CORPORATE INFORMATION

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2 CORPORATE INFORMATION Board of Directors 1. N Rangachary Chairman 2. Gary Ng Jit Meng Nominee Director 3. Namgial Nominee Director 4. Paolo Brichetti Nominee Director 5. P B Sampath Director 6. V Shankar Director 7. N Srinivasan Director 8. Viswanatha Prasad Subbaraman Nominee Director 9. P N Vasudevan Managing Director Registered Office 4 th Floor, Temple Tower, 672, Anna Salai, Nandanam, Chennai Tel: Fax: corporate@equitas.in Website: Auditors Deloitte Haskins & Sells 8 th Floor, ASV N, Ramana Towers, 52, Venkatnarayana Road, T.Nagar, Chennai Tel: Fax:

3 Bankers Axis Bank Ltd Canara Bank Central Bank of India Citibank N.A DBS Bank Ltd. Development Credit Bank Ltd Dhanlaxmi Bank Ltd HDFC Bank Ltd ICICI Bank Ltd IDBI Bank Ltd Indusind Bank Ltd ING Vysya Bank Ltd Kotak Mahindra Bank Ltd Punjab National Bank Lakshmi Vilas Bank Ltd State Bank of India State Bank of Patiala State Bank of Travancore Syndicate Bank The Royal Bank of Scotland NV Yes Bank Ltd Financial Institution Small Industries Development Bank of India Non Bank Lenders Maanaveeya Holdings & Investments Private Ltd Reliance Capital Ltd Reliance Consumer Finance Pvt Ltd Tata Capital Ltd 2

4 TABLE OF CONTENTS Chairman s Note 5 Directors Report 8 Management Discussion and Analysis 15 Report on Corporate Governance 20 Auditors Report 30 Financial Statements 34 3

5 FROM THE CHAIRMAN S DESK Dear Members An eventful year has passed in which we ve seen the company s operating environment change significantly. With the effect of the credit crunch of 2009 receding away, the year started positively for the sector. However soon, the worry of over heating and hyper-growth of the sector was becoming a concern. Being an unsecured form of lending, the fear of borrowers availing loans beyond their requirement was high. The Association, Micro Finance Institutions Network did come out with a Code of Conduct for the members in the beginning of the year, curtailing the loan exposure per borrower and also put in efforts to get a credit bureau up and running for the sector. However lukewarm response of many of the members including the large ones, led to these efforts not delivering the intended stability to the sector and the fear of over borrowing by clients and resultant social damage remained high. The first IPO of a microfinance company in India with its attendant concerns raised more bad press for the sector. In response to media reports of microfinance customers experiencing stress, the Government of Andhra Pradesh intervened by introducing very stringent regulation on Micro Finance activities in that State which included collection of instalments only at Government offices rather than near the client s house etc. This combined with strong negative voices of various politicians in the State has led to a huge crisis in Andhra Pradesh with loan recovery rates plunging from about 98% before October 2010 to about 10% post this period. RBI s regulation for the MFI sector: RBI addressed the regulatory uncertainty by constituting a sub-committee chaired by Shri Malegam. On 3 rd May 2011, RBI has approved the broad framework of regulations recommended by the Committee and implemented the first phase of the recommendation while promising to implement the remaining shortly. Phase I regulation by RBI includes key issues such as lending rate cap, margin cap and total exposure per borrower. It is pertinent to add that our officials had met the Malegam committee and submitted our suggestions to them and the regulations which have come are very much in line with the company s suggestions except on lending rate cap where RBI has fixed it at 26% against our proposal of 24%. The following measures Equitas operating philosophy against the benchmark of the key regulations recently announced by RBI. 4

6 S.No RBI Regulations Interest cap of 26% plus a processing fee of 1% maximum Amount of loan should not exceed Rs 35,000 in first cycle and Rs 50,000 in subsequent cycles Margin cap of 12% to be maintained Credit bureau to be established for curtailing over-lending to borrowers Atleast 75% of loan to be utilised by borrower for productive purpose Equitas philosophy Equitas has consistently adopted a fair pricing philosophy since its inception. Its lending rate has been linked to the expected long-term operating cost target rather than current cost. Equitas commenced its business in 2007 with a declining rate of 25.5% in a market where the nearest rate was over 32%. Equitas currently charges 26% declining interest rate and no processing fee Equitas provides loans between Rs and Rs only Equitas pioneered the concept of passing its efficiency gains to the customers by voluntarily adopting an ROE cap of 25%. RBI has adopted a similar approach of capping the margin. Equitas current margin is at around 12.75%. Equitas has been at the forefront of industry initiatives in establishing a credit bureau. Equitas had initiated this within months of commencing operations in Nearly 50% of the NBFC-MFI data is on the bureau and with the support of other MFIs and under the guidance of RBI, Equitas hopes that this credit bureau will become fully operational soon. As a policy, Equitas extends loans only to people who undertake business activities thereby ensuring that the money is used for productive purpose. However, though the company does end-use verification, it is difficult to establish beyond doubt the exact use of the entire loan amount and we would be relying on selfdeclaration by the borrowers The regulatory uncertainty prevailing in the sector for the past few months has now been cleared with the announcement of RBI s regulations. However co-operation from multiple stakeholders is critical in ensuring a long-term sustainable growth for the sector: 1. MFIs will have to work together to ensure that the credit bureau becomes fully functional as soon as possible. Without this step, the adherence of MFIs to the cap on multiple lending norms can neither be followed nor monitored. 2. Lenders have continued to support MFIs such as Equitas in the past few difficult months. Under the broad guidelines announced by RBI, one hopes that lenders will continue to extend this support 3. State Governments and agencies operating SHGs could also look at collaborating with MFIs in this credit bureau initiative; thereby protecting the larger interest of the low-income population 5

7 Equitas response to the crisis: In response to both regulatory uncertainty and risk of over-borrowing by clients, Equitas had consciously been pruning its portfolio and reduced it by about 20% in the past 6 months. Though regulation is now firmly in place, we will continue to watch closely developments related to creation of authentic industry-wide data base through the credit bureau and on-the-field compliance by other MFIs to the norm of maximum 2 MFIs funding per client. We will continue to prune our portfolio and look to growth only after we are convinced that significant majority of the industry has fallen in line with these two initiatives and the risk of over-lending to the same client recedes. The response of other MFIs, especially the larger ones, to this crucial issue in the past has been very timid but we hope in the present regulated environment they would take serious steps to address this issue. We expect that this may take a few more months to settle down and expect to look at growing the portfolio in the second half of the current financial year Diversification: The company had initiated plans for diversifying into secured lending by incorporating Equitas Housing Finance P Ltd in early 2010 and applying to NHB for a licence in May The approval has since come and we expect to commence operations shortly. We have also taken over an NBFC by name VAP Finance Ltd as a wholly owned subsidiary of the company and plan to roll out commercial vehicle finance through the same. In line with the Mission of the company, these two subsidiaries would also focus on those clients who are excluded from the formal financial system. Though VAP Finance, we would help drivers turn entrepreneurs. It is every human being s desire to own a house of their own but when the low end self-employed category of people are denied access to home loans from the mainstream lenders, such dreams remain unfulfilled. Equitas Housing Finance would precisely be focussing on such client segment, helping them convert their dream to reality, further promoting financial inclusion. Equitas: Fair and Transparent philosophy: In my previous year s speech, I had noted, with satisfaction, the various steps the company has taken to live up to the name Equitas a Latin word which means being Fair and Transparent. The company has consistently sought to distinguish itself in its various actions such as its unique Pricing Philosophy, transparent communication of real borrowing rate to the clients etc. We continue to set new global benchmarks in our effort to remain a Responsible Lender. The company has put in place many philosophies and policies such as the following: 1. Voluntary cap on RoE: While the company aims to generate a Return on Equity of around 20% which is in line with the RoEs of most Government owned banks in India, it has set a voluntary cap of 25% on RoE. Thus the benefits of efficiency over this return would necessarily be shared with the borrowers. This is hailed within the micro finance sector globally as the first of its kind initiative and is duly recognized 2. Voluntary cap on Managerial Pay: The Company has adopted a voluntary cap on the gap between the minimum and maximum pay in the company at 40 times. Accordingly the MD had taken a pay cut last year to remain within this multiple and his remuneration remains fixed till such time there is a revision on the minimum pay. This year, following in his steps, the COO of the company has put 6

8 a voluntary freeze on his remuneration. The culture of the company is being strongly re-inforced that remuneration alone does not become the reason for continuity in employment 3. The lending rate philosophy continues to remain unique in the sector which has helped the company steer clear of any criticism of high rates. As per MFTransparency.org, a global NGO, in India, Equitas is the only company where the lending rate communicated to the borrower is same as the all-inclusive charge actually paid by the clients. Equitas Eco-system: Though the stress that the micro finance sector has being going through in the past few months has taken its toll on management time, the company has remained steadfast in its pursuit of offering a range of developmental services to its clients. Some of the highlights of the same are: Sl. No. Activity No of beneficiaries as of March 2010 No of beneficiaries as of March Free primary medicare through medical camps 167, , Vocational skill development training 59, , Free spectacles and cataract operations Spectacles: Cataract: 5859 Spectacles: Cataract: Tuition centres 5 centres covering about 300 children 49 centres covering about 3100 children 5. Schools Nil 2 schools with about 350 students studying The schools are truly the feather in our cap. I had the opportunity to visit one of the schools and the quality of holistic education being imparted to children from the under-priveleged sections of the society is truly transformative. Feedback from parents and children continue to encourage us to do more in this direction. The schools are ear-marked certain budgets after which they would be self-sustainable Conclusion : In conclusion, I would like to stress that Micro Finance cannot and should not be treated as a normal lending programme. The sensitivity required to deal with the low income category of people should be exhibited by all lenders. Buyer Beware is not appropriate for this segment. The lenders should take the extra responsibility of being Responsible Lenders while supporting the financial inclusion agenda of the Governments. While regulations are definitely going to help streamline the sector, still there is nothing which can replace the selfdiscipline of the lenders in their service to this segment. We hope that all Micro Finance Institutions would adhere to the tenets of Responsible Lending with reasonable returns expectations. Micro Finance is a much needed service for the low income segment and an ethical and prudent approach by the lenders can make this a sustainable service to them. 7 N Rangachary Chairman

9 DIRECTORS REPORT TO MEMBERS Your directors have pleasure in presenting the fourth annual report together with the audited accounts of the company for the financial year ended 31 st March Background This annual report covers the third full year of operations. Equitas was founded with the intent of extending micro credit to households which are otherwise excluded from mainstream financial channels. The aim is to bring the technological and operational efficiencies of main stream retail banking to what has traditionally been a social sector and extend the benefits of such efficiencies to the customer by way of reduced cost. 2. Significance of the Name Equitas in Latin means equitable, in English which means fair and transparent. All products, processes and actions of the company are measured against this yardstick to ensure that whatever we do is fair to the other person and communicated transparently. We have already created new global benchmarks in the industry in terms of being both fair and transparent with our customers. 3. Financial Results Particulars Gross Income Interest Income Net Profit after Tax Year ended 31 st March , , , (Rupees in Lakhs) Year ended 31st March , , , Dividend The Directors do not recommend any dividend for the year to conserve resource for future growth. 5. Highlights 5.1 Regulatory Environment During the year ended 31 st March 2011, the microfinance sector has experienced a shift in the regulatory environment. The Government of Andhra Pradesh promulgated an ordinance on October 15 th 2010, which was later replaced by a similar Act, to regulate the operations of microfinance companies within the state. Apart from the impact on microfinance operations within the state of Andhra Pradesh, this legislative intervention by a State Government created a sense of regulatory uncertainty in other states. There was a clear possibility of similar legislation being passed in other states as well. Subsequently, the Reserve Bank of India constituted a committee under the chairmanship of Shri Y.H.Malegam, director RBI, to study and recommend regulations for the sector. After consultations with a wide range of stakeholders including micro finance industry associations, this committee submitted its recommendations to RBI. RBI has since announced its decision on the Malegam Committee recommendations and broadly accepted the framework of regulations proposed by the Committee including caps on interest rate and margin. 8

10 A separate committee was also constituted by the Ministry of Finance, Government of India to come out with a suitable change to the existing draft microfinance bill after considering the Malegam committee recommendations. While the regulatory uncertainty has affected the operations of microfinance companies (especially within Andhra Pradesh), the Malegam Committee recommendations have set the stage for a more robust and sustainable growth for the sector 5.2 Operational Highlights The company completed third full year of operations during the year under review. The company continued to make good progress in its operations. However, the AP legislation seriously impacted the operations of all MFIs operating in the state of AP with a drastic fall in the recovery of existing loans. The regulatory uncertainty caused by the legislation affected the business across the country of all MFIs including our company.. Some of the highlights for the year ended 31 st March 2011 are: Loan outstanding has moved up from Rs.605 Crores to Rs.957 Crores (including managed assets) as on 30 th November However due to the impact of the AP crisis, the disbursements were affected and hence the loan outstanding came down to Rs 794 Crores as on 31 st March branches fully operational Operations cover 6 States and one union territory. We are now present in 78 districts out of which 22 are amongst the poorest districts. Client base stands at just under Lakhs Corporate Social Responsibility (CSR) activities of the Company have scaled up substantially. Over 425,000 clients have benefited from the Company s free medical camps and screening camps and over 190,000 clients have been given vocational skill training 5.3 Credit Rating During the year, CRISIL upgraded the MFI grading of the company to mfr2 from mfr3 During the month of June 2010, bank loan rating of the company was upgraded by CRISIL from BBB- to BBB. However post the AP crisis the rating was downgraded to BB+ in the month of December 2010 before it was upgraded to BBB- during February Corporate Governance rating The company is committed to highest level of corporate governance. With a view to constantly improve the governance practices by benchmarking with the best companies; the company went in for corporate governance and value creation rating from CRISIL. The company was awarded rating of GVC level 3 in a scale of 1 to 8 (1 representing the best) 6. RBI Guidelines The Company being a systemically important non-deposit taking Non Banking Financial Company (NBFC) has complied with all applicable regulations of the Reserve Bank of India. As per Non-Banking Finance 9

11 Companies RBI Directions, 1998, the Directors hereby report that the Company did not accept any public deposits during the year and did not have any public deposits outstanding at the end of the year. 7. Capital Adequacy The capital adequacy ratio was 39.68% as on 31 st March The Net Owned Funds (NOF) as on that date was Rs Crores. The minimum capital adequacy requirement stipulated for the company by RBI is 15%. 8. Prospects With the recent announcement of regulations by RBI, the period of relative regulatory uncertainty seems to be drawing to a close. The regulations proposed by RBI will help steer the microfinance sector to realize its potential on a long-term sustainable basis. RBI has also highlighted the need for the microfinance institutions to work together in limiting over-borrowing by microfinance institutions. Micro Finance Institution Networks (MFIN s) credit bureau initiative is currently being rolled out. On successful rollout of this credit bureau initiative, the growth prospects of the company will improve, since the underlying demand for microcredit among borrowers exists in a large scale. Diversification: Towards diversifying its business, Equitas has invested in subsidiary companies that will operate in used commercial vehicle finance, housing finance and B2B fruits & vegetables wholesale trading businesses. The Commercial Vehicle & Housing Finance companies will focus on the segment of customers who do not have access to formal financial services. The fruits & vegetables wholesale trading business will focus on microfinance borrowers operating in this trade. Details of the investment in these subsidiaries are given separately in this report. 9. Capital Infusion The company mobilized Rs lacs of capital funds during the year ended 31 st March Out of the above Rs 1.2 lakhs represents share premium. During the year, the Company issued and allotted 8, 02,937 Equity Shares of Rs 10/- each, under the ESOP scheme of the Company. Out of the above, equity shares were issued at par, 2,027 equity shares were issued at a premium of Rs 2/- per share and 5300 equity shares were issued at a premium of Rs 22/ - per share respectively. 11,60,333 equity shares of Rs 10/- each were issued at par to Mr P N Vasudevan, Managing Director pursuant to the agreement dated 4 th February 2008 between the Company and Mr Vasudevan for his subscribing to 20 lakh equity shares of the Company over a period of 3 years at par. 10. Dematerialization of Shares The equity shares of the Company have been admitted for dematerialization by National Securities Depository Limited (NSDL) during the year in addition to Central Depository Services Limited (CDSL). 11. ESOP & Right to subscribe to Future Shares An Employees Stock Option Scheme titled UPDB Employees Stock Option Scheme, 2007 was approved by the Board of Directors on 15 th December 2007 and subsequently was also approved by the Shareholders on 17 th December The Scheme is for a total of 5,620,000 Equity Shares of Rs. 10 each, and the Remuneration & Nomination Committee (formerly known as Compensation Committee) was constituted to administer the scheme. As at 31 st March2011, 61,71,200 options were granted to eligible employees and options were added back to the pool owing to the eligible employees ceasing to be employees of 10

12 the company and also on account of release of options based on performance criteria. The balance options available in the pool as at 31 st March 2011 are 657,752 The details pertaining to the scheme as on 31 st March 2011 are given below: a) Options granted: b) The pricing formula: The exercise price of the option is based on the intrinsic value of the share. c) Options vested: d) Options exercised: e) The total number of shares arising as a result of exercise of option: f) Total number of Options in force: The company also entered into an agreement dated 4 th February 2008 with Mr. P N Vasudevan, Managing Director, under which, based on certain performance parameters, Mr. Vasudevan would be entitled to subscribe upto 2,000,000 equity shares of the company at par over a three year period. For the year ended 31 st March 2009, and 31 st March 2010,Mr. P N Vasudevan is entitled to subscribe to 533,333 equity shares of Rs 10 each and 6,27,000 equity shares of Rs 10 each respectively. The balance options available for subscription by him for the year March 2011 is equity shares of Rs.10 each at par while the actual options he would be entitled to subscribe is subject to the terms of the above referred agreement. 12. Directors Responsibility Statement The directors responsibility statement as required under Section 217(2AA) of the Companies Act, 1956 reporting the compliance with the accounting standards, is attached and forms part of the directors report. 13. Corporate Governance Report Clause 49 of the standard listing agreement and the corporate governance report under this clause are not applicable to the company. Notwithstanding this, a report on corporate governance is attached and forms part of the directors report. 14. Management Discussion and Analysis The management discussion and analysis report, highlighting the important aspects of the business is attached and forms part of this report. 15. Directors During the financial year ended 31 st March 2011, the following changes took place in the constitution of the Board. Mr. P B Sampath who was appointed as an additional director on 20 th July 2009 was appointed in the third annual general meeting held on 7 th June 2010 as a director liable to retire by rotation. Mr. V Shankar who was appointed as additional director on 28 th October, 2009 was appointed in the third annual general meeting held on 7 th June 2010 as a director liable to retire by rotation. Mr Paolo Brichetti was re-nominated as a director on behalf of Microventures S.P.A with effect from 30 th July Mr N Srinivasan was appointed as an additional director on 25 th January

