated by the Company through wind power project. For each Unit that we buy, our practice is to sell that Unit to a customer on identical terms and conditions, which we refer to as back-to-back trading, subject to a margin that we retain. We believe that arranging back-to-back transactions is an important risk management practice. We also strive to limit our risk through a carefully developed set of risk management policies, including, among other things, receipt of security in the form of bank guarantees or letters of credit. For the nine month period ended December 31, 2008, short term trading of electricity (generally, trades having a term of less than one year) accounted for 52.1% of our trading volume and 79.9% of our sales, and medium term (terms of between one and 25 years in duration) and long term trading (for a period of 25 years and more) accounted for 47.9% of our trading volume and 20.1% of our sales. To date, all of our medium and long term trades have included cross border contracts for the purchase of hydro-electric power generated in Bhutan. 69

79 We have seen more competition and increased regulation of short term trading over the past few years, including the imposition of a statutory cap of Rs per Unit on our short term trading margins and more recently, on cross border trades. For information about the regulatory framework affecting our business, see Industry Overview. While we plan to continue building on our successes in short term trading, we see more growth opportunities in the long term trading business, and our strategy is to increase the volume and mix of medium and long term trading contracts by entering into longer term off-take arrangements. We have worked on ways to increase long term access to power supplies by (i) entering into long term PPAs with new IPPs and Captives, which are industrial companies that produce the majority of their power for their own consumption (but also often have surplus capacity), (ii) developing fuel intermediation and tolling programs, through which we act as an aggregator of coal and sell such fuel to thermal power plants (intermediation) or provide power plants with fuel and sell the resulting power (tolling), (iii) pursuing our own investments in new power projects, through majority or minority holdings and (iv) developing relationships with producers in Nepal and building on existing trade relationships with producers in Bhutan, each of which have substantial hydroelectric power potential. Due to these efforts to increase available sources of supply, we believe that we are uniquely positioned for long term trading of power. We are constantly looking to develop different ways to capitalize on our industry experience and strong brand. We continue to evolve our strategies by matching our buyers and sellers needs with innovative products to ensure maximum scheduling at the highest tariff. This has allowed us to maintain our leadership position in terms of trade volumes sold by Indian power trading licensees. In FY 2007, we established our first subsidiary, PFS, to be our investment vehicle and for providing financial solutions to a diverse range of companies in the energy sector. We also established a wholly owned subsidiary, PEL, in FY 2009 which will seek to develop and manage businesses in the energy sector such as power generation, power distribution, power transmission, power tolling, importing coal and taking up energy efficiency projects while also providing consultancy services. We also provide consultancy services to various clients in the energy sector, including on the developing regulatory regime, preparing financial models for IPPs, preparing market study reports, pre-feasibility reports and detailed project reports. In August 2007, CERC approved the establishment of India s first nationwide automated and online electricity trading platform IEX, in which PFS owns a 26% equity interest and is a co-promoter. IEX began operating in June IEX is run on the platform of OMX Exchanges, which includes seven other international exchanges, which has brought scalable technology solutions for nationwide energy trading. From the start of its operations through December 31, 2008, IEX trade volumes totaled 3,540 MUs (Source: IEX). Our organization structure which reflects our equity investments as on March 31, 2009 is as follows: 70

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