13 Mr. M Anandan and Mr V P Nandakumar resigned as directors of the Company with effect from 17 th January The Board places on record its deep appreciation for the contributions made by Mr. M Anandan both as director as well as the member of the audit & risk management and resourcing committees. The Board places on record its deep appreciation for the contributions made by Mr. V P Nandakumar both as director as well as a member of the remuneration & nomination committee. Mr P B Sampath, director is retiring at the forthcoming annual general meeting and being eligible, offers himself for re-appointment. 16. Auditors Deloitte Haskins & Sells, Chartered Accountants, auditors of the company retire at the forthcoming annual general meeting and are eligible for reappointment. The company has received confirmation that their appointment, if made, will be within the limits prescribed under Section 224(1B) of the Companies Act, Information as per Section 217(1) (e) of the Companies Act, The company has no activity relating to consumption of energy or technology absorption. Foreign currency expenditure amounting to Rs Lakhs was incurred during the period under review. The company does not have any foreign currency earnings. 18. Personnel During the year, there were no employees who were in receipt of remuneration as per the provisions of Section 217 (2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, Corporate Social Responsibility Equitas has established a not-for-profit trust named Equitas Development Initiatives Trust (EDIT). The following eminent personalities from a cross section of the society serve as the trustees: Dr. C K Gariyali, IAS (Retd) Mr. S P Mathur IPS (Retd) Mr. M B Nirmal, Founder Exnora International Ms. T V Jayalakshmi, Educationist Mr. P N Vasudevan, M.D Equitas Micro Finance India Pvt Ltd EDIT runs two schools named Equitas Gurukul and Shikshas (Tuition Centres) for providing quality education to children from the under-privileged segment of the society besides providing training on various livelihood development skills. 20. Subsidiaries During the year, the following two subsidiaries were formed, a. Equitas Housing Finance Private Limited (EFHC) b. Equitas B2B Trading Private Limited (B2B) 12

14 Further, during the year the company and its nominees acquired the entire outstanding shares of V.A.P. Finance Private Limited (VAP) making it a wholly owned subsidiary of the company. EHFC was incorporated as a wholly owned subsidiary of the Company on 14 th May It obtained license from National Housing Bank to carry on the business of housing finance on 24 th January During the year, the company subscribed to 60,00,000 equity shares of Rs 10/- each in EHFC The company is expected to commence disbursement in the current financial year. B2B was incorporated as a wholly owned subsidiary of the Company on 19 th May During the year, the Company subscribed to 20,00,000 equity shares of Rs 10/- each in B2B. B2B which commenced its operations during the year recorded a turnover of Rs Lakhs and reported a loss of Rs Lakhs. VAP is an Non Banking Finance Company (NBFC) incorporated in the year The Company and its nominees acquired the entire paid up capital of the company amounting to Rs 55 lacs comprising of 55,000 equity shares of Rs 100/- each on 21 st March Accordingly, VAP became a wholly owned subsidiary of the Company with effect from that date. Subsequently, the Company subscribed to 5,00,000 equity shares of VAP of Rs 100/- each on 31 st March As on date, the Company is holding 5,55,000 equity shares of Rs 100/- each in VAP. The company reported a gross income of Rs 1.59 Lakhs and a net loss of Rs Lakhs for the year The annual reports of the aforesaid subsidiaries are appended and form part of this annual report. Acknowledgement The Directors wish to thank the customers, bankers, shareholders and other service agencies for their support. The directors also thank the employees for their contribution to the company s operations during the period under review. For and on behalf of the Board of Directors Chennai 13 th May 2011 N Rangachary Chairman 13

15 ANNEXURE TO THE DIRECTORS REPORT Directors Responsibility Statement To the best of their knowledge and belief, and according to the information and explanations obtained by them, your Directors confirm the following in terms of Section 217(2AA) of the Companies Act, 1956: that in preparation of the financial statements the generally accepted accounting principles (GAAP) of India and applicable accounting standards issued by Institute of Chartered Accountants of India have been followed. that appropriate accounting policies have been selected and applied consistently and judgments and estimates that are reasonable and prudent have been made so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; that they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. To ensure this, the company has established internal control systems, consistent with its size and nature of operations, subject to the inherent limitations that should be recognized in weighing the assurance provided by any such system of internal controls. These systems are reviewed and updated on an ongoing basis. Periodic internal audits are conducted to provide reasonable assurance of compliance with these systems. that they have prepared the annual accounts on a going concern basis. For and on behalf of the Board of Directors Chennai 13 th May 2011 N Rangachary Chairman 14

16 ANNEXURE TO THE DIRECTORS REPORT Statement pursuant to Section 212 (1) (e) of the Companies Act, 1956, relating to the Subsidiary Companies Rs.in Lakhs Name of the Subsidiary Company Financial Year of the subsidiary ended on Date from which it became subsidiary Equitas Housing Finance Private Limited 31 st March th May 2010 Equitas B2B Trading Private Limited 31 st March th May 2010 V.A.P Finance Private Limited 31 st March st March 2011 Shares of subsidiary company held on the above date and extent of holding 6,000,000 equity shares of Rs. 10/- each at par 2,000,000 equity shares of Rs. 10/- each at par 5,55,000 equity shares of Rs. 100/- each at par 100 % 100 % 100 % Net aggregate amount of profits/ (losses) of the subsidiary not dealt with in the holding company s accounts a) For the Financial Year of the Subsidiary Company b) For the Previous financial years since it become a subsidiary Rs.(44.20) _ Rs.(87.31) _ Rs. (21.96) _ Net aggregate amount of profits/ (losses) of the subsidiary dealt with in the holding company s accounts by way of dividends on the shares held in subsidiary Company a. For the Financial Year of the Subsidiary Company b. For the Previous financial years since it become a subsidiary For & on behalf of the Board of Directors Chennai 13 th May Mr Rangachary Chairman

17 MANAGEMENT DISCUSSION AND ANALYSIS 1. Introduction The year has been a turbulent one for the entire sector marked by changes in the regulatory environment. While these changes have injected uncertainty into the sector in the shorter term perspective, robust and uniform regulations across the country could result in a sustainable and healthy environment for the entire sector over the long term. 2. Regulatory environment During the year ending 31 st March 2011, the Government of Andhra Pradesh promulgated an Ordinance to regulate the microfinance sector operating within the state. Some of the major reasons for this legislation are: a. Interest rate Interest rate charged by some microfinance companies was alleged to be excessive. It was also perceived that MFIs did not adopt the highest levels of transparency in communicating their lending rates to their borrowers. b. Stress among borrowers Media reports alleged stress among borrowers primarily due to multiple borrowing from different MFIs and also the alleged coercive recovery practices adopted by some MFIs. c. Impact on (Self help group) SHG program This excessive borrowing at MFIs was also seen to have an impact on the discipline among the members of Government supported SHG programme. The regulations imposed by the AP Government include the following: 1. All microfinance companies were required to register with the state government. Member-level information to be shared with the Government on a regular basis. 2. Permission to be sought from state government before giving a loan to an SHG member 3. Repayment frequency to be set as monthly on mandatory basis 4. Recovery of loans can be only at the specified locations like village panchayat office and not near the residential loacations of the customer. The regulations had a stifling effect on the operation of MFIs within the state and the recovery rates of AP portfolio sharply reduced from above 95% to below 20% for all MFIs. The repayment culture outside the state has remained healthy barring certain localized instances. However the regulation of microfinance companies by one State Government increased the risk of similar stringent regulations in other States. In response to this regulatory uncertainty, the Reserve Bank of India constituted a sub-committee under the chairmanship of Shri Malegam. Based on public consultations with all stakeholders including MFIs, the Malegam Committee has submitted its recommendations to RBI. RBI has accepted the broad framework of these recommendations. Some of the key aspects of the proposed regulation include: 1. Cap of interest rates at 26%. Also a margin cap of 12% at the portfolio level between cost of funds and lending rate. 16

18 2. Maximum amount MFIs can lend to a customer set at Rs 50, Not more than 2 MFIs should lend to a borrower 4. Credit bureau to be established to curtail over-borrowing by customers Preparedness in lieu of changes in the regulatory environment The company has consistently adopted a responsible lending framework. Consequently, the company believes it is well aligned to work in the changed regulatory environment. In particular, the following key points are highlighted: 1. Transparency The actions of Government of Andhra Pradesh and Malegam Committee have been motivated by the perceived lack of transparency in communication of interest rates to customers. Since its inception, Equitas has taken a clear stance of communicating its all-inclusive interest rate to the customers. During this year, Micro Finance Institutions Network (MFIN), a body of NBFC- MFIs, has partnered with mftransparency.org to publish online the all-inclusive interest rate of all MFIs. 2. Interest rates There has been considerable debate on fair lending rate in the microfinance space. As part of the company s pricing philosophy, the lending rate has consistently been linked to the long-term target operating cost instead of the prevailing operating cost. This ensures that the cost of expansion is not borne by existing borrowers. In response to the changed environment, the company has adopted a uniform 26% interest rate across all its branches. 3. Curbing multiple borrowing Multiple borrowing among members could place severe strain on the long-term growth prospects of the entire sector. The ability of MFIs to address this problem has been limited due to the absence of a common infrastructure to verify the borrowing levels of customers. During this past year, MFIN has partnered with High Mark Credit Information Services Private Limited to establish a credit bureau for MFIs. MFIs have begun contributing data to this credit bureau. The company is actively involved in this initiative and is committed to its success. Once fully functional, this platform will curtail over-borrowing and hence lead to a healthy environment for the sector to grow. The company is, largely, aligned with the Malegam Committee recommendations. Based on the RBI s decision on these recommendations, the company will adopt suitable changes, as required. The company believes that prudent regulation coupled with responsible sector-level co-operation in rolling out the credit bureau will strengthen the sector s growth prospects on a sustainable basis. 3. Financial Results In its third full year of operations, the company has extended micro credit to around Lakhs clients and has a loan outstanding of about Rs.794 Crores (including managed assets) by 31 st March The performance of MFIs for the year ending 31 st March 2011 was affected due to the following reasons: 1. Drastic fall in repayments within the state of Andhra Pradesh 2. Increase in operating cost due to addition of new branches. This cost had a greater impact because disbursement growth was limited in light of the prevailing regulatory scenario. 17

19 3. The company s decision to gradually align the lending rates proactively to the rates recommended by Malegam committee. In this environment, the company posted a net profit of Rs Crores for the year ending 31 st March This has been enabled by the company s limited exposure in Andhra Pradesh(AP exposure as on 1 st November 2010 was around 2%of the total loan portfolio including the managed portfolio); and the focus on maintaining efficient operations through centralized processes and use of technology. Investment in subsidiaries The company has focused on microfinance segment since inception. In order to address the concentration risk arising from this sectoral focus, the company evaluated options for diversification based on the prevailing market scenario and the management s ability to manage the diversified businesses. Based on this evaluation, the company has invested in subsidiary companies focused on housing finance and used commercial vehicle finance. These subsidiaries will adopt the company s approach of focusing on the segment of borrowers with limited access to formal credit. Also, as part of the ecosystem of initiatives to improve the quality of life of its members, the company has invested in a subsidiary to provide business demand aggregation benefits to its borrowers. This subsidiary will seek to aggregate the sourcing requirements of these borrowers within a particular trade and deliver cost savings arising out of the volume aggregation. To begin with, the subsidiary is focusing on aggregating the demands of members in the fruits & vegetables trading business in Chennai. 4. Marketing and distribution The company has extended its branch network to cover newer states and to also expand its coverage into smaller towns. The geographic diversification is seen as a key element of the company s risk diversification plan. The change in company s branch network is illustrated in the table below: branches in Tamil Nadu & Pondy branches in Andhra Pradesh branches in other states Total 31 Mar Mar Social Initiatives In the midst of the uncertainty in the sector, Equitas has continued to demonstrate its commitment to its wide range of social initiatives. Its medical camps have covered over 425,000 members across its branch network. Over 193,000 members have been provided skill-based training. Under the aegis of Equitas Development Initiatives Trust, 49 tuition centres and 2 schools for our members are being operated. The company has invested Rs Crores in the year for the purchase of land and construction of building intended exclusively for schools. The Trust is expected to open 2 more schools in the coming academic year. The goodwill generated by these social initiatives is expected to provide a further ring of support in protecting the portfolio against any external event. 5. Resources and Treasury The funding for the business is from an optimum mix of equity and debt. Equitas continue to follow the policy of diversification of funding sources as well as the diversification of instruments used for the same. The 18

20 company has existing relationship with about 22 lenders across Banks, Financial Institution and NBFCs, who have sanctioned limits of Rs. 1, Crores during the year, and out of which Rs.1, Crores has been availed as on 31 st March During the year, Company had also raised around Rs.250 Crores through bilateral assignment and securitization transactions. Even though the company started the year with reduction in interest rates on fresh sanctions backed by an upgrade on the debt rating to BBB(stable) by CRISIL, the events that unfolded post the Andhra Pradesh crises had the following effect: a. There was a drastic fall in collection efficiency of all MFIs which had exposure to AP including our company. b. There were expectations that similar such events can happen in other states, which led to almost freezing of fresh release of funds by banks including the limits that were available on executed sanctions. This lead to a severe liquidity crunch in the MFI sector. c. Due to the uncertainty, the rating agencies kept all the MFIs in the rating watch and most of them were eventually downgraded. We are the only MFI whose rating was upgraded post the downgrade. d. Also, due to the high inflation and tight liquidity situation, the benchmark interest rates were increased regularly by RBI and this had an impact on our floating rate borrowings from our lenders. Hence, the company made repeated requests to banks for re-consideration of the interst rate and convert it to fixed rates.. Some of the lenders chose not to pass on the increase in their floating rate benchmark, but most of the lenders continued to pass on the increase. e. Due to the general perception in the market and the effect of the rating watch, the ability to diversify beyond banks into mutual funds and other investors at the time of crises was severely hampered. The company was able to face the liquidity crises by the following measures: a. Increase in the cash holding limits to Rs.100 Crores b. Reduction of fresh disbursements to ensure the maintenance of cash holding limits 6. Support Process and Information Technology In order to stabilize its information technology systems for its future growth targets, the company has strengthened its back-office support powered by its core banking system (Temenos T24 platform). The focus on technology has enabled the company to establish an efficient business model. The company expects this to play a crucial role in the prevailing scenario where pricing pressure is expected to persist in the middle term. The centralized back-office framework also helps the company to quickly adapt to changes in the regulatory domain. The company could quickly switch its repayments in Andhra Pradesh to monthly frequency and commence collections under the changed regime within a short period of time. Also, the centralized backoffice has enabled the company to become the first MFI to actively contribute comprehensive data for the MFI credit bureau initiative. 19

21 7. Human Resources The company has provided a wide range of benefits to its employees including health insurance for all employees and their dependents. As a mark of its employee-friendly practices, the company was ranked as among the top 100 Great Places to Work in India. The company has also invested in robust training processes to ensure standardization of communication to members across all branches. 8. Risk Management During the past year, the board has adopted a Risk Management Policy and the board periodically reviews the risks faced by the company and the practices followed to manage them. The dominant risk affecting the company in the past year is the regulatory uncertainty. This has been elaborated in previous sections. Some of the other major risks faced by the company and the mitigants are given below: 8.1 Credit Risk Risk of non-repayment of loans by customers is one of the primary risks faced by the company. The joint liability framework provides the basic risk mitigation where the other members in the group take active role in credit screening and monitoring credit behaviourof other customers apart from providing credit guarantee. Non-payment may be triggered by either excessive borrowing by clients due to multiple MFIs offering loans or also due to natural calamities such as floods etc. The concerns on potential overheating of the microcredit market in certain pockets of the country further reinforce the need for the company to address the credit risk. The company considers all other borrowings of clients, need for funds for productive purposes and repayment capability before extending loan which is further reinforced through group guarantees. In addition, with the full rollout of the credit bureau initiative, over-borrowing will be curtailed. Towards this purpose, the company has been an active participant at industry level initiatives, as part of MFIN (Micro Finance Institutions Network). The company has also adopted an MFIN Code of Conduct promoting responsible lending by MFIs. 8.2 Operational Risk Risk due to inadequate or failed internal processes, people or systems could cause loss to the company. Micro finance, given its small ticket size is transaction-intensive. These transactions are handled by large number of employees spread over branches. Further both disbursement and collections from members are done by way of cash, increasing the operational risk. Under the circumstances it becomes critical to have sound risk management practices. The company has put in multi-layered checks and controls over key client interface processes. While it would be impossible to prevent staff from committing frauds, the approach of the company is to put in place robust controls to identify mis-steps at the earliest to enable corrective actions. Further the company also constantly upgrades its control processes based on analysis of failed processes. The company s robust controls are well reflected in almost negligible instances of breach of control. The company has also identified a few critical processes and has put in a rigorous FMEA (Failure Mode Effect Analysis) process to ring fence potential process failures and limit damages. In order to improve the resilience of the company s operational framework, a basic disaster recovery plan is put in place. This will be monitored on an ongoing basis; and strengthened as per the requirements of the company. 20

22 8.3 Market Risk Liquidity risk: Given the sensitive nature of the sector, the banks funding is closely linked to the overall image of the sector as well as the regulatory environment. Any change in these factors could affect the overall liquidity risk for the company. ALM Risk: The Company ensures matched funding without any adverse mis-match in structural liquidity. The interest rate sensitivity is higher due to mix of floating rate borrowings and fixed rate borrowings when compared to fixed rate for lending. The company tries to use off-book transactions like securitization/bilateral assignments as a means of locking in interest rates. Leverage: The Company adopts a conservative policy related to leveraging capital. Along these lines, the company considers the entire managed assets (including securitization and bilateral assignment of portfolios) for maintaining sufficient capital adequacy. Outlook: On the growth-side, with underlying demand for microcredit, the long-term prospects look good. However, the company will have to manage the geographic concentration risk and work towards limiting overborrowing by its members. The company is pleased to note that RBI is steering microfinance companies to focus on improving efficiencies for delivering returns by capping the margin. Even though the interest and margin cap would impact the returns to the shareholders in the near term, the company is hopeful of providing reasonable returns to shareholders over medium term by improving operational efficiencies. With prudent regulation in place and with the co-operation of multiple stakeholders, the company expects steady growth prospects in the long-term. For and on behalf of the Board of Directors Chennai 13 th May 2011 N Rangachary Chairman 21

23 REPORT ON CORPORATE GOVERNANCE Corporate Governance is the commitment of an organization to follow ethics, fair practices and transparency in all its dealings with its various stakeholders such as Customers, Employees, Investors, Government and the Society at large. Sound corporate governance is the result of external marketplace commitment and legislation plus a healthy board culture which directs the policies and philosophy of the organization. Your Company is committed to good Corporate Governance in all its activities and processes. COMPANY PHILOSOPHY Equitas Micro Finance India Private Limited s (Equitas) philosophy on corporate governance envisages adherence to the highest levels of transparency, accountability and fairness, in all areas of its operations and in all interactions with its stakeholders. The Board shall work to ensure the success and continuity of the Company s business through the appointment of qualified management and through on-going monitoring to assure the Company s activities are conducted in a responsible, ethical and transparent manner. BOARD OF DIRECTORS In terms of the Corporate Governance philosophy all statutory and other significant material information is placed before the Board of Directors to enable it to discharge its responsibility of strategic supervision of the Company as trustees of the Shareholders. The Board of Directors currently consists of nine members. Other than the Managing Director, all the other members of the Board are non-executive directors, including five who are independent directors. During the financial year ended 31 st March 2011, six (6) Board Meetings were held on 26 th April 2010, 30 th July 2010, 27 th October 2010, 25 th January 2011, 24 th February 2011 and 10 th March 2011 and not more than four months elapsed between any two meetings. Particulars of the Directors attendance to the Board /Committee Meetings and particulars of their other company directorships are given below: Name N Rangachary M Anandan (1) V P Nandakumar (2) Namgial Paolo Brichetti Viswanatha Prasad Subbaraman Gary Ng Jit Meng P B Sampath V Shankar N Srinivasan (3) P N Vasudevan Nature of Directorship Independent & Non-Executive- Chairman Non-Executive Non-Executive Independent, Non-Executive & Nominee, SIDBI Non-Executive & Nominee, MVA Ventures Ltd, Mauritius Non-Executive & Nominee, Caspian Funds Non-Executive & Nominee, Lumen Investment Holdings Ltd Independent & Non-Executive Independent & Non-Executive Independent & Non-Executive Executive - Managing Director Attendance Board Committee 6 NA NA NA 5 13 Other Directorships

24 $ Excluding Alternate Directorships and Directorships of Foreign Companies, wherever applicable (1) MAnandan resigned as a director of the Company with effect from 17 th January 2011 (2) V P Nandakumar resigned as a director of the Company with effect from 17 th January 2011 (3) N Srinivasan was appointed as an additional director with effect from 25 th January 2011 CHANGES IN BOARD CONSTITUTION During the financial year ended 31 st March 2011, the following changes took place in the constitution of the Board. Mr. P B Sampath who was appointed as an additional director on 20 th July 2009 was appointed in the third Annual General Meeting held on 7 th June 2010 as a Director liable to retire by rotation. Mr. V Shankar who was appointed as additional director on 28 th October, 2009 was appointed in the third Annual General Meeting held on 7 th June 2010 as a Director liable to retire by rotation. Mr Paolo Brichetti was re-nominated as a Director on behalf of Microventures S.P.A with effect from 30 th July Mr N Srinivasan was appointed as an additional director on 25 th January Mr. M Anandan and Mr V P Nandakumar resigned as Directors of the Company with effect from 17 th January COMMITTEES OF THE BOARD The Board has currently five Committees, namely, Audit & Risk Management Committee (formerly known as Audit Committee), Remuneration and Nomination Committee (formerly known as Compensation Committee), Resourcing Committee (formerly known as Borrowing Committee), Business Committee and Governance Committee. The Board is responsible for constituting, assigning and co-opting the members of the committee. The Board fixes the terms of reference of committees and also delegates powers to the Committees from time to time. The minutes of the meetings of the committees are circulated to the Board for its information and confirmation. AUDIT & RISK MANAGEMENT COMMITTEE Composition and Meetings The Audit & Risk Management Committee currently consists of the following members: 1. Mr. P B Sampath - Chairman, 2. Mr. V Shankar 3. Mr. Gary Ng Jit Meng 4. Mr N Srinivasan The Audit Committee of the Board met six (6) times during the year on 26 th April 2010, 29 th June 2010, 30 th July 2010, 27 th October 2010, 7 th December 2010 and 25 th January 2011 respectively. Terms of Reference The role of the Committee, among others will include: 1. Oversight of the company s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. 23

25 2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the audit fees. 3. Reviewing, with the management, the quarterly and annual financial statements before submission to the board for approval, with particular reference to: a. Matters required to be included in the Director s Responsibility Statement to be included in the Board s report in terms of clause (2AA) of section 217 of the Companies Act, 1956 b. Changes, if any, in accounting policies and practices and reasons for the same. c. Major accounting entries involving estimates based on the exercise of judgment by management d. Significant adjustments made in the financial statements arising out of audit findings e. Compliance with accounting and other legal requirements relating to financial statements f. Disclosure of any related party transactions g. Qualifications in the draft audit report. 4. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems. 5. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 6. Discussion with internal auditors any significant findings and follow up there on. 7. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 8. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 9. Laying down and review of procedures relating to risk assessment & risk minimization to ensure that executive management controls risk through means of a properly defined framework. The Committee shall mandatorily review the following information: 1. Management discussion and analysis of financial condition and results of operations; 2. Statement of significant related party transactions (as defined by the audit committee), submitted by management; 3. Management letters / letters of internal control weaknesses issued by the statutory auditors; 4. Internal audit reports relating to internal controls of the Company; 24

26 REMUNERATION AND NOMINATION COMMITTEE Composition and Meetings The Remuneration and Nomination Committee currently consists of the following members, namely, 1. Mr. Paolo Brichetti, Chairman 2. Mr. Viswanatha Prasad Subbaraman 3. Mr N Srinivasan The Remuneration and Nomination Committee of the Board met three (3) times during the year on 26 th April 2010, 27 th October 2010 and 25 th January 2011 respectively. Terms of Reference The primary role of the Committee is the administration and superintendence of the Employees Stock Options Scheme (UPDB ESOS, 2007) and formulate from time to time specific parameters relating to the Scheme, including, Quantum of Options to be granted to Eligible employees, determination of eligibility conditions and selection of Eligible employees, the Vesting period and the Exercise period, Exercise price and framing suitable policies and systems, fixing and revision of remuneration payable to the Managing and Whole-time directors of the Company from time to time and to recommend to the Board changes in the Board members including Committees thereof. RESOURCING COMMITTEE Composition and Meetings The Resourcing Committee currently consists of the following members, namely, 1. Mr. P B Sampath 2. Mr V Shankar 3. Mr. P N Vasudevan The Resourcing Committee of the Board met ten (10) times during the year on 21 st June 2010, 25 th June 2010, 8 th July 2010, 27 th July 2010, 6 th August 2010, 25 th August 2010, 21 st September 2010, 30 th September 2010, 27 th October 2010 and 11 th January Terms of Reference The role of the Resourcing Committee is to approve borrowings from various persons including, banks, institutions, corporates, etc. on such terms and conditions as to repayment, interest rate or otherwise as it thinks fit and to review proposals for fresh issue of securities, equity, quasi equity or debt and recommend the same to the Board for its consideration. BUSINESS COMMITTEE Composition and Meetings The Business Committee currently consists of the following members: 1. Mr.Viswanatha Prasad Subbaraman, Chairman 2. Mr. Paolo Brichetti 3. Mr. P B Sampath 25

27 4. Mr. V Shankar 5. Mr. Gary Jit Meng Ng 6. Mr. P N Vasudevan The Committee met thrice during the year on 9 th December 2010, 25 th January 2011 and 16 th February 2011 respectively. Terms of Reference The Business committee has been authorized to review and submit its recommendations to the Board in the following matters: 1. Annual Business Plans 2. Revision in Annual Business Plans 3. New Business Initiatives proposed to be undertaken by the Company GOVERNANCE COMMITTEE Composition and Meetings The Governance Committee was constituted during the year and currently consists of the following members: 1. Mr N Srinivasan, Chairman 2. Mr Namgial 3. Mr V Shankar Terms of Reference The Governance committee has been authorized to review and submit its recommendations to the Board in the following matters: 1. To study the report issued by CRISIL on the Governance rating as well as the Guidelines on Corporate Governance and Corporate Social Responsibility issued by Ministry of Corporate Affairs, SEBI and other authorities. 2. To study the best practices and benchmarks of leading Indian corporate as well as international best practices. 3. To recommend to the Board the draft set of governance guidelines to achieve the highest level of governance at par with global benchmarks. 4. Based on approval by the Board, to oversee the implementation of the same, both at the Board level and Management level. RISK & ASSET LIABILITY MANAGEMENT COMMITTEE (RMC) Composition and Meetings Apart from the committees of the Board, a Risk & Asset Liability Management Committee was constituted 26

28 as per the guidelines issued by RBI in this regard for systemically important NBFCs. The committee currently consists of: 1. Mr. P N Vasudevan, Managing Director 2. Mr. S Bhaskar, Chief Operating Officer 3. Mr. V G Suchindran, Head - Treasury & Risk 4. Mr. K P Venkatesh, Zonal Head- Business 5. Mr. S Sethupathy, Head - Operations 6. Mr. H Mahalingam, Chief Technology Officer The Committee meets regularly once every month. Terms of Reference The terms of reference of the RMC include: 1. Liquidity Risk Management 2. Management of Market (Interest Rate) Risk 3. Funding and Capital Planning 4. Pricing, Profit planning and Growth projections 5. Credit and Portfolio Risk Management 6. Setting credit norms for various lending products of the company 7. Operational and Process Risk Management 8. Laying down guidelines on KYC norms 9. To approve and revise the actual interest rates to be charged from customers for different products from time to time applying the interest rate model. The Committee reviews the asset liability management reports to be submitted periodically to RBI. REMUNERATION OF DIRECTORS All directors except the Managing Director are paid a sitting fee of Rs. 10,000 for attending every meeting of the Board and Rs. 5,000 for every meeting of the Committees thereof. No sitting fee is payable to members of the Risk Management Committee. The details of remuneration of Non-Executive Directors for the financial year ended 31 st March 2011 are: Name of Director Mr. N Rangachary Mr. Namgial Mr. Paolo Brichetti Mr. Viswanatha Prasad Subbaraman Mr. P B Sampath Mr. V Shankar Mr. N Srinivasan Mr. Gary Jit Meng Ng Total Gross Remuneration Amount in Rs. 1,036, , , , , ,433 93, ,433 4,500,000 27

29 Mr. P N Vasudevan, Managing Director has been appointed on contractual terms approved by the Board. His remuneration consists of salary, allowances and perquisites fixed by the Board. The details of remuneration paid to the Managing Director for the financial year ended 31 st March 2011 is as follows : Particulars Amount in Rs. Salary 4,560,000 PF Employer contribution 230,400 Others 116,360 Total 4,906,760 Note: In computing the Managing Director s remuneration, perquisites have been valued in terms of actual expenditure incurred by the Company in providing the benefits except in the case of provision of car where it has been valued as per Income Tax Act. Actuarial valuation based contribution/ provision with respect to gratuity and compensated absences have not been included as these are computed for the Company as a whole. The details of sitting fees paid to directors and the shares held by them in the Company are as follows: Name Mr. N Rangachary Mr. M Anandan Mr. V P Nandakumar Mr. Namgial Mr. Paolo Brichetti Mr. Viswanatha Prasad Subbaraman Mr. Gary Ng Jit Meng Mr. P B Sampath Mr. V Shankar Mr. N Srinivasan Mr. P N Vasudevan GENERAL BODY MEETINGS Sitting Fees (Rs) Board Committee NA NA Nil Nil Nil No. of equity shares held in the Company Nil 675, ,000 Nil Nil Nil Nil Nil Nil Nil 2,637,333 During the financial year ended 31 st March 2011, one (1) Annual General Meeting and one (1) Extraordinary General Meeting were held as per details given below: Date Time Venue 26 th April th June 2010 (3 rd AGM) AM AM 28 4 th Floor, Temple Tower,672, Anna Salai, Nandanam, Chennai th Floor, Temple Tower, 672, Anna Salai, Nandanam, Chennai

30 All the proposed resolutions, including special resolutions, were passed by the shareholders as set out in their respective Notices. CEO/CFO CERTIFICATION CEO and CFO have given a certificate to the Board as per the format given in clause 49 of the standard listing agreement. CODE OF CONDUCT The Company has formulated and adopted a code of conduct for the Board of Directors and Senior Management. Equitas s Code of Conduct is derived from three interlinked fundamental principles, viz. good corporate governance, good corporate citizenship and exemplary personal conduct. FAIR PRACTICES CODE The Company has formulated a Fair Practices Code pursuant to the RBI guidelines issued in this regard to lay down procedures and practices in dealing with the business transactions, namely, applications for loans and their processing, loan appraisal and terms/conditions, disbursement of loans including changes in terms and conditions and handling of customer grievances. The Code came into effect on 15th December The Code was amended by the Board of directors at its meeting held on 23 rd January DISCLOSURES The particulars of transactions between the Company and its related parties, as defined in Accounting Standard 18, are set out the financial statements. GENERAL SHAREHOLDER INFORMATION Financial year: April 1 st to March 31 st Shareholding pattern as on 31 st March 2011 Category # Shares % Promoter Individual Investors Bodies Corporate Indian Bodies Corporate Foreign Financial Institutions Employees and Ex -Employees Total 2,637,333 2,346, ,000 35,399,182 2,059,277 1,032,882 44,425, % 5.28% 2.14% 79.68% 4.64% 2.32% % Address for Correspondence Company Secretary Equitas Micro Finance India (P) Limited 4 th Floor, Temple Tower, 672, Anna Salai, Nandanam,Chennai Tel : Tel : /4573/3224 Fax: Fax: corporate@equitas.in Web: For and on behalf of the Board of Directors Chennai Rangachary 13 th May Chairman

31 13 th May 2011 CEO/ CFO Certificate The Board of Directors Equitas Micro Finance India Private Limited This is to certify that: 1. We have reviewed financial statements and the cash flow statement for the year ended 31 st March 2011 and that to the best of our knowledge and belief: a. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; b. these statements together present a true and fair view of the company s affairs and are in compliance with existing accounting standards, applicable laws and regulations. 2. There are, to the best of our knowledge and belief, no transactions entered into by the company during the year which are fraudulent or illegal. 3. We accept responsibility for establishing and maintaining internal controls for financial reporting. Mr P N V Vasudevan MD / CEO Mr S Bhaskar COO / CFO Place: Chennai 30

32 AUDITORS REPORT To the Members of Equitas Micro Finance India Private Limited 1. We have audited the attached Balance Sheet of EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED (the Company) as at 31 March 2011, the Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on that date, both annexed thereto. These financial statements are the responsibility of the Company s Management. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We conducted our audit in accordance with the auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. As required by the Companies (Auditor s Report) Order, 2003 (CARO), issued by the Central Government in terms of Section 227 (4A) of the Companies Act, 1956, we enclose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order. 4. Further to our comments in the Annexure referred to in paragraph 3 above, we report as follows: a. we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; b. in our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books; c. the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account; d. in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in compliance with the Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956; e. in our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India: (i) in the case of the Balance Sheet, of the state of affairs of the Company as at 31 March 2011; 31

33 (ii) in the case of the Profit and Loss Account, of the profit of the Company for the year ended on that date; and (iii) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date. 5. On the basis of the written representations received from the Directors as at 31 March 2011 taken on record by the Board of Directors, none of the Directors of the Company is disqualified as at 31 March 2011, from being appointed as a Director in terms of Section 274(1)(g) of the Companies Act, For Deloitte Haskins & Sells Chartered Accountants Registration No S K. Sai Ram Place: Chennai Partner Date: 13 May 2011 Membership No

34 ANNEXURE TO THE AUDITORS REPORT (Referred to in paragraph 3 of our report of even date) (i) (ii) Having regard to the nature of the Company s business/activities/result during the year, clauses 4(ii), 4(viii), 4(x), 4(xii), 4(xiii), 4(xiv), 4(xviii) and 4(xix) of CARO are not applicable to the Company. In respect of its fixed assets: (a) (b) (c) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets. The fixed assets were physically verified during the year by the Management in accordance with a programme of verification which, in our opinion, provides for physical verification of all the fixed assets at reasonable intervals. According to the information and explanations given to us, no material discrepancies were noticed on such verification. The fixed assets disposed off during the year, in our opinion, do not constitute a substantial part of the fixed assets of the Company and such disposal has, in our opinion, not affected the going concern status of the Company. (iii) (iv) (v) The Company has neither granted nor taken any loans, secured or unsecured, to / from companies, firms or other parties listed in the register maintained under Section 301 of the Companies Act, In our opinion and according to the information and explanations given to us, there is generally an adequate internal control system commensurate with the size of the Company and the nature of its business for the purchase of fixed assets and for the rendering of services and we have not observed any major weaknesses in such internal control system. The Company does not purchase inventory nor does it sell any goods in the ordinary course of its business. In respect of contracts or arrangements entered in the register maintained in pursuance of Section 301 of the Companies Act, 1956, to the best of our knowledge and belief and according to the information and explanations given to us: (a) (b) The particulars of contracts or arrangements referred to in Section 301 of the Companies Act, 1956 that needed to be entered in the Register maintained under the said Section have been so entered. Where each of such transactions is in excess of Rs. 5 lakhs in respect of any party, the transactions have been made at prices which are, prima facie, reasonable having regard to the prevailing market prices at the relevant time. (vi) (vii) According to the information and explanations given to us, the Company has not accepted any deposits from the public during the year. In our opinion, the internal audit functions carried out during the year by an external agency appointed by the Management have been commensurate with the size of the Company and the nature of its business. 33

35 (viii) According to the information and explanations given to us in respect of Statutory dues: (a) (b) (c) The Company has been regular in depositing undisputed statutory dues, including Provident Fund, Employees State Insurance Scheme, Income Tax, Wealth Tax, Service Tax, Cess and other material statutory dues applicable to it with the appropriate authorities during the year. There were no undisputed amounts payable in respect of Provident Fund, Employees State Insurance Scheme, Income Tax, Wealth Tax, Service Tax, Cess and other material statutory dues in arrears as at 31 March 2011 for a period of more than six months from the date they became payable. There are no dues of disputed Income tax, Service Tax and Cess that have not been deposited with the appropriate authorities. (ix) (x) (xi) (xii) (xiii) (xiv) In our opinion and according to the information and explanations given to us, the Company has not defaulted in the repayment of dues to banks and financial institutions. The Company has not issued any debentures during the current year. In our opinion and according to the information and explanations given to us, the terms and conditions of the guarantees given by the Company for loans taken by others from financial institutions are not, prima facie, prejudicial to the interests of the Company. In our opinion and according to the information and explanations given to us, term loans availed by the Company were, prima facie, applied by the Company during the year for the purposes for which the loans were obtained, other than temporary deployment pending application. In our opinion and according to the information and explanations given to us, and on an overall examination of the Balance Sheet of the Company, funds raised on short term basis have, prima facie, not been used during the year for long term investment. During the year covered by our audit report, the Company has not raised any money by public issue. To the best of our knowledge and according to the information and explanations given to us, no fraud by the Company and no material fraud on the Company has been noticed or reported during the year, although there were some minor instances of fraudulent embezzlements of cash by certain employees of the Company and submission of fraudulent documentation by borrowers of the Company which were noticed by the Management. Appropriate provisions / write off of these amounts were recorded in the books of account, wherever required, based on the estimates of the Management. For Deloitte Haskins & Sells Chartered Accountants Registration No S K. Sai Ram Place: Chennai Partner Date: 13 May 2011 Membership No

36 Equitas Micro Finance India Private Limited Balance Sheet as at 31 March 2011 Schedule As at As at 31 March March 2010 Amount in Rs. Amount in Rs. SOURCES OF FUNDS Shareholder s Funds Share Capital 1 444,250, ,617,790 Share Application Money Pending Allotment 23, ,000 (Refer Note 3 of Schedule 18) Reserves & Surplus 2 2,596,201,145 2,291,688,158 Loan Funds Secured Loans 3 5,918,708,049 4,317,967,690 TOTAL 8,959,183,444 7,034,823,638 APPLICATION OF FUNDS Fixed Assets 4 Gross Block 300,327, ,417,632 Less: Accumulated Depreciation / Amortisation 82,181,668 35,589,259 Net Block 218,145, ,828,373 Capital Work in Progress (incl. Capital Advances) 7,806,700 3,124, ,952, ,952,629 Investments 5 137,129,000 2,000,000 Deferred Tax Asset (Net) (Refer Note 20(b) of Schedule 18) 48,134,275 28,296,055 Current Assets, Loans & Advances Receivables under Financing Activity 6 6,267,943,017 4,783,036,181 Cash & Bank Balances 7 2,480,342,880 2,310,995,417 Other Current Assets 8 307,247, ,098,357 Other Loans & Advances 9 229,850,619 51,324,814 9,285,383,681 7,376,454,769 Less: Current Liabilities & Provisions Current Liabilities ,054, ,830,551 Provisions ,360, ,049, ,415, ,879,815 Net Current Assets 8,547,968,075 6,879,574,954 TOTAL 8,959,183,444 7,034,823,638 Significant Accounting Policies 17 Notes to Accounts 18 The Schedules referred to above form an integral part of the Balance Sheet. As per our report attached For Deloitte Haskins & Sells For and on behalf of the Board of Directors Chartered Accountants Firm Registration No S K Sai Ram P.N. Vasudevan P.B. Sampath S. Bhaskar Partner Managing Director Director Chief Operating Officer Membership No & Company Secretary & Place: Chennai Place: Chennai Chief Financial Officer Date : 13 May 2011 Date : 13 May

37 Equitas Micro Finance India Private Limited Profit and Loss Account for the Year Ended 31 March 2011 Schedule For the year For the year ended ended 31 March March 2010 Amount in Rs. Amount in Rs. INCOME Income from Operations 12 2,277,341,084 1,197,164,564 Other Income ,142,684 43,840,914 TOTAL 2,381,483,768 1,241,005,478 EXPENDITURE Finance Expenses ,042, ,864,703 Prompt Payment Rebate 148,442,128 78,252,332 Operating & Other Expenses ,646, ,085,385 Depreciation / Amortisation 4 47,951,732 24,189,346 Provisions & Write Offs (Net) ,887,259 49,491,306 TOTAL 1,925,969, ,883,072 Profit before Taxation 455,514, ,122,406 Provision for Taxation - Current Tax (Refer Note 20(a) of Schedule 18) 170,460, ,000,000 - Deferred Tax (Refer Note 20(b) of Schedule 18) (19,838,220) (16,130,000) - Wealth Tax 500, ,000 Total Tax Expense 151,121, ,470,000 Profit after Tax 304,392, ,652,406 Transfer to Statutory Reserve (Refer Note 30 of 60,900,000 45,800,000 Schedule 18) 243,492, ,852,406 Balance Brought Forward 180,790,987 (2,061,419) Balance Carried to Balance Sheet 424,283, ,790,987 Earnings Per Share of Rs. 10 each (Refer Note 19 of Schedule 18) - Basic Diluted Significant Accounting Policies 17 Notes to Accounts 18 The Schedules referred to above form an integral part of the Profit and Loss Account As per our report attached For Deloitte Haskins & Sells For and on behalf of the Board of Directors Chartered Accountants Firm Registration No S K Sai Ram P.N. Vasudevan P.B. Sampath S. Bhaskar Partner Managing Director Director Chief Operating Officer Membership No & Company Secretary & Place: Chennai Place: Chennai Chief Financial Officer Date : 13 May 2011 Date : 13 May

38 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Cash Flow Statement for the Year Ended 31 March 2011 Cash Flows From Operating Activities For the Year Ended For the Year Ended 31 March March 2010 Amount in Rs. Amount in Rs. Profit before Taxation 455,514, ,122,406 Adjustment for: Depreciation / Amortisation 47,951,732 24,189,346 (Profit) / Loss on Sale / Write Off of Fixed Assets (72,424) 58,632 Provision for Standard Receivables under Financing Activity (Net) 18,151,618 37,583,094 Provision for Sub-standard and Doubtful Receivables under Financing Activity (Net) 14,506,438 2,742,979 Provision for Credit Enhancements on Assets De-Recognised (Net) 5,033,682 9,150,928 Loss Assets Written Off 239,195,521 14,305 Provision for Prompt Payment Rebate 60,349,451 71,904,263 Provision for Compensated Absences 4,921,882 5,184,231 Provision for Gratuity 5,420,483 1,558,998 Provision for Doubtful Advances 2,384,271 - Interest on Term Loans 665,560, ,541,908 Interest on Deposits (70,054,600) (32,000,422) Income from Securitisation / Assignment of Receivables (234,976,031) (112,398,797) Dividend Income from Current - Non-Trade - Investments - (3,951,752) Profit on Sale of Current - Non-Trade - Investments (30,198,333) (6,876,431) Operating Profit Before Working Capital Changes 1,183,687, ,823,688 Receivables under Financing Activity (2,173,884,676) (3,171,156,384) Other Current Assets (59,699,889) (149,250,248) Bank Deposits under Lien (37,871,185) (177,835,106) Other Loans & Advances (150,283,286) (1,851,007) Current Liabilities and Provisions 65,581,077 83,655,732 Bilateral Assignment and Securitisation of Assets (Net) 731,938, ,523,277 (440,531,183) (1,929,090,048) Interest Paid on Term Loans (646,097,323) (346,139,963) Interest Income on Deposits 53,605,681 11,795,203 Taxes Paid (201,658,930) (140,116,550) Net Cash Used in Operating Activities - (A) (1,234,681,755) (2,403,551,358) Cash Flows from Investing Activities Purchase of Fixed Assets (149,439,722) (124,772,287) Consideration from Sale of Fixed Assets 560, ,409 Purchase of Long Term Investments (135,129,000) (2,000,000) Purchase of Current Investments (9,623,025,325) (11,451,847,753) Proceeds from Sale of Investments 9,653,223,658 11,458,724,184 Dividend Income from Current - Non-Trade - Investments - 3,951,752 Net Cash Used in Investing Activities - (B) (253,809,440) (115,453,695) 37

39 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Cash Flow Statement for the Year Ended 31 March 2011 For the Year Ended For the Year Ended 31 March March 2010 Amount in Rs. Amount in Rs. Cash Flows From Financing Activities Proceeds from Fresh Issue of Equity Share Capital 19,203,354 1,384,612,351 Share Application Money Received 23, ,000 Share Issue Expenses - (23,663,516) Loans Received 5,377,000,000 3,797,000,000 Loans Repaid (3,776,259,641) (1,315,979,879) Net Cash From Financing Activities - (C) 1,619,967,473 3,842,518,956 Net Increase in Cash & Cash Equivalents - (A+B+C) 131,476,278 1,323,513,903 Cash & Cash Equivalents at Beginning of Year 1,980,199, ,686,004 Cash & Cash Equivalents at End of Year 2,111,676,185 1,980,199,907 Notes : 1. The reconciliation to the Cash and Bank Balances as given in Schedule 7 is as follows: Cash & Cash Equivalents at End of Year as per Schedule 7 2,480,342,880 2,310,995,417 Less: Bank Deposits under Lien as per Schedule 7 368,666, ,795,510 2,111,676,185 1,980,199, Adjustments for increase / decrease in current liabilities related to acquisition of fixed assets have been made to the extent identified. The accompanying Schedules 1 to 18 form an integral part of the Accounts. As per our report attached For Deloitte Haskins & Sells For and on behalf of the Board of Directors Chartered Accountants Firm Registration No S K Sai Ram P.N. Vasudevan P.B. Sampath S. Bhaskar Partner Managing Director Director Chief Operating Officer Membership No & Company Secretary & Place: Chennai Place: Chennai Chief Financial Officer Date : 13 May 2011 Date : 13 May

40 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Schedules Forming Part of the Balance Sheet as at 31 March 2011 Schedule 1 Share Capital (Refer Note 2 of Schedule 18) As at As at 31 March March 2010 Amount in Rs. Amount in Rs. Authorised Equity Shares: 53,500,000 Equity Shares of Rs.10 each 535,000, ,000,000 Preference Shares: 10,000,000 Compulsorily Convertible Preference Shares of Rs.10 each 100,000, ,000,000 Total 635,000, ,000,000 Issued Equity Shares: 44,425,049 (As at 31 March ,461,779) Equity Shares of Rs.10 Each 444,250, ,617,790 Preference Shares: Nil (As at 31 March ,638,784) Compulsorily Convertible Preference Shares of Rs.10 Each - 96,387,840 Note: The above Preference Shares have been converted into Equity Shares during the year ended 31 March During the year ended 31 March 2011 the issued Preference Shares were cancelled. Also Refer Note 2(ii) of Schedule 18. Total 444,250, ,005,630 Subscribed & Paid-up Equity Shares: 44,425,049 (As at 31 March ,461,779) Equity Shares of Rs.10 Each 444,250, ,617,790 Total 444,250, ,617,790 39

41 Schedules Forming Part of the Balance Sheet as at 31 March 2011 As at As at 31 March March 2010 Amount in Rs. Amount in Rs. Schedule 2 Reserves & Surplus Securities Premium Account Opening Balance 2,060,686, ,710,466 Add : Additions (Refer Note 1 below) 120,654 1,282,639,221 Less : Share Issue Expenses (Refer Note 2 below) - 23,663,516 2,060,806,825 2,060,686,171 Statutory Reserve (Refer Note 30 of Schedule 18) Opening Balance 50,211,000 4,411,000 Add : Additions 60,900,000 45,800, ,111,000 50,211,000 Profit and Loss Account 424,283, ,790,987 Total 2,596,201,145 2,291,688,158 Notes: 1. Additions to Securities Premium Account represents; For the Current Year (Refer Note 4(ii) of Schedule 18) - Premium on Allotment of 2,027 Equity Shares of Rs.10 each to employees under the ESOP Scheme at a premium of Rs. 2 per Share. - Premium on Allotment of 5,300 Equity Shares of Rs.10 each to employees under the ESOP Scheme at a premium of Rs. 22 per Share. For the Previous Year - Premium on Allotment of 1,301,064 Equity Shares of Rs.10 each to certain investors at a premium of Rs. 55 per Share. - Premium on Allotment of 1,367,989 Equity Shares of Rs.10 each to certain investors at a premium of Rs per Share. - Premium on Allotment of 7,523,940 Equity Shares of Rs.10 each to an investor at a total premium of Rs. 1,024,760, Identifiable Share Issue Expenses incurred have been adjusted against the Securities Premium Balance in accordance with Section 78 of the Companies Act, Schedule 3 Secured Loans (Refer Note 9 of Schedule 18) Rupee Term Loans - From Banks 3,479,416,296 2,710,334,380 - From Financial Institutions 1,729,758,400 1,271,000,000 - From Others 709,533, ,578,633 Cash Credit Account with Bank - 54,677 Total 5,918,708,049 4,317,967,690 Amounts Repayable within One Year 4,052,038,479 2,460,472,000 40

42 Equitas Micro Finance India Private Limited Schedules Forming Part of the Balance Sheet as at 31 March 2011 Schedule 4 Fixed Assets Amount in Rs. Gross Block Accumulated Depreciation / Amortisation Net Block Description As at 1 April 2010 Additions Deletions As at 31 March 2011 As at 1 April 2010 For the Year Deletions As at 31 March 2011 As at 31 March 2011 As at 31 March 2010 Land - Freehold * 58,260,929 36,170,509-94,431, ,431,438 58,260,929 Buildings * - 21,733,679-21,733, , ,755 20,917,924 - Improvements to Leasehold Premises 13,922,984 6,344,066 55,727 20,211,323 5,757,972 5,835,841 9,759 11,584,054 8,627,269 8,165,012 Office Equipments 4,898,439 4,895,258 18,950 9,774,747 2,654,677 3,001,508 8,582 5,647,603 4,127,144 2,243,762 Computers 37,640,749 45,857, ,997 83,056,015 12,948,245 18,700, ,239 31,292,283 51,763,732 24,692,504 Furniture & Fittings 9,017,677 7,724,811 31,174 16,711,314 6,480,359 6,554,106 18,366 13,016,099 3,695,215 2,537,318 Vehicles 2,200,304 2,578,105 1,300,000 3,478, , , , ,402 2,901,007 1,369,388 Intangible Assets - Software 31,476,550 19,453,587-50,930,137 6,917,090 12,331,382-19,248,472 31,681,665 24,559,460 Grand Total 157,417, ,757,278 1,847, ,327,062 35,589,259 47,951,732 1,359,323 82,181, ,145, ,828,373 Previous Year 36,868, ,648,031 1,099, ,417,632 11,950,180 24,189, ,267 35,589, ,828,373 24,918,729 * Refer note 8 of schedule 18 41

43 Schedules Forming Part of the Balance Sheet as at 31 March 2011 As at As at 31 March March 2010 Amount in Rs. Amount in Rs. Schedule 5 Investments (Refer Note 10 of Schedule 18) Wholly Owned Subsidiaries - Long Term - Unquoted 6,000,000 (As at 31 March Nil) Equity Shares of Rs. 10 each of Equitas Housing Finance Private Limited 60,000,000-2,000,000 (As at 31 March Nil) Equity Shares of Rs. 10 each of Equitas B2B Trading Private Limited 20,000, ,000 (As at 31 March Nil) Equity Shares of Rs. 100 each of V.A.P. Finance Private Limited 55,129,000 - Long Term Investments - Trade - Unquoted 200,000 (As at 31 March ,000) Equity Shares of Alpha Micro 2,000,000 2,000,000 Finance Consultants Private Limited of Rs. 10 each 137,129,000 2,000,000 Note: Aggregate Cost of Unquoted Investments 137,129,000 2,000,000 Schedule 6 Receivables Under Financing Activity (Refer Note 4 below) Unsecured Micro Finance Loans (Refer Notes 1 & 2 below) 6,199,611,063 4,770,743,906 Micro Finance Loans given as Credit Enhancements for Loans Assigned 47,087,693 - Installments and Other Dues from Borrowers 21,110,498 3,439,249 Secured Loans for Purchase of Gold Coins (Refer Note 3 below) 125,787 8,823,431 Installments and Other Dues from Borrowers 7,976 29,595 Total 6,267,943,017 4,783,036,181 Notes : 1. The above Micro Finance Loans comprise of Loans which have been granted under the Joint Liability Group (JLG) Scheme and Other Loans to the Individual Borrowers of the Company. 2. Refer Notes 5 & 6 of Schedule 18 for details of Assets De-Recognised on account of Securitisation / Assignment of Receivables. 3. The above Loans for Purchase of Gold Coins are secured by Pledge of the Gold Coins. 4. Of the above: - Considered Good 6,225,607,715 4,773,865,968 - Others (Sub-standard and Doubtful Receivables under Financing 42,335,302 9,170,213 Activity as per Company s Provisioning Norms) * * Refer Schedule 11 for Provision for Sub-standard and Doubtful Receivables under Financing Activity. 5. Secured Installments and Other Dues from Borrowers includes amounts 6,201 - outstanding for more than 6 months 6. Unsecured Installments and Other Dues from Borrowers includes amounts 10,122, ,375 outstanding for more than 6 months 42

44 Schedules Forming Part of the Balance Sheet as at 31 March 2011 As at As at 31 March March 2010 Amount in Rs. Amount in Rs. Schedule 7 Cash & Bank Balances Cash on Hand - 19,150 Balances with Scheduled Banks: On Current Accounts 594,756, ,180,757 On Deposit Accounts - Free of Lien 1,516,920,000 1,790,000,000 - Under Lien (Refer Note Below) 368,666, ,795,510 Total 2,480,342,880 2,310,995,417 Note: Deposit Accounts under Lien represents : - A total amount of Rs. 276,383,948 (As at 31 March Rs. 236,195,510) placed as collateral towards Assets De-recognised. (Refer Notes 5 and 6 of Schedule 18) A total Amount of Rs. 92,282,747 (As of 31 March Rs. 94,600,000) with respect to the Term Loans obtained by the Company from Banks. (Refer Note 9 of Schedule 18) Schedule 8 Other Current Assets - Considered Good Gold Coins on Hand [including Repossessed Gold Coins Rs. Nil 25,965 28,742 (As at 31 March Rs. 2,777)] Deposits (Refer Note below) 229,838, ,994,186 Interest Accrued but Not Due - on Loans to Borrowers 37,386,188 29,527,751 - on Deposits 39,996,597 23,547,678 Total 307,247, ,098,357 Note: Deposits represents:- A total amount of Rs. 1,588,415 (As at 31 March Rs. 34,744,186) placed as collateral with an NBFC towards Assets De-recognised. (Refer Note 6 of Schedule 18) A total Amount of Rs. 228,250,000 (As of 31 March Rs. 143,250,000) with respect to the Term Loans obtained by the Company from a Financial Institution. (Refer Note 9 of Schedule 18) 43

45 Schedules Forming Part of the Balance Sheet as at 31 March 2011 As at As at 31 March March 2010 Amount in Rs. Amount in Rs. Schedule 9 Other Loans & Advances (Refer Note 4 below) Secured Loans to Employees (Refer Note 1 below) 8,907,005 2,908,496 Unsecured Advances Recoverable in Cash or in Kind or for Value to be Received 137,268,429 18,074,915 Loans to Employees 8,674,647 2,513,281 Rental Deposits 30,970,560 20,474,190 Balance with Government Authorities - Service Tax Input Credit 12,498,989 4,065,462 Advance Income Tax / TDS [Net of Provision for Tax Rs. 321,860,000 33,899,173 3,272,383 (As at 31 March Rs. 151,400,000)] Advance Fringe Benefit Tax [Net of Provision for Tax Rs. 1,412,207 16,087 16,087 (As at 31 March Rs. 1,412,207)] 232,234,890 51,324,814 Less : Provision for Doubtful Advances 2,384,271 - Total 229,850,619 51,324,814 Notes: 1. Secured Loans to Employees are secured by Hypothecation of the Vehicles purchased by the Employees out of the Loan proceeds. 2. Amount Due from Equitas Dhanyakosha India 15,235,067 67, Maximum Amount Outstanding from Equitas Dhanyakosha India at any time during the Year 15,235,067 1,124, Of the above - Considered Good 229,850,619 51,324,814 - Considered Doubtful 2,384,271 - Schedule 10 Current Liabilities Sundry Creditors - Micro Enterprises and Small Enterprises (Refer Note 12 of Schedule 18) 179, ,300 Sundry Creditors - Others 72,040,901 51,432,511 Unamortised Income - Processing Fee - 4,965,663 - Gain on Securitisation / Assignment of Receivables 98,825, ,234,946 - Interest Strip Retained on Assignment of Receivables 81,589, ,044 Advances from Customers 736, ,407 Interest Accrued but Not Due on Loans 50,226,297 30,763,458 Other Liabilities (Refer Note below) 146,455,987 95,650,222 Total 450,054, ,830,551 Note: Other Liabilities include monies held in trust in respect of collections from Assets De-Recognised on account of Securitisation / Assignment of Receivables. 127,406,131 88,939,034 Schedule 11 Provisions (Refer Note 22 of Schedule 18) Provision for Standard Receivables under Financing Activity 77,824,943 59,673,325 Provision for Sub-standard and Doubtful Receivables under Financing Activity 17,389,595 2,883,157 Provision for Credit Enhancements on Assets De-Recognised 20,887,568 15,853,886 Provision for Prompt Payment Rebate 149,336,135 88,986,684 Provision for Compensated Absences 13,355,872 8,433,990 Provision for Gratuity 8,038,705 2,618,222 Provision for Wealth Tax [(Net of Advance Tax of Rs. 572,140 (As at 31 March Rs. Nil)] 527, , ,360, ,049,264

46 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Schedules Forming Part of the Profit and Loss Account for the Year Ended 31 March 2011 For the Year Ended For the Year Ended 31 March March 2010 Amount in Rs. Amount in Rs. Schedule 12 Income from Operations Interest Income from Loans 1,986,410,920 1,017,548,001 Processing, Membership and Centre Fees 38,491,807 50,966,788 Income from Securitisation / Assignment of Receivables 234,976, ,398,797 Insurance Administration Charges 17,462,326 16,250,978 Total 2,277,341,084 1,197,164,564 Schedule 13 Other Income Interest on Deposits [Tax Deducted at Source - Rs. 6,901,138 (Previous Year - Rs. 3,588,468)] 70,054,600 32,000,422 Profit on Sale of Current - Non Trade - Investments (Refer Note 10 of Schedule 18) 30,198,333 6,876,431 Dividend Income from Current - Non-Trade Investments - 3,951,752 Foreign Currency Exchange Gain (Net) 14, ,552 Profit on Sale of Fixed Assets (Net) 72,424 - Rental Income 2,444,472 - Miscellaneous Income 1,357, ,757 Total 104,142,684 43,840,914 Schedule 14 Finance Expenses Interest on Term Loans 665,560, ,541,908 Loan Processing Fees 22,720,789 23,133,286 Bank Charges 14,761,542 3,189,509 Total 703,042, ,864,703 Schedule 15 Operating & Other Expenses Salaries & Bonus (Also Refer Note 11 of Schedule 18) 374,715, ,973,742 Contribution to Provident & Other Funds 31,104,278 10,510,125 Gratuity 5,420,483 1,558,998 Staff Welfare Expenses 32,631,390 13,576,008 Rent 31,040,922 17,494,214 Electricity Charges 4,134,647 2,313,943 Rates & Taxes 1,080, ,306 Brokerage & Commission 286, ,300 Insurance 8,740,275 2,891,667 Software Expenses 23,792,281 7,713,837 Repairs & Maintenance - Others 7,128,864 6,412,779 Cash Management Charges 23,617,032 8,491,721 Travelling & Conveyance 39,737,010 17,988,943 Communication Expenses 27,282,185 7,544,535 Printing & Stationery 26,014,870 13,236,749 Centre Head Fees 60,052,860 29,800,570 Advertisement & Business Promotion 4,851,259 1,930,785 Legal & Professional Charges 22,580,909 8,621,350 Directors Sitting Fees 640, ,000 Donations (Refer Note 28 of Schedule 18) 15,219,617 12,432,620 Auditors Remuneration (Net of Service Tax Input Credit) - Statutory Audit 1,300, ,000 - Limited Review 500, ,000 - Tax Audit 300, ,000 - Others 30, ,000 - Out of Pocket Expenses 10,627 5,682 Provision for Doubtful Advances 2,384,271 - Fixed Assets Written Off - 58,632 - Other Expenses 5,049,852 1,186,879 Total 749,646, ,085,385 45

47 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Schedules Forming Part of the Profit and Loss Account for the Year Ended 31 March 2011 For the Year Ended For the Year Ended 31 March March 2010 Amount in Rs. Amount in Rs. Schedule 16 Provisions & Write offs (Net) Provision for Standard Receivables under Financing Activity (Refer Note 22 of Schedule 18) 18,151,618 37,583,094 Provision for Sub-standard and Doubtful Receivables under Financing Activity (Refer Note 22 of Schedule 18) 14,506,438 2,742,979 Provision for Credit Enhancements on Assets De-Recognised (Refer Note 22 of Schedule 18) 5,033,682 9,150,928 Loss Assets Written Off (Refer Note 29 of Schedule 18) 239,195,521 14,305 Total 276,887,259 49,491,306 46

48 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Schedules Forming Part of the Accounts for the Year Ended 31 March 2011 Schedule 17 Significant Accounting Policies 1. Basis of Preparation of Financial Statements The financial statements are prepared under the historical cost convention in accordance with the generally accepted accounting principles in India, Accounting Standards (AS) notified by the Companies (Accounting Standards) Rules, 2006, and relevant provisions of the Companies Act, The Company follows the prudential norms for income recognition, asset classification and provisioning as prescribed by the Reserve Bank of India for Systemically Important Non-deposit taking Non-Banking Finance Companies (NBFC-ND-SI) or more stringent norms as indicated in Item 20 below. Also Refer Note 26 of Schedule Use of Estimates The preparation of the financial statements requires the Management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses during the reporting period like provisioning for employee benefits, provisioning for receivables, provisioning for advances, provisioning for credit enhancement for assets de-recognised, useful lives of fixed assets, provisioning for prompt payment rebate, provisioning for taxation etc. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Future results may vary from these estimates. 3. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. i. Interest Income on Loans given is recognized under the internal rate of return method. Income on Non-performing Assets is recognized only when realized and any interest accrued on such assets is de-recognized totally by reversing the unrealized interest income already recognized. ii. iii. iv. Loan Processing Fee is recognized over the life of the loan on a straight line basis. Membership Fees and Insurance Administration Charges, which are due at the time of disbursement, are recognized as income on upfront basis. Centre Fees are collected for each centre meeting and accounted on accrual basis. v. Pre-closure Charges are levied and accounted at the time of actual pre-closure. vi. In respect of the receivables securitised / assigned, gains arising thereon are amortised over the life of the related receivables. In case of any loss the same is recognised in the profit and loss account immediately. vii. Interest Income on deposits is recognized on a time proportion basis taking into account the amount outstanding and the rate applicable. 47

49 viii. All other income is recognized on an accrual basis, when there is no uncertainty in the ultimate realisation / collection. 4. Fixed Assets and Depreciation Fixed assets are stated at cost less accumulated depreciation. Cost includes taxes, duties, freight and incidental expenses related to the acquisition and installation of the asset. Assets under installation or under construction as at the balance sheet date are shown under Capital Work in Progress. Advances paid towards acquisition of assets are also included under Capital Work in Progress. Eligible borrowing costs directly attributable to acquisition or construction of fixed assets which necessarily take a substantial period of time to get ready for their intended use are capitalised. Depreciation on fixed assets is provided pro-rata on the basis of the straight-line method, over the period of use of these assets, at the annual depreciation rates and in the manner stipulated in Schedule XIV to the Companies Act, 1956 or based on the depreciation rates as per the estimated useful lives of the assets determined by the Management, whichever is higher as follows: Fixed Assets Percent Building Office Equipments Computers Furniture & Fittings Vehicles Intangible Assets - Software Lower of License Period or 3 years Improvements to leasehold premises are depreciated over the primary lease period or 3 years, whichever is lower. Individual fixed assets costing Rs. 5,000 or less are fully depreciated in the year of purchase. Depreciation is accelerated on fixed assets, based on their condition, usability etc. as per the technical estimates of the Management, where necessary. 5. Impairment The carrying amounts of fixed assets are reviewed at each balance sheet date if there is any indication of impairment based on internal / external factors. An impairment loss is recognized wherever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the asset s net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value at the weighted average cost of capital. 48

50 After impairment, depreciation is provided on the revised carrying amount of the asset over its remaining useful life. 6. Investments Investments which are long term in nature, are stated at cost net of provision, if any, for diminution, other than temporary, in the value of investments. Current investments are valued at lower of cost and fair value. 7. Cash and Cash Equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with banks with an original maturity of three months or less. 8. Receivables under Financing Activity All loan exposures to borrowers with installment structure are stated at the full agreement value after netting off installments appropriated up to the year-end 9. Finance Expenses Expenditure incurred for raising borrowed funds including ancillary costs incurred in connection with the arrangement of borrowings, which is not eligible for capitalization, is fully charged to the profit and loss account on incurrence. 10. Provision for Prompt Payment Rebate Prompt payment rebate is payable to the eligible borrowers at the end of the loan tenure, upon satisfaction of the repayment terms of the loan. Provision required for such prompt payment rebate as at the end of the reporting period is estimated and provided for in the books based on the repayments made during the year by such potentially eligible borrowers. 11. Foreign Currency Transactions i) Transactions in foreign currency are accounted at the exchange rate prevailing on the date of the transaction. ii) Foreign currency monetary items as at the balance sheet date are restated at the closing exchange rates. Exchange rate differences arising on actual payments/realizations and period-end restatements are recognized as income or expense in the profit and loss account. 12. Retirement and Other Employee Benefits i) Defined Contribution Plan Provident Fund: Contributions to the employees provident fund scheme maintained by the Central Government are accounted for on an accrual basis. ii) Defined Benefit Plan Gratuity: The Company estimates its liability towards employees gratuity based on an actuarial valuation done by an independent actuary using the projected unit credit method done at the end of 49

51 each accounting period. Actuarial gains/losses are immediately recognised in the profit and loss account in the period in which they occur. Obligation under the defined benefit plans is measured at the present value of estimated future cash flows using a discounted rate that is determined by reference to the prevailing market yields at the balance sheet date on Indian Government bonds where the currency and term of the Indian Government bonds are consistent with the currency and estimated term of the defined benefit obligation. iii) Compensated Absences The liability for long term compensated absences carried forward on the balance sheet date is provided for based on an actuarial valuation done by an independent actuary using the projected unit credit method done at the end of each accounting period. Short term compensated absences is recognized based on the eligible leave at credit on the balance sheet date, and the estimated cost is based on the terms of the employment contract. 13. Deferred Employee Stock Compensation Cost Deferred employee stock compensation cost for stock options is recognised as per the Guidance Note on Accounting for Employee Share-based Payments, issued by the Institute of Chartered Accountants of India. The Company measures compensation cost relating to the employee stock options using the intrinsic value method. The compensation cost, if any, is amortised uniformly over the vesting period of the options. 14. Service Tax Input Credit Service tax input credit is accounted for in the books in the period when the underlying service received is accounted and when there is no uncertainty in availing / utilizing the same. 15. Leases Leases where the lessor effectively retains substantially all the risks and benefits of ownership are classified as operating leases. Operating lease payments are recognised as an expense in the profit and loss account on a straight-line over the lease term. Lease rental income from assets given on operating lease is recognized on a time proportion basis as per the terms of the contract. 16. Insurance Claims Insurance claims are accrued for on the basis of claims admitted and to the extent there is no uncertainty in receiving the claims. 17. Earnings Per Share Basic earnings per share is computed by dividing the profit / (loss) after tax (including the post tax effect of extra ordinary items, if any) by the weighted average number of equity shares outstanding during the year. Diluted earnings per share is computed by dividing the profit / (loss) after tax (including the post tax effect of any extra ordinary items, if any) by the weighted average number of equity shares considered for deriving basic earnings per share and also the weighted average number of 50

52 equity shares which could have been issued on the conversion of all dilutive potential equity shares. Dilutive potential equity shares are deemed converted as at the beginning of the period, unless they have been issued at a later date. The dilutive potential equity shares are adjusted for the proceeds receivable had the shares been actually issued at fair value (i.e. value of the outstanding shares transferred between two independent persons). Dilutive potential equity shares are determined independently for each period presented. The number of equity shares and potentially dilutive equity shares are adjusted for share splits/ reverse share splits and bonus shares, as appropriate. 18. Income Taxes Current tax is the amount of tax payable on the taxable income for the year and is determined in accordance with the provisions of the Income Tax Act, Deferred tax is recognised, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets in respect of unabsorbed depreciation and carry forward losses are recognised if there is virtual certainty that there will be sufficient future taxable income available to realise such assets. Other deferred tax assets are recognised if there is reasonable certainty that there will be sufficient future taxable income available to realise such assets. Deferred tax assets and liabilities are measured using the tax rates and tax laws that have been enacted or substantially enacted by the balance sheet date. 19. Provisions, Contingent Liabilities and Contingent Assets Provisions are recognised only when the Company has present or legal obligations as a result of past events for which it is probable that an outflow of economic benefit will be required to settle the transaction and when a reliable estimate of the amount of obligation can be made. Contingent liability is disclosed for (i) Possible obligations which will be confirmed only by future events not wholly within the control of the Company or (ii) Present obligations arising from past events where it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made. Contingent assets are not recognised in the financial statements since this may result in the recognition of income that may never be realised. 20. Classification & Provisions of Loan Portfolio Loans are classified and provided for as per the Company s Policy and Management s estimates, subject to the minimum classification and provisioning norms required as per the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions,

53 i. Classification of Loans Asset Classification Standard Assets Period of Overdue Not Overdue and Overdue for less than 30 days Non Performing Assets (NPA) Sub-Standard Assets Doubtful Assets Loss Assets Overdue for 30 days and more but less than 90 days Overdue for 90 days and more Assets which are identified as loss asset by the Company or the internal auditor or the external auditor or by the Reserve Bank of India. Overdue refers to interest and / or principal and / or installment remaining unpaid from the day it became receivable. ii. Provisioning Norms for Loans Asset Classification Standard Assets Provisioning Percentage used by the Company 1.25% Non Performing Assets (NPA) Sub-Standard Assets a. Overdue for 30 days and more but less than 60 days b. Overdue for 60 days and more but less than 90 days Doubtful Assets a. Doubtful Assets Overdue for 90 days and more but less than 120 days b. Doubtful Assets Overdue for 120 days and more Loss Assets 10% 25% 50% 100% 100% Note: Income on NPAs is recognised only when realised. iii. Under exceptional circumstances, Management may renegotiate loans by rescheduling repayment terms for customers who have defaulted in repayment but who appear willing and able to repay their loans under a longer term agreement. Rescheduled Standard Assets are classified / provided for as Sub-Standard Assets as per (ii) above which classification / provisioning is retained for a period of 1 year of satisfactory performance. Rescheduled Non Performing Assets are not upgraded but are retained at the original classification / provisioning for a period of 1 year of satisfactory performance. 52

54 21. Provision for Credit Enhancements on Assets De-Recognised Provision for Credit Enhancements on Assets De-Recognised is made based on Management 1.25% of the outstanding amount of assets de-recognised from the books of the Company as at the balance sheet date. 22. Share Issue Expenses Identifiable share issue expenses are either debited to the profit and loss account or adjusted against the securities premium account in accordance with Section 78 of the Companies Act, Preliminary Expenses Preliminary expenses are written off fully in the year / period of commencement of commercial operations. 53

55 EQUITAS MICRO FINANCE INDIA PRIVATE LIMITED Schedules Forming Part of the Accounts for the Year Ended 31 March 2011 Schedule 18 Notes to Accounts 1. Nature Of Operations Equitas Micro Finance India Private Limited ( the Company ) was incorporated on 22 June The Company is engaged in extending micro credit to economically active persons who are otherwise unable to access finance from the mainstream banking channels. The Company generally provides small value collateral free loans upto Rs. 20,000 for a tenor of six months to two years with fortnightly / monthly repayment. The Company broadly follows the Grameen model with suitable adaptations using the Joint Liability Groups (JLG) framework, where each member of the group guarantees the loan repayment of the other members of the group. All transactions are conducted in the group meetings organised every fortnight / monthly near the habitats of the members. The Company also provides individual loans to the existing borrowers ranging between Rs. 100 to Rs. 20,000 as additional loans like second cycle loans, educational loans, kirana loans etc. Further, the Company provides loans to the existing borrowers for purchase of Gold Coins. These loans are secured against the Gold Coins purchased by the borrower and are given for a maximum tenor of two years. The Company has tied up with various insurance companies and acts as Group Manager for providing group term life insurance to its members. The Company collects nominal charges from its members to meet the administrative costs incurred for rendering these services. Also Refer Note 26 below. 2. Share Capital i. Equity Share Capital a. During the year ended 31 March 2011, the Company allotted 1,160,333 Equity Shares of Rs. 10 each at par to the Managing Director of the Company in accordance with the agreement dated 4 February Refer Note 4(i) below. b. During the year ended 31 March 2011, the Company allotted 802,937 (Previous Year 4,320) Equity Shares of Rs. 10 each to eligible employees pursuant to exercise of options under the Employee Stock Options Scheme. Refer Note 4(ii) below. c. As of 31 March 2011, the total foreign investment in the Company has exceeded 75% of the Paid-up Share Capital of the Company.Consequently, the non-resident shareholders of the Company are required to bring in a total minimum amount of USD 50,000,000 (including an up-front amount of USD 7,500,000) of Foreign Direct Investment (FDI) within the stipulated time. As of 31 March 2011, the non- 54 3

56 resident shareholders of the Company have directly brought in USD 48,960,560 (including the up-front amount of USD 7,500,000) of FDI towards Share Capital and Securities Premium of the Company. The Company is confident that the balance amount of USD 1,039,440 of FDI will be brought in by its current / prospective non-resident shareholders within the time limit prescribed / available as per the applicable RBI Regulations. ii. Preference Share Capital During the year ended 31 March 2009, the Company had entered into a Subscription Agreement dated 6 August 2008 with certain investors for issue of 9,638,784 Zero Coupon Compulsorily Convertible Preference Shares ( CCPS ) of Rs. 10 each at a premium of Rs. 42 per Share. Pursuant to the same, the aforesaid CCPS were allotted to the investors on 23 August The CCPS carried no dividend and were convertible into fully paid Equity Shares on a date no later than 31 August The CCPS were converted into 8,793,278 fully paid Equity Shares of Rs. 10 each at a total premium of Rs. 8,455,060 on 31 March During the year ended 31 March 2011, the issued CCPS were cancelled at the Board Meeting held on 25 January Share Application Money Pursuant to a Employee Stock Option (ESOP) Scheme as indicated under Note 4 (ii) below, the Company has received the Share Application Money of Rs. 23,760 from two employees towards subscription of 1,485 Equity Shares of Rs. 10 each at various exercise prices, which was granted to employees under the ESOP Scheme. Pending allotment, the amount received from the employee has been shown as Share Application Money Pending Allotment as at 31 March During the previous year ended 31 March 2010, pursuant to a Employee Stock Option (ESOP) Scheme as indicated under Note 4 (ii) below, the Company had received the Share Application Money of Rs. 550,000 from an employee towards subscription of 55,000 Equity Shares of Rs. 10 each, which was granted at an exercise price of Rs. 10 per Share during the first batch of ESOPs issued during February Pending allotment, the amount received from the employee had been shown as Share Application Money Pending Allotment as at 31 March During the year ended 31 March 2011, the Company has allotted the Shares to the employee and the amount included under Share Application Money Pending Allotment has been transferred to Equity Share Capital. 4. Share Options and Preferential Offer of Shares i. Preferential Offer of Equity Shares to Managing Director The Company had entered into an agreement dated 4 February 2008 with the Managing Director of the Company for his subscribing to a total of 2,000,000 Equity Shares of the Company over a period of 3 years at Par (660,000 Equity Shares for years 1 and 2 respectively and 680,000 Equity Shares for year 3). The Shares can be purchased partly based on the duration of employment and partly based on performance. Subsequently, the Board, at its meetings held on 22 April 2009 and 26 April 2010, has revised the terms of the agreement and has approved the offer of 533,333 Equity Shares as against the eligible 660,000 Equity Shares for the first year as per the original agreement. Further, the Remuneration 55

57 and Nomination Committee, at its meeting held on 26 April 2010, has revised the terms of the agreement and has approved the offer of 627,000 Equity Shares as against the eligible 660,000 Equity Shares for the second year as per the original agreement. On 30 July 2010, the Managing Director has excersied the preferential offer and subscribed for 1,160,333 Equity Shares of Rs. 10 each (comprising 533,333 Equity Shares for the first year and 627,000 Equity Shares for the second year), which has been approved and allotted by the Board at its meeting held on that date. The outstanding number of Shares pending to be exercised as at 31 March 2011 pursuant to the above agreement is 680,000 Equity Shares. ii. Employee Stock Option Scheme On 17 December 2007, the Company established an Employees Stock Option Scheme. Under the plan, the Company is authorized to issue upto 5,620,000 Equity Shares of Rs. 10 each to eligible employees of the Company and its Subsidiaries. Employees covered by the plan are granted an option to purchase shares of the Company subject to the requirements of vesting. A Compensation Committee constituted by the Board of Directors of the Company administers the plan. As at 31 March 2011, 4,154,991 (As at 31 March ,510,984) (net of forfeitures) options were outstanding which were granted at various exercise prices. The following are the outstanding options as at 31 March 2011: Particulars Grant 1 Grant 2 Grant 3 Grant4 Grant5 Grant 6 Grant 7 Date of Grant 26 February 9 June 1 November 22 April 28 October 26 April 27 October Exercise Price Per Option (Rs) Total Options granted 2,035, , , , , and outstanding as at 31 March 2010 Add: Options Granted ,350 1,102,150 during the Year Less: Options Forfeited 113,245 15,790 46,867 46, , , ,550 / Lapsed during the Year Options Exercised 795,610 2,027 5, during the Year Options Outstanding as at 31 March Vested 340,830* 82, ,420# 125,496 95, Yet to Vest 785,400 62, , , , , ,600 * Includes 1,080 options vested, for which the Company has received Share Application Money, which is pending allotment of Equity Shares as at 31 March Refer Note 3 above. # Includes 405 options vested, for which the Company has received Share Application Money, which is pending allotment of Equity Shares as at 31 March Refer Note 3 above. 56

58 The fair value of options used to compute Proforma net profit and earnings per Equity Share have been estimated on the date of the grant using Black-Scholes model by an external firm of Chartered Accountants. The key assumptions used in Black-Scholes model for calculating fair value as on the date of the grant are: Date of Grant Variables 26 February 9 June 1 November 22 April 28 October 26 April 27 October Risk Free Interest 8.5% 8.75% 9.75% 8.25% 6.75% 6.50% 7.25% Rate to 9% to 7% to 7.25% to 7.50% 2. Expected Life 3.33 to 3.33 to 3.33 to 3.33 to 3.33 to 3.33 to 3.33 to 5.33 yrs 5.33 yrs 5.33 yrs 5.33 yrs 5.33 yrs 5.33 yrs 5.33 yrs 3. Expected Volatility 43% 43% 41% 42% 37% 37% 35% to 45% to 45% to 47% to 44% to 44% to 40% to 40% 4. Dividend Yield Nil Nil Nil Nil Nil Nil Nil 5.Price of the underlying Share at the time of the Option Grant (Rs.) 6. Fair Value of the Option (Rs.) 1 st Stage nd Stage rd Stage th Stage Had compensation cost for the stock options granted under the Scheme been determined based on the fair value approach, the Company s net profit and earnings per share would have been as per the Proforma amounts indicated below: (Amount in Rs.) Particulars Net Profit (as reported) Add: Stock Based Employee Compensation Expense included in Net Profit Less: Stock Based Compensation Expense Determined under Fair Value based Method (Proforma) Net Profit (Proforma) For the Year Ended 31 March ,392,333-20,009, ,382,985 For the Year Ended31 March ,652,406-19,114, ,537,452 57

59 Particulars Basic Earnings per Share of Rs. 10 each (as reported) (Rs.) Basic Earnings per Share of Rs. 10 each (Proforma) (Rs.) Diluted Earnings per Share of Rs. 10 each (as reported) (Rs.) Diluted Earnings per Share of Rs. 10 each (Proforma) (Rs.) For the Year Ended 31 March For the Year Ended 31 March Securitization of Assets : As per the RBI guidelines on Securitization on Standard Assets issued on 6 February 2006, the details of Assets De-recognised by way of Securitisation is as under: (Amount in Rs.) Particulars Total Number of Loan Assets Securitized during the Year Book Value of Loans Assets Securitized during the Year Sale Consideration Received during the Year Total Gain on account of Securitization to be Amortised over the Life of the Receivables during the Year Gain Recognised in the Profit and Loss Account during the Year (including amortization of Unamortised Income) Quantum of Credit Enhancement provided during the Year in the form of Deposits For the Year Ended 31 March , ,215, ,993, ,777,889 98,506,362 99,980,000 For the Year Ended 31 March , ,642, ,836,104 58,193,493 37,678,382 54,700,000 Particulars Un-amortised Income as at Year End Quantum of Credit Enhancement as at Year End As at 31 March ,185,550 99,980,000 (Amount in Rs.) As at 31 March ,209,733 73,032,532 58

60 6. Bilateral Assignment of Receivables The Company has entered into certain bilateral assignments with Banks / NBFCs and the transactions have been accounted for in accordance with the Accounting Policy of the Company. The details of these assignment transactions are given below: (Amount in Rs.) Particulars Assets De-Recognised during the Year Consideration Received during the Year Cash Collaterals provided as First Loss and Second Loss Facility during the Year Micro Finance Loans Subordinated as Credit Enhancements for Assets De-Recognised For the Year Ended 31 March ,056,478,736 1,123,784, ,623,303 47,087,693 For the Year Ended 31 March ,775,276 1,034,381, ,441,631 - Excess Interest Spread Receivable Subordinated as Credit Enhancements for Assets De-Recognised Total Gain on Assignment to be Amortised over the Life of the Receivables during the Year (Including Interest Strip Retained) 60,891, ,636, ,606,181 Gain Recognised in the Profit and Loss Account during the Year (including amortization of Unamortised Income) 136,469,669 74,720,415 Particulars Unamortised Income as at Year End Cash Collaterals as at Year End Micro Finance Loans Subordinated as Credit Enhancements for Assets De- Recognised Excess Interest Spread Receivable Subordinated as Credit Enhancements for Assets De-Recognised As at 31 March ,229, ,992,363 47,087,693 60,891,057 (Amount in Rs.) As at 31 March ,025, ,907,

61 Notes: 1. Also Refer Note 7(v) below 2. During the year ended 31 March 2011, the Company has entered into a bilateral assignment transactions with M/s IDBI Bank Limited for a total purchase consideration of Rs. 423,789,237. The Company has given a total credit enhancement of Rs. 204,602,290 in the form of cash collateral (Rs. 96,623,540), subordination of principal (Rs. 47,087,693) and subordination of excess interest spread (Rs. 60,891,057) which is outstanding as at 31 March The Company believes that on the basis of legal advice obtained by the Company, the aforesaid assignment transaction is a true sale and, hence, the Company has de-recognised the receivables assigned under the transaction amounting to Rs. 423,789,237 during the year. 3. During the year ended 31 March 2009, the Gujarat High Court, in the case of Kotak Mahindra Bank vs O.L of M/s APS Star India Limited, held that Banks are prohibited from transferring or purchasing debts. Consequent to the above, a Special Leave Petition (SLP) was filed with the Supreme Court. In its interim order, the Supreme Court held that in the event of dismissal of the SLP, the assignment deals entered into by Banks would be deemed not to have materialized. During the year ended 31 March 2011, the Supreme Court has opined that the assignment transactions by Banks are within the framework of permitted activities of the banking business. 7. Commitments and Contingencies i. Estimated amount of contracts remaining to be executed on capital account and not provided for as at 31 March 2011 Rs. 16,369,305 (As at 31 March 2010 Rs. 16,191,227). ii. Provident Fund Demand During the year the Company has received an Order dated 22 October 2010 from the Regional Provident Fund Commissioner demanding an amount of Rs. 18,753,700 towards provident fund payment for the period February 2009 to September 2010 on the incentives / allowances paid to the employees. The Company believes that the claim is untenable and, hence, has preferred an appeal with the Honorable Employees Provident Fund Appellate Tribunal and has obtained a stay against the said order. As per the stay order received from the Honorable Employees Provident Fund Appellate Tribunal, the Company deposited an amount of Rs. 5,626,110 with the Employees Provident Fund Organisation. As at 31 March 2011, the appeal is pending to be settled. iii. Service Tax Input Credit (Amount in Rs.) Details As at As at 31 March March 2010 Disputes in relation to 12,585,245 1,823,780 Service Tax Input Credit During the previous year ended 31 March 2010, the Company had received a show cause notice from the Service Tax authorities disallowing the service tax input credit claimed by the Company during the year to the extent of Rs. 1,823,780 and demanding payment of service tax amounting to Rs. 1,823,

62 On the same grounds, during the year ended 31 March 2011, the Company has received a show cause notice from the Service Tax authorities disallowing the service tax input credit claimed during the year to the extent of Rs. 10,761,465. The Company has replied to the above show cause notices contesting the disallowance and the same is pending to be disposed off. The Company expects a favourable decision with respect to all the above disputed demands / claims based on professional advice and, hence, no provision for the same has been made in the books of account as at 31 March iv. The Company has issued a Corporate Guarantee on behalf of Equitas Dhanyakosha India (a Private Limited Company registered under Section 25 of the Companies Act, 1956 engaged in supply of Groceries at subsidised rates to the lower income section of the society) to Reliance Capital Limited for an amount of Rs. 5,000,000 (As at 31 March 2010 Rs. 5,000,000) and to Ananya Finance for Inclusive Growth Private Limited for an amount of Rs. 20,000,000 (As at 31 March 2010 Rs. 10,000,000). The net worth of the Equitas Dhanyakosha India is fully eroded and the Company is incurring cash losses during the year ended 31 March Considering the future business plans, the Management believes that Equitas Dhanyakosha India will honour its commitments to its lenders on the due dates. Further, the Company, if required, will also extend the necessary financial support in the form of loans / guarantees to Equitas Dhanyakosha India based on the limits approved by the Company s Board. v. The Company has also furnished Corporate Guarantee for Rs. 71,891,240 (As at 31 March 2010 Rs. 84,843,329) towards certain Bilateral Assignments executed by the Company. Also Refer Note 6 above. 8. Fixed Assets A. Land During the previous year ended 31 March 2010, the Company had purchased land at 4 locations in Tamil Nadu for a total cost amounting to Rs. 58,260,929. Further, during the year ended 31 March 2011, the Company has purchased additional land at 2 locations in Tamil Nadu for a cost amounting to Rs. 36,170,509. Also See Note (B) below. B. Buildings During the year ended 31 March 2011, the Company has completed the construction of buildings in Trichy & Dindigul. Accordingly, the total cost of Rs. 21,733,679 incurred by the Company for construction has been capitalized to Buildings. As part of Corporate Social Responsibility activity, the Company has let out these building to Equitas Development Initiatives Trust from 1 July 2010 for running schools for a period of 30 years at a nominal rent. 61

63 C. Capital work in Progress The Company is in the process of constructing buildings at Salem and Coimbatore. The Cost incurred and advances given upto 31 March 2011 amounting to Rs. 7,344,392 has been included under Capital Work in Progress. D. The Company intends to construct the buildings on the lands acquired primarily for the purpose of letting them out on hire to Equitas Developments Initiatives Trust for running schools, as a part of its Corporate Social Responsibility initiatives. 9. Secured Loans As at 31 March 2011, the total amount of Secured Loans outstanding is Rs. 5,918,708,049 (As at 31 March 2010 Rs. 4,317,967,690). All the loans are secured by hypothecation of the Book Debts receivable under Micro Finance Loans and other free assets (excluding fixed assets) of the Company. Further, the Company has provided a specific lien on deposits with Banks amounting to Rs. 92,282,747 (As at 31 March 2010 Rs. 94,600,000) and deposits with Financial Institutions amounting to Rs. 228,250,000 (As at 31 March 2010 Rs. 143,250,000) for the Term Loans. 10. Investment Activity during the Year A. Current Year ( ) i. Long Term Investments Particulars Shares Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Shares Sold during the Year (In Nos.) Sale Proceeds (Amount in Rs.) Equitas Housing Finance Private Limited 6,000,000 60,000, Equitas B2B Trading Private Limited (Refer Note below) V.A.P. Finance Private Limited Total 2,000, ,000 20,000,000 55,129, ,129, Note: As per the audited accounts for the year ended 31 March 2011 of Equitas B2B Trading Private Limited, one of the wholly owned subsidiaries of the Company, the net worth as at 31 March 2011 is partially eroded and the subsidiary has made significant cash losses during the period ended 31 March The Company has a total investment amounting to Rs. 20,000,000, in the aforesaid subsidiary as at 31 March However, the Management of the Company considers that the aforesaid diminution in the value of the investment in the subsidiary is temporary in view of the future business plans of the subsidiary and the expectation that the operations of the subsidiary would improve in the near future. Accordingly, the Management believes that there is no diminution, other than temporary, in the value of the investment made in Equitas B2B Trading Private Limited as at 31 March

64 ii. Current Investments Mutual Fund Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) Axis Liquid Fund Institutional Growth Axis Treasury Advantage Fund - Retail Growth Axis Treasury Advantage Fund - Institutional Growth Birla Sun Life Savings Fund Growth Birla Sun Life Cash Plus - Institutional Premium Plan Growth Birla Sun Life Cash Manager IP Growth Birla Sun Life Short Term Fund - Institutional Growth Baroda Pioneer Liquid Fund Baroda Pioneer Treasury Advantage Fund IP Growth Canara Robeco Liquid Super Instt Growth Fund Canara Robeco Treasury Advantage Sup Inst Growth Fund DWS Insta Cash Plus Fund - Institutional Plan Growth DWS Cash Opportunities Fund - Institutional Plan Growth DWS Treasury Fund Cash- Institutional Plan-Growth DWS Ultra Short Term Fund - IP Growth Fidelity Cash Fund - IP Growth ICICI Prudential Institutional Liquid Plan - Super Institutional Growth ICICI Prudential Flexible Income Plan Premium - Growth IDFC Cash Fund IDFC Money Manager Fund Treasury Plan SIP C Growth IDBI Liquid Fund IDBI Ultrs Short Term Fund Growth JM High Liquidity Fund - Institutional Plan - Growth 188, ,000, , ,052,842 18,471 19,400,000 18,471 19,406,336 45,768 49,106,336 45,768 49,418,098 2,857,801 50,005,515 2,857,801 50,107,538 22,937, ,000,000 22,937, ,704,357 8,359, ,007,313 8,359, ,072,332 7,021,134 79,503,874 7,021,134 80,326,684 18,462, ,194,574 18,462, ,884,546 4,713,159 50,030,650 4,713,159 50,062,700 61,526, ,000,000 61,526, ,868,381 9,860, ,614,237 9,860, ,360,231 20,245, ,165,747 20,245, ,428,492 2,112,337 25,003,097 2,112,337 25,165,747 7,028,381 74,808,681 7,028,381 75,221,029 2,219,396 25,223,430 2,219,396 25,630,693 7,681, ,000,000 7,681, ,305,441 2,277, ,000,000 2,277, ,817, ,572 99,506, , ,468,962 44,110, ,000,000 44,110, ,683,209 16,097, ,517,396 16,097, ,583,245 34,205, ,000,000 34,205, ,811,233 9,850, ,194,213 9,850, ,304,102 1,300,458 20,000,000 1,300,458 20,015,866 63

65 Mutual Fund JM High Liquidity Fund - Super Institutional Plan - Growth JPMORGAN India Liquid Fund- Super Inst. SBI Premier Liquid Fund - Super Institutional- Growth SBI-SHF-Ultra Short Term Fund IP Growth SBI Magnum INSTA Cash Fund Cash Option Templeton India Ultra Short Bond Fund Super Institutional Plan Growth Templeton India Treasury Management Account Super Institutional Plan - Growth HDFC Liquid Fund - Premium Plan Growth HDFC Cash Management Fund - Treasury Advantage Plan - Wholesale Growth HDFC Cash Management Fund Savings Plan HDFC Floating Rate Income Fund - Growth Option Kotak Flexi Debt Scheme Institutional - Growth Kotak Floater Short Term Growth Kotak Liquid (Institutional) Growth LIC Liquid Fund - Growth Plan LICMF Income Plus Fund - Growth Plan LICMF Savings Plus Fund - Growth Plan Tata Liquid Super High Inv. Fund - Appreciation Tata Treasury Manager Ship Growth Tata Floater Fund Pramerica Liquid Fund - Growth Pramerica Ultra Short Bond Fund Growth UTI Liquid Cash Plan Institutional - Growth Option UTI Money Market Mutual Fund - Institutional Growth Plan Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) 10,284, ,100,000 10,284, ,463,895 20,025, ,000,000 20,025, ,789,408 22,110, ,071,317 22,110, ,640,335 16,328, ,520,664 16,328, ,212,404 4,870, ,000,000 4,870, ,013,150 4,205,677 50,005,499 4,205,677 50,168, , ,000, , ,196,320 14,623, ,000,000 14,623, ,223,068 3,688,235 75,015,657 3,688,235 75,140,481 1,529,325 30,000,000 1,529,325 30,009,176 3,184,664 50,006,226 3,184,664 50,182,765 4,410,088 50,006,425 4,410,088 50,442,142 8,340, ,000,000 8,340, ,998,657 9,454, ,000,000 9,454, ,694,966 28,088, ,011,522 28,088, ,564,037 8,035, ,078,140 8,035, ,282,605 12,903, ,048,977 12,903, ,208, , ,047, , ,883,465 47,716 50,006,232 47,716 50,202,692 6,668,613 94,505,814 6,668,613 95,069, , ,000, , ,713,564 47,084 48,300,000 47,084 49,031, , ,000, , ,262, , ,000, , ,422,430 64

66 Mutual Fund Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) UTI Treasury Advantage Fund - Institutional Plan (Growth Option ) UTI Floating Rate Fund SIP Peerless Liquid Fund - Super IP Growth Reliance Money Manager Fund- Institutional Option - Growth Plan Reliance Liquid Fund - Treasury Plan- Institutional Option - Growth Option - Growth Plan Reliance Liquid Fund - Cash Plan - Growth Option Reliance Liquidity Fund Sundaram Money Fund - Super IP Growth Sundaram Ultra St Fund - Super IP Growth Religare Liquid Fund - IP Growth Taurus Liquid Fund - IP Growth Taurus Ultra Short Term Bond Fund - SIP Growth Total 149, ,540, , ,170,366 46,974 50,052,309 46,974 50,459,037 34,092, ,000,000 34,092, ,581,822 31,844 40,005,162 31,844 40,272,681 9,178, ,272,682 9,178, ,441,128 6,425, ,000,000 6,425, ,977,593 3,427,404 50,000,000 3,427,404 50,573,405 4,952, ,000,000 4,952, ,127,055 6,925,018 89,609,727 6,925,018 89,994,523 1,568,185 20,000,000 1,568,185 20,015, , ,000, , ,303,236 88,379 99,539,620 88, ,792,725 9,623,025,325 9,653,223,658 B. Previous Year ( ) i. Long Term Investments Particulars Shares Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Shares Sold during the Year (In Nos.) Sale Proceeds (Amount in Rs.) Alpha Micro Finance Consultants Private Limited 200,000 2,000, ,000,

67 ii. Current Investments Mutual Fund Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) Birla Sun Life Cash Plus - Institutional Prem. - Growth Birla Sun Life Savings Fund Growth Birla Sun Life Savings Fund - Institutional - Daily Dividend Reinvestment Birla Sun Life Cash Manager - Institutional Plan - Growth Birla Sun Life Cash Manager Institutional Plan Option Daily Dividend Birla Sun Life Cash Plus - Institutional Premium - Daily Dividend -Reinvestment Birla Sun Life Short Term Fund -Institutional Growth Bharti AXA Liquid Fund Bharti AXA Treasury Advantage Fund- Institutional Plan Growth Baroda Pioneer Liquid Fund - Institutional Growth Plan Baroda Pioneer Treasury Advantage Fund - Institutional Growth Plan Canara Robeco Liquid Super Institutional Growth Fund Canara Robeco Treasury Advantage Super Institutional Growth Fund Canara Robeco Liquid Fund - Institutional Growth DWS Insta Cash Plus Fund - Institutional Plan Growth DWS Cash Opportunities Fund - Institutional Plan Growth DWS Ultra Short Term Fund - Institutional Daily Dividend DWS Cash Opportunities Fund - Regular Plan Daily Dividend DWS Cash Opportunities Fund - 30 Days Daily Dividend ICICI Prudential Institutional Liquid Plan - Super Institutional Growth ICICI Prudential Flexible Income Plan Premium Growth 14,490, ,000,000 14,490, ,067,924 3,498,004 60,057,059 3,498,004 60,102,578 19,020, ,335,130 19,020, ,335,130 9,889, ,536,745 9,889, ,690,010 5,999,067 60,008,669 5,999,067 60,008,669 5,006,697 50,164,597 5,006,697 50,164,597 4,714,377 50,012,937 4,714,377 50,045,091 41,104 45,000,000 41,104 45,008,987 13,764 15,002,853 13,764 15,004,679 4,760,091 50,000,000 4,760,091 50,005,236 4,837,734 50,005,236 4,837,734 50,023,619 21,835, ,000,000 21,835, ,090,256 3,602,283 50,005,818 3,602,283 50,049,045 1,226,159 20,000,000 1,226,159 20,004,537 24,268, ,553,725 24,268, ,647,019 7,858,132 90,229,062 7,858,132 90,760,080 4,996,429 50,053,725 4,996,429 50,053,725 4,936,155 49,460,275 4,936,155 49,472,115 5,010,338 50,203,657 5,010,338 50,225,129 27,503, ,500,000 27,503, ,673,839 5,983, ,484,806 5,983, ,892,433 66

68 Mutual Fund Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) ICICI Prudential Flexible Income Plan Premium - Daily Dividend ICICI Prudential Institutional Liquid Plan - Super Institutional Daily Dividend IDFC Cash Fund IDFC Money Manager Fund Treasury Fund Plan B IDFC Money Manager Fund JM Money Manager Fund Super Plus Plan - Growth JM High Liquidity Fund - Institutional Plan - Growth SBI Premier Liquid Fund - Super Institutional- Growth SBI-SHF-Ultra Short Term Fund IP Growth SBI Magnum Insta Cash Fund Cash Option SBI SHF Ultra Short Term Fund - Institutional Plan - Daily Dividend SBNPP Money Fund Super Institutional Growth SBNPP Ultra ST Fund Super Institutional Growth SBNPP Ultra ST Fund Super Institutional Dividend Reinvestment Daily SBNPP Money Fund Super Institutional Templeton India Ultra Short Bond Fund Super Institutional Plan Growth Templeton India Ultra Short Bond Fund Super Institutional Plan Growth Templeton India Treasury Management Account Super Institutional Plan - Growth HDFC Liquid Fund - Premium Plan Growth HDFC Cash Management Fund - Treasury Advantage Plan - Wholesale - Growth HDFC Cash Management Fund - Savings Plan - Growth 17,526, ,312,127 17,526, ,312,127 9,499,935 95,010,847 9,499,935 95,010,847 22,541, ,044,077 22,541, ,083,808 3,399,698 50,005,815 3,399,698 50,026,213 13,894, ,017,143 13,894, ,183,148 1,176,111 15,001,407 1,176,111 15,003,289 1,005,301 15,000,000 1,005,301 15,001,407 3,580,610 50,000,000 3,580,610 50,006,087 4,259,951 50,003,735 4,259,951 50,036,963 2,489,953 50,000,000 2,489,953 50,003,735 5,001,902 50,044,033 5,001,902 50,044,033 5,314, ,000,000 5,314, ,011,982 4,117,785 50,004,733 4,117,785 50,047,969 9,979, ,166,285 9,979, ,166,284 4,954,591 50,018,080 4,954,591 50,018,080 6,488,671 75,249,686 6,488,671 75,572,526 2,166,588 25,004,625 2,166,588 25,032,511 93, ,572,526 93, ,603,025 15,562, ,000,000 15,562, ,121,827 10,627, ,183,625 10,627, ,507,485 13,981, ,000,000 13,981, ,080,336 67

69 Mutual Fund Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) HDFC Floating Rate Income Fund - Growth Option HDFC Cash Management Fund -Treasury Advantage Plan - Wholesale - Daily Dividend HDFC Cash Management - Savings Plan - Daily Dividend Reinvestment Kotak Flexi Debt Scheme Institutional - Growth Kotak Floater LT Growth Kotak Liquid (Institutional) Growth LIC Liquid Fund - Growth Plan LICMF Income Plus Fund - Growth Plan LICMF Savings Plus Fund - Growth Plan LICMF Income Plus Fund - Daily Dividend Plan LICMF Savings Plus Fund Daily Dividend Plan Tata Liquid Super High Investment Fund Appreciation Tata Treasury Manager Ship Growth Tata Liquid High Investment Fund - Growth (Hip) Tata Floating Rate Short Term Fund Tata Floater Fund Dividend Tata Treasury Manager Ship Daily Dividend UTI Liquid Cash Plan Institutional - Growth Option UTI Money Market Mutual Fund - Institutional Growth Plan UTI Treasury Advantage Fund - Institutional Plan ( Growth Option ) UTI Floating Rate Fund - Short Term Plan - Institutional Growth Option UTI Treasury Advantage Fund - Institutional Plan (Daily Dividend Option)- Re-Investment 3,237,019 50,005,794 3,237,019 50,054,673 14,980, ,276,616 14,980, ,276, ,968 10,008, ,968 10,008,512 19,196, ,025,879 19,196, ,217,335 2,777,814 40,004,126 2,777,814 40,054,404 18,169, ,111,610 18,169, ,167,841 73,304,855 1,208,708,905 73,304,855 1,209,120,316 37,353, ,791,985 37,353, ,331,607 19,047, ,713,955 19,047, ,348,393 15,042, ,421,536 15,042, ,421,531 12,062, ,624,855 12,062, ,624, , ,642, , ,950, , ,167, , ,507,500 4,609 7,000,000 4,609 7,000,659 3,159,380 45,000,000 3,159,380 45,005,160 4,988,643 50,064,030 4,988,643 50,064, , ,580, , ,580, , ,120, , ,365, , ,061, , ,121, , ,633, , ,984,846 48,682 50,000,000 48,682 50,037, , ,434, , ,434,754 68

70 Mutual Fund Units Purchased during the Year (In Nos.) Amount Invested (Amount in Rs.) Units Sold during the Year(In Nos.) Sale Proceeds (Amount in Rs.) Reliance Medium Term Fund-Retail Plan - Growth Plan - Growth Option Reliance Money Manager Fund- Institutional Option - Growth Plan Reliance Liquid Fund - Treasury Plan- Institutional Option - Growth Option - Growth Plan Reliance Liquidity Fund Growth Reliance Money Manager Fund- Institutional Option - Daily Dividend Plan Reliance Medium Term Fund-Daily Dividend Plan TOTAL 11. Managerial Remuneration i. Managing Director 3,679,111 68,044,674 3,679,111 68,105, , ,024, , ,391,643 24,083, ,434,513 24,083, ,651,730 3,612,978 50,000,000 3,612,978 50,006, , ,476, , ,476,873 5,862, ,215,461 5,862, ,215,472 11,451,847,753 11,458,724,184 (Amount in Rs.) Particulars For the For the Year Ended Year Ended 31 March March 2010 Salaries and Allowances 4,560,000 5,338,880 Employers Contribution to Provident Fund 230, ,528 Others 116, ,252 Total 4,906,760 5,723,660 Notes: 1. In computing the Managing Director s remuneration, perquisites have been valued in terms of actual expenditure incurred by the Company in providing the benefits except that in case of certain expenses where the actual amount of expenditure cannot be ascertained, notional amount as per Income Tax Rules, wherever required, has been considered. Actuarial valuation based contribution/ provision with respect to gratuity and compensated absences have not been included as these are computed for the Company as a whole. 2. The above excludes the value of the shares allotted to the Managing Director under the Preferential Offer. Also refer Note 4(i) above. 69

71 ii. Non-Whole time Directors (Amount in Rs.) Particulars For the For the Year Ended Year Ended 31 March March 2010 Sitting Fees 640, ,000 Directors Remuneration 4,500,000 1,434,521 Note: The Board of Directors, at its meeting held on 13 May 2011, approved a total remuneration of Rs. 4,500,000 to the non-whole time directors for the year ended 31 March 2011, which has been provided for in the books of account. 12. Micro Enterprises and Small Enterprises Based on and to the extent of information received by the Company from the suppliers during the year regarding their status under the Micro Small and Medium Enterprises Development Act, 2006 (MSMED Act), the relevant particulars for the years ended 31 March 2011 and 31 March 2010 are furnished below: Particulars Principal amount due to suppliers under MSMED Act as at year end 179, ,300 Interest accrued and due to suppliers under MSMED Act, on the above amount as at year end - - Payment made to suppliers (other than interest) beyond the appointed day, during the year - - Interest paid to suppliers under MSMED Act (other than Section 16) - - Interest paid to suppliers under MSMED Act (Section 16) - - Interest due and payable to suppliers under MSMED Act as at year end, for payments already made - - Interest accrued and remaining unpaid at the end of the year to suppliers under MSMED Act as at year end - - (Amount in Rs.) 70

72 13. Expenditure in Foreign Currency (Amount in Rs.) Particulars For the For the Year Ended Year Ended 31 March March 2010 Software Charges 9,442,950 2,524,500 Directors Sitting Fees 125,000 60,000 Director Remuneration 1,036, ,000 Professional Fees 2,160,691 - Membership Fees 17,961 - Others - 26,847 Total 12,783,468 2,761, Compensated Absences The Key Assumptions used in the computation of provision for long term compensated absences are as given below: Particulars For the For the Year Ended Year Ended 31 March March 2010 Discount Rate (% p.a) 8.00% 7.50% Future Salary Increase (% p.a) 5.00% 5.00% Mortality Rate LIC Rates LIC Rates Attrition (% p.a.) 5.00% 5.00% 15. Gratuity The Company does not have a funded gratuity scheme for its employees as at 31 March 2011 and 31 March Gratuity provision has been made based on the actuarial valuation done as at the year end. The details of actuarial valuation as provided by the Independent Actuary is as follows : (Amount in Rs.) Particulars Change in Projected Benefit Obligation Projected Benefit Obligation at the Beginning of the Year 2,618,222 1,059,224 Service Cost 4,722,996 1,645,440 Interest Cost 209,458 79,442 Curtailment Cost - - Settlement Cost - - Actuarial Losses / (Gains) 488,029 (165,884) 71

73 Benefits Paid - - Projected Benefit Obligation as at the End of the Year 8,038,705 2,618,222 Change in Plan Assets Expected Returns on Plan Assets at the Beginning of the Year - - Employer s Contribution - - Benefits Paid - - Actuarial Gains / (Losses) - - Fair Value of Plan Assets as at the End of the Year - - Amounts Recognised in the Balance Sheet Present Value of Obligation 8,038,705 2,618,222 Fair Value of the Plan Assets at the Year End - - Liability Recognised in the Balance Sheet 8,038,705 2,618,222 Cost of the Defined Benefit Plan for the Year Current Service Cost 4,722,996 1,645,440 Interest on Obligation 209,458 79,442 Expected Return on Plan Assets - - Net Actuarial Losses / (Gains) Recognized in the Year 488,029 (165,884) Net Cost Recognized in the Profit and Loss Account 5,420,483 1,558,998 Assumptions Discount Rate 8.00% 7.50% Future Salary Increase 5.00% 5.00% Mortality Rate LIC Rates LIC Rates Attrition Rate 5.00% 5.00% Expected Rate of Return on Plan Assets NA NA Notes: 1. The estimate of future salary increase takes into account inflation, seniority, promotion and other relevant factors. 2. Discount rate is based on the prevailing market yields of Indian Government Bonds as at the Balance Sheet date for the estimated term of the obligation. 3. Experience Adjustments: (Amount in Rs.) Particulars * Defined Benefit Obligations 8,038,705 2,618,222 1,059, ,401 Plan Assets Deficit 8,038,705 2,618,222 1,059, ,401 Experience Adjustments on Plan Liabilities - Losses / (Gains) 488,029 (165,884) 222,605 NA * First year of Operation for the period 22 June 2007 (Date of Incorporation) to 31 March Since the Company does not have funded gratuity scheme, the expected contributions during the next year is Rs. Nil. 72

74 16. Segment Information The Company is primarily engaged in the business of Micro financing. All the activities of the Company revolve around the main business. Further, the Company does not have any separate geographic segments other than India. As such there are no separate reportable segments as per AS-17 Segmental Reporting. 17. Related Party Disclosures Name of Related Parties and Nature of Relationship (with respect to parties with whom the Company had transactions during the Year) Nature of Relationship Name of the Party For the Year Ended For the Year Ended 31 March March 2010 Key Management Personnel Mr. P.N. Vasudevan, Mr. P.N. Vasudevan, Managing Director Managing Director Entities Holding Substantial Interest - India Financial Inclusion Fund (Up to 27 October 2009) MVA Ventures Limited (Up to 26 March 2010) Subsidiary Companies Equitas Housing Finance Private Limited - Equitas B2B Trading Private Limited - V.A.P. Finance Private Limited - Entities where the Company has Control Equitas Development Equitas Development Initiatives Trust Initiatives Trust Equitas Dhanyakosha India Equitas Dhanyakosha India Note: Related Party relationships are as identified by the Management and relied upon by the Auditors. Transactions with Related Parties (Amount in Rs.) Transaction Issue of Equity Shares Related Party Mr. P.N. Vasudevan For the Year Ended 31 March ,603,330 For the Year Ended 31 March Remuneration Mr. P.N. Vasudevan (Refer Note 11 (i) above) 4,906,760 5,723,660 Donations Equitas Development Initiatives Trust Equitas Dhanyakosha India 15,219,617-11,432,620 1,000,000 73

75 Purchase of Food Items (CSR Expenses) Equitas Dhanyakosha India 980,683 - Recovery of Expenses Equitas Development Initiatives Trust 3,094,749 1,041,757 Equitas Dhanyakosha India 5,855,900 3,495,870 Investment in Wholly Owned Subsidiaries Equitas B2B Trading Private Limited Equitas Housing Finance Private Limited 1,938,645 60,000, Equitas B2B Trading Private Limited 20,000,000 - V.A.P. Finance Private Limited 50,000,000 - Sale of Assets Equitas B2B Trading Private Limited 518,652 - Rental Income Equitas Development Initiatives Trust 2,444,472 - Interest Income Recovery of Preliminary Expenses Equitas Dhanyakosha India Equitas Housing Finance Private Limited 395,341 1,108,620 - Equitas B2B Trading Private Limited 208,520 - Other Recovery Equitas Housing Finance Private Limited 264,870 - Paid on behalf of Customers Equitas Development Initiatives Trust 3,330,870 - Balance as at Year End Donation Payable Equitas Development Initiatives Trust 2,219,613 4,432,620 Receivable Equitas Dhanyakosha India - 67,153 Loan Outstanding Equitas Dhanyakosha India 15,235,067 - Notes: 1. The above excludes the sitting fee of Rs. 640,000 (Previous Year Rs. 660,000) and Remuneration of Rs. 4,500,000 (Previous Year Rs. 1,434,521) paid / payable to Non-Whole time Directors. 2. Also Refer Note 4(i) above with respect to Share Options and Preferential Offer of Shares. 3. Also Refer Note 7(iv) above with respect to Corporate Guarantee given on behalf of Equitas Dhanyakosha India and Letter of Support to Equitas Dhanyakosha India. 4. The Company accounts for costs incurred by / on behalf of the Related Parties based on the actual invoices / debit notes raised and accruals as confirmed by such related parties. The Related Parties have confirmed to the Management that as at 31 March 2011, there are no further amounts payable to / receivable from them, other than as disclosed above. Also Refer Note 23 below. 18. Operating Lease (a) The Company has operating lease agreements primarily for office premises. The lease term period is about 2 to 5 years. An amount of Rs. 31,040,922 (Previous Year Rs. 17,494,214) was debited to the Profit & Loss Account towards lease rentals and other charges for the office premises for the current period. The future minimum lease payments for the office premises under operating leases contracted are as follows: 74

76 (Amount in Rs.) Lease Obligation Expected Minimum Expected Minimum Lease Commitment Lease Commitment as at 31 March 2011 as at 31 March 2010 Not later than one year 26,634,282 24,565,779 Later than one year but not later than five years 30,785,856 33,421,334 Later than five years - - (b) The Company has let out its premises at Trichy and Dindigul to Equitas Development Initiatives Trust and has accordingly recorded an amount of Rs. 2,444,472 (Previous Year - Rs. Nil) as rental income during the year ended 31 March The lease term period is for 30 years. The Company is entitled to receive the following amounts in respect of operating leases: (Amount in Rs.) Particulars As at As at 31 March March 2010 Not less than 1 year 3,384,000 - More than one year but not more than 5 years 13,536,000 - More than 5 Years 82,062, Earnings per Share Note: Particulars For the Year Ended For the Year Ended 31 March March 2010 Profit after Tax (Rs.) 304,392, ,652,406 Weighted Average Number of Equity Shares - Basic (Nos.) 43,631,001 33,037,299 - Diluted (Nos.) 46,576,180 39,346,193 Earnings per Share (EPS) - Basic (Rs.) Diluted (Rs.) Face Value of Shares (Rs.) Earnings per Share calculations have been done in accordance with Accounting Standard 20 Earnings per Share. The Fair Value of Equity Shares for the purpose of calculation of Diluted Earnings per Share has been arrived at based on the valuation provided by an external firm of Chartered Accountants. 2. Reconciliation of basic and diluted weighted average number of Equity shares used in computing Earnings per Share: 75

77 20. Taxation Particulars For the Year Ended For the Year Ended 31 March March 2010 Number of Shares considered for Computing Basic Earnings per Share 43,631,001 33,037,299 Add: Effect of Outstanding Potential Equity Shares 2,945,179 6,308,894 Number of Shares considered for Computing Diluted Earnings per Share 46,576,180 39,346,193 (a) Income Tax Provision for current tax for the year has been determined based on the total income of the Company for the year ended 31 March 2011 and in accordance with Income Tax Act, 1961 amounting to Rs. 170,460,000 (Previous year - Rs. 135,000,000) taking into account various deductions / exemptions proposed to be claimed by the Company, in the Income Tax Return, based on professional advice. (b) Deferred Tax The Deferred Tax Asset of Rs. 48,134,275 as at 31 March 2011 (As at 31 March Rs. 28,296,055) has arisen on account of the following: (Amount in Rs.) Particulars As at Amount Charged / As at 31 March 2010 (Credited) 31 March 2011 Deferred Tax Asset / (Liability) Difference between Book and Tax Depreciation (1,586,136) 3,576,646 1,990,510 Provision for Standard Assets under Financing Activity 19,821,987 5,428,316 25,250,303 Provision for Sub-Standard and Doubtful Receivables under Financing Activity 957,713 4,684,341 5,642,054 Provision for Credit Enhancements on Assets De-Recognized 5,266,265 1,510,706 6,776,971 Employee Benefits 3,671,269 3,270,202 6,941,471 Others 164,957 1,368,009 1,532,966 Net Deferred Tax Asset 28,296,055 19,838,220 48,134, Loan Portfolio and Provision for Standard and Non Performing Assets A. Current Year (Amount in Rs.) Asset Loan Outstanding Provision for Assets Loan Outstanding Classification as at as at as at 31 March 2011(Gross) as at 31 March 2011(Net) as at 31 March 2011(Net) Standard Assets 6,225,607,715 77,824,943 6,147,782,772 Sub-Standard Assets 27,327,879 3,746,285 23,581,594 Doubtful Assets 15,007,423 13,643,310 1,364,113 Loss Assets Total 6,267,943,017 95,214,538 6,172,728,479 76

78 B. Previous Year (Amount in Rs.) Asset Loan Outstanding Provision for Assets Loan Outstanding Classification as at as at as at 31 March 2010(Gross) as at 31 March 2010(Net) as at 31 March 2010(Net) Standard Assets 4,773,865,968 59,673,325 4,714,192,643 Sub-Standard Assets 7,052,816 1,043,475 6,009,341 Doubtful Assets 2,117,397 1,839, ,715 Loss Assets Total 4,783,036,181 62,556,482 4,720,479, Changes in Provisions A. Current Year (Amount in Rs) Particulars As at Additional Utilization/ As at 1 April 2010 Provision Reversal 31 March 2011 Provision for Standard Assets under Financing Activity 59,673,325 21,123,711 2,972,093 77,824,943 Provision for Sub-Standard and Doubtful Receivables under Financing Activity 2,883,157 15,372, ,036 17,389,595 Provision for Credit Enhancements on Assets De-Recognized 15,853,886 18,790,638 13,756,956 20,887,568 Provision for Prompt Payment Rebate 88,986,684 64,766,635 4,417, ,336,135 B. Previous Year (Amount in Rs.) Particulars As at Additional Utilization/ As at 1 April 2009 Provision Reversal 31 March 2010 Provision for Standard Assets under Financing Activity (Note 1 below) 22,090,231 37,583,094-59,673,325 Provision for Sub-Standard and Doubtful Receivables under Financing Activity 140,178 2,757,284 14,305 2,883,157 Provision for Credit Enhancements on Assets De-Recognized (Note 2 below) 6,702,958 13,644,498 4,493,570 15,853,886 Provision for Prompt Payment Rebate 17,082,421 75,684,378 3,780,115 88,986,684 Notes: i. The Management had reviewed the provisioning norms applied on the Standard Assets and increased the provisioning percentage effective from from 1% to 1.25%. Accordingly, Provision for Standard 1.25% was created on the total Standard Assets in the books of the Company as 77

79 at 31 March Had the Company followed the previous provisioning norms, the provision for Standard Assets for the Previous year ended 31 March 2010 would have been lower by and the profit after tax would have been higher by Rs. 11,934,665. ii. The Management had reviewed the provisioning norms applied on the Provision for Credit Enhancements on Assets De-Recognised and increased the provisioning percentage effective from from 1% to 1.25%. Accordingly, Provision for Credit Enhancements on Assets 1.25% was created on the total Assets De-Recognised from the books of the Company as at 31 March Had the Company followed the previous provisioning norms, the Provision for Credit Enhancements on Assets De-Recognised for the previous year ended 31 March 2010 would have been lower by and the profit after tax would have been higher by Rs. 3,170, Common Costs The Company incurs certain costs on behalf of other Entities in the Group. The Company has confirmed that these costs have been allocated / recovered from the Entities in the Group on a reasonable basis mutually agreed to with the other Entities in the Group. 24. Disclosure Pursuant to Reserve Bank of India Notification DNBS.200/CGM (PK) 2008 dated 1 August 2008 i. Capital Adequacy Ratio (Amount in Rs.) Particulars As at 31 March 2011 As at 31 March 2010 Tier I Capital 2,910,669,455 2,627,484,167 Tier II Capital 43,062,769 39,010,945 Total Capital 2,953,732,224 2,666,495,112 Total Risk Weighted Assets 7,444,221,534 5,514,777,314 Capital Ratios Tier I Capital as a Percentage of Total Risk Weighted Assets (%) Tier II Capital as a Percentage of Total Risk Weighted Assets (%) Total Capital (%) ii. Exposure to Real Estate Sector, both Direct and Indirect The Company does not have any direct or indirect exposure to the real estate sector as at 31 March 2011 and 31 March

80 iii. Asset Liability Management Maturity Pattern of Certain Items of Assets and Liabilities as at 31 March 2011: (Rs.in Crores) Upto Over1 Over 2 Over 3 Over 6 Over 1 Over 3 Over 5 Total 1 Month month to Months to Months to Months to Year to Year to Years 2 months 3 months 6 months 1 year 3 years 5 years Liabilities Borrowing from Banks* Market Borrowings Assets Advances# Investments * The above Borrowings exclude Interest Accrued but Not Due on Borrowings from Banks and also exclude Borrowings from Financial Institutions and Other Non-Bank Lenders. # The above Advances exclude Micro Finance Loans Subordinated as Credit Enhancements on Assets De-Recognised. Maturity Pattern of Certain Items of Assets and Liabilities as at 31 March 2010: (Rs.in Crores) Upto Over1 Over 2 Over 3 Over 6 Over 1 Over 3 Over 5 Total 1 Month month to Months to Months to Months to Year to Year to Years 2 months 3 months 6 months 1 year 3 years 5 years Liabilities Borrowing from Banks* Market Borrowings Assets Advances Investment * The above Borrowings exclude Interest Accrued but Not Due on Borrowings from Banks and also exclude Borrowings from Financial Institutions and Other Non-Bank Lenders. 79

81 25. Disclosure Pursuant to Reserve Bank of India Notification DNBS.193DG (VL) dated February 22, 2007: A. Current Year As at 31 March 2011 S.No. Particulars Amount Amount Outstanding Overdue in Rs. in Rs. Liabilities: (1) Loans and Advances availed by the NBFC inclusive of interest accrued thereon but not paid: (a) Debentures - Secured Unsecured - - (other than falling within the meaning of public deposits) (b) Deferred Credits - - (c) Term Loans * 5,968,934,346 - (d) Inter-Corporate Loans and Borrowings - (e) Commercial Paper - - (f) Other Loans - - Note: * Includes Interest Accrued but Not Due on Loans amounting to Rs. 50,226,297 S.No. Particulars Amount Outstanding as on 31 March 2011 in Rs. Assets: (2) Break-up of Loans and Advances including Bills Receivables [other than those included in (3) below] : (a) Secured 134,401 (b) Unsecured 6,305,194,804 The above includes Interest Accrued but Not Due amounting to Rs. 37,386,188 on Loans to Borrowers and excludes Other Loans and Advances (Schedule 9) which are not in the nature of lending to Borrowers. S.No. Particulars Amount Outstanding as on 31 March 2011 in Rs. (3) Break up of Leased Assets and Stock on Hire and Other Assets counting towards AFC activities (i) Lease Assets including Lease Rentals Accrued and Due: (a) Financial Lease - (b) Operating Lease - 80

82 (ii) (iii) Stock on Hire including Hire Charges under Sundry Debtors: (a) Assets on Hire - (b) Repossessed Assets - Other Loans counting towards AFC Activities (a) Loans where Assets have been Repossessed - (b) Loans other than (a) above - (4) Break-up of Investments Amount Outstanding as on 31 March 2011 in Rs. Current Investments I Quoted: (i) Shares: (a) Equity - (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others (please specify) - II Unquoted: (i) Shares: (a) Equity - (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others - Long Term Investments I Quoted: (i) Shares: (a) Equity - (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others (please specify) - II Unquoted: (i) Shares: (a) Equity 137,129,000 (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others - 81

83 Note: (5) Borrower Group-wise Classification of Assets Financed as in (2) and (3) above S.No. Category As at 31 March 2011 Amount in Rs. (Net of Provisions) Secured Unsecured Total 1. Related Parties (a) Subsidiaries (b) Companies in the same Group (c) Other Related Parties Other than Related Parties 126,113 6,287,813,497 6,287,939,610 Total 126,113 6,287,813,497 6,287,939,610 The amount of Provisions represents the Provision for Sub-Standard and Doubtful Receivables under Financing Activity amounting to Rs. 17,389,595 and excludes Provision for Standard Receivables under Financing Activity amounting to Rs. 77,824,943. (6) Investor Group-wise Classification of all Investments (Current and Long Term) in Shares and Securities (both Quoted and Unquoted) : Category Market Value / Break up Value S.No. or Fair Value or Net Asset Value (Company s Share) Book Value 1. Related Parties - - (a) Subsidiaries 117,527, ,129,000 (b) Companies in the Same Group - - (c) Other Related Parties Other than Related Parties (Refer Note) 1,986,758 2,000,000 Total 119,513, ,129,000 Note: The Company s share of the Net Asset Value of Alpha Micro Finance Consultants Private Limited has been calculated based on the unaudited financial statements of the Company as at 31 March (7) Other Information Related Parties Other than Related Parties (i) Gross Non-Performing Assets - 42,335,302 (ii) Net Non-Performing Assets - 24,945,707 (iii) Assets Acquired in Satisfaction of Debt

84 B. Previous Year As at 31 March 2010 S.No. Particulars Amount Amount Outstanding Overdue in Rs. in Rs. Liabilities: (1) Loans and Advances availed by the NBFC inclusive of interest accrued thereon but not paid: (a) Debentures - Secured Unsecured - - (other than falling within the meaning of public deposits) (b) Deferred Credits - - (c) Term Loans * 4,348,676,471 - (d) Inter-Corporate Loans and Borrowings - (e) Commercial Paper - - (f) Other Loans 54,677 - * Includes Interest Accrued but Not Due on Loan amounting to Rs. 30,763,458 Note: S.No. Particulars Amount Outstanding as on 31 March 2010 in Rs. Assets: (2) Break-up of Loans and Advances including Bills Receivables [other than those included in (3) below] : (a) Secured 8,900,039 (b) Unsecured 4,803,663,893 The above includes Interest Accrued but Not Due on Loans to Borrowers amounting to Rs. 29,527,751 and excludes Other Loans and Advances (Schedule 9) which are not in the nature of lending to Borrowers. S.No. Particulars Amount Outstanding as on 31 March 2010 in Rs. (3) Break up of Leased Assets and Stock on Hire and Other Assets counting towards A2FC activities (i) Lease Assets including Lease Rentals Accrued and Due: (a) Financial Lease - (b) Operating Lease - (ii) Stock on Hire including Hire Charges under Sundry Debtors: (a) Assets on Hire - (b) Repossessed Assets - (iii) Other Loans counting towards AFC Activities (a) Loans where Assets have been Repossessed - (b) Loans other than (a) above - 83

85 (4) Break-up of Investments Amount Outstanding as on 31 March 2010 in Rs. Current Investments I Quoted: (i) Shares: (a) Equity - (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others (please specify) - II Unquoted: (i) Shares: (a) Equity - (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others - Long Term Investments I Quoted: (i) Shares: (a) Equity - (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others (please specify) - II Unquoted: (i) Shares: (a) Equity 2,000,000 (b) Preference - (ii) Debentures and Bonds - (iii) Units of Mutual Funds - (iv) Government Securities - (v) Others - (5) Borrower Group-wise Classification of Assets Financed as in (2) and (3) above S.No. Category As at 31 March 2010 Amount in Rs. (Net of Provisions) Secured Unsecured Total 1. Related Parties (a) Subsidiaries (b) Companies in the same Group (c) Other Related Parties Other than Related Parties 8,886,797 4,800,793,978 4,809,680,775 Total 8,886,797 4,800,793,978 4,809,680,775 84

86 Note: The amount of Provisions represents the Provision for Sub-Standard and Doubtful Receivables under Financing Activity amounting to Rs. 2,883,157 and excludes Provision for Standard Receivables under Financing Activity amounting to Rs. 59,673,325. (6) Investor Group-wise Classification of all Investments (Current and Long Term) in Shares and Securities (both Quoted and Unquoted) : Category Market Value / Break up Value or Fair Value or Net Asset Value (Company s Share) Book Value 1. Related Parties - - (a) Subsidiaries - - (b) Companies in the Same Group - - (c) Other Related Parties Other than Related Parties (Refer Note) 1,950,878 2,000,000 Total 1,950,878 2,000,000 Note: The Company s share of the Net Asset Value of Alpha Micro Finance Consultants Private Limited was calculated based on the unaudited financial statements of the Company as at 31 March (7) Other Information Related Parties Other than Related Parties (i) Gross Non-Performing Assets - 9,170,213 (ii) Net Non-Performing Assets - 6,287,056 (iii) Assets Acquired in Satisfaction of Debt NBFC ND The Company is a Systemically Important Non-deposit taking Non-Banking Finance Company (NBFC-ND-SI). The Company has received Certificate of Registration dated 13 December 2007 / 13 March 2008 from the Reserve Bank of India to carry on the business of Non Banking Financial Institution without accepting deposits. 27. Foreign Currency Exposure As at 31 March 2011, the Company does not have any outstanding position in respect of any of the derivative products. The un-hedged foreign currency exposure is as given below: Particulars Exposure as at Exposure as at 31 March March 2010 Sundry Creditors Equivalent INR 1,036,866 Equivalent INR 2,701,200 85

87 28. Donations The Company has approved and accounted a donation of Rs. 15,219,617 (Previous Year Rs. 11,432,620) to Equitas Development Initiatives Trust computed at the rate of 5% of the Profit after Tax for the year ended 31 March Loss Assets Written off During the year ended 31 March 11, the Management has reviewed the recoverability of Micro Finance Loans given to customers located in the State of Andhra Pradesh taking into account the situation prevailing there after the enactment of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, Based on such review, the Company s outstanding micro finance dues of Rs. 237,767,472 in Andhra Pradesh is considered irrecoverable by the Management and, accordingly, the same has been fully written off in the current financial year. This amount is included in the Loss Assets Written Off amounting to Rs. 239,195, Statutory Reserve As per Section 45-IC of the Reserve Bank of India Act, 1934, the Company is required to create a reserve fund at the rate of 20% of the net profits of the Company every year. Accordingly, the Company has transferred an amount of Rs. 60,900,000 (Previous Year Rs. 45,800,000), out of the net profit after tax for the year ended 31 March 2011 to Statutory Reserve. 31. Previous Year Figures Previous year s figures have been reclassified to conform with the current year s classification / presentation, wherever applicable. For and on behalf of the Board of Directors Place: Chennai Date: 13 May 2011 P.N. Vasudevan P.B. Sampath S. Bhaskar Managing Director Director Chief Operating Officer & & Company Secretary Chief Financial Officer 86

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