CONTENTS BOARD OF DIRECTORS HIGHLIGHTS CHAIRMAN S STATEMENT INFRASTRUCTURE REVIEW

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2 CONTENTS HIGHLIGHTS CHAIRMAN S STATEMENT BOARD OF DIRECTORS INFRASTRUCTURE REVIEW

3 DIRECTORS REPORT 22 MANAGEMENT DISCUSSION & ANALYSIS 30 CORPORATE GOVERNANCE 46 ADDITIONAL SHAREHOLDER INFORMATION 54 AUDITORS CERTIFICATE ACCOUNTS CONSOLIDATED GROUP ACCOUNTS WITH AUDITORS REPORT 59 INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LTD. 74 ACCOUNTS OF SUBSIDIARY COMPANIES IDFC PRIVATE EQUITY COMPANY LTD. 106 IDFC TRUSTEE COMPANY LTD. 122 FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LTD. 132

4 HIGHLIGHTS LOAN BOOK GREW by 43 per cent to Rs. 103,210 million in IDFC S ASSET-BOOK, comprising loans as well as equity participation stood at Rs. 106,899 million as at March 31, % OTHERS 12% COMMERCIAL/INDUSTRIAL 18% TELECOM & IT 28% TRANSPORTATION 37% ENERGY CHART B SECTORWISE DISTRIBUTION OF IDFC S TOTAL EXPOSURE 2

5 REVENUE FROM OPERATIONS increased by over 41 per cent to Rs. 10,496 million in NET INTEREST INCOME grew by 18 per cent to Rs. 3,029 million. NON-INTEREST INCOME rose by 32 per cent to Rs. 2,292 million. FEE-BASED INCOME increased by 96 per cent to Rs. 954 million. PROFIT BEFORE TAX was higher by 34 per cent at Rs. 4,426 million. PROFIT AFTER TAX (PAT) increased by over 26 per cent to Rs. 3,908 million. RETURN ON NET WORTH (RONW) stood at 17.5 per cent for FULLY DILUTED EARNING PER SHARE was Rs IDFC ANNUAL REPORT

6 CHAIRMAN S STATEMENT I TAKE THIS OPPORTUNITY to thank all the domestic and foreign, institutional and individual investors who placed their faith in us and welcome them aboard. While we will continue our endeavour to deliver best possible returns, I urge our shareholders to be patient, considering that infrastructure investments usually entail long gestation periods. When profit is unshared, it is less likely to grow greater. Malcom Forbes Fiscal 2006 has been a momentous year for all of us at IDFC. Our offer for sale of million equity shares - including a fresh issue of 120 million - aggregating Rs billion, was oversubscribed 37 times. The Initial Public Offering has opened up a new vista for funding our future growth and, in the process, provided us a platform for sharing our wealth-generating potential with a larger shareholder community. Equally importantly, it has committed us to even higher standards of transparency, accountability and (market) discipline. In fiscal 2006 (FY 2006), we have also successfully put into practice the 4X4 STRATEGY I had enunciated last year, to harness the emerging opportunities and negotiate the ever-increasing challenges in a fiercely competitive environment. The Strategy, you may recall, was essentially aimed at maintaining superior returns on Assets and Equity by consolidating our traditional areas of strength and concomitantly giving fillip to avenues for earning non-interest revenues, viz., fee generating advisory, syndications and the asset management business in particular. Impressive results posted by IDFC on various fronts suggest that the Strategy is on track: Profits increased by 26% to touch a record Rs. 3.9 billion; Gross annual approvals and disbursements increased by 66% and 62% respectively to reach new highs of Rs. 106 billion and Rs. 60 billion. PROSPECTS Investment opportunities in infrastructure are poised to become bigger. Spurred by the impressive average annual growth of 8% in GDP over the last three years, the Government of India is now eyeing a target of 10%, which implies that in a wide array of sectors ranging from power to roads, the country needs to not only rapidly bridge the cumulative capacity deficits of the past but also simultaneously plan for the future. 4

7 Today, the Indian infrastructure space is abuzz with excitement of burgeoning opportunities everywhere and there is a veritable rush of existing and new players, from India as well as abroad, to get a piece of the action. It is in this context that IDFC has to conduct its business and find opportunities for growth. Put simply, we will need many more power plants, additional road corridors, further capacity at our air & sea ports, greater telecom bandwidth, and substantial augmentation of a variety of urban amenities. The great secret of success in life is for a man to be ready when his opportunity comes. Benjamin Disraeli According to the latest Economic Survey, the Committee on Infrastructure, headed by the Prime Minister, has estimated infrastructure investment requirements as follows: Rs. 1,720 billion in the National Highways sector by FY 2012; Rs. 400 billion for Airports by FY 2010; and Rs. 500 billion for Ports by FY The power sector alone reportedly requires an additional investment of Rs. 8,000 billion to achieve the stated goal of adding 100,000 MW of generation capacity and erecting associated transmission and distribution facilities, by FY The Ministry of Power launched the Ultra Mega Power Project (UMPP) initiative to facilitate development of a clutch of large (4000 MW each) generation plants at coal pithead and coastal locations. Each of these plants alone would require an investment of about Rs. 160 billion! Morgan Stanley, in one of their recent studies, have set out an expectation that infrastructure investments in India would double from US$ 24 billion (3.5% of GDP) at present to US$ 47 billion (4.7% of GDP) by FY Citing China s capital spending on infrastructure sectors in FY US$ 150 billion (10.6% of GDP) - the study suggested that in order to attain a sustained growth of 8-9%, India should gradually increase its annual infrastructure spending to US$ 100 billion (8% of GDP) by FY CHALLENGES Clearly, the opportunities delineated above augur well for all of us. I would, however, like to remind the reader that the challenges that have to be overcome to reap these prospects are likely to be substantial. For example, to sustain the impressive growth in teledensity, we need to facilitate adequate interconnection, alleviate spectrum constraints in dense urban areas and put in place cost-effective mechanisms for deploying subsidy support to rural areas. In a similar vein, to provide a fresh impetus to the roads sector, we should quickly evolve a consensus on the Model Concession Agreement and tolling for encouraging private sector participation and expedite the proposed institutional strengthening of the National Highways Authority of India (NHAI). All problems become smaller if you don t dodge them but confront them. Touch a thistle timidly and it pricks you; grasp it boldly and its spines crumble. William F. Hasley IDFC ANNUAL REPORT

8 In the power sector, apart from fuel - which is fast emerging as a major area of concern - I see two proximate challenges. First, given the chronic power shortages and our desire to accelerate growth, we should quickly bring more capacity on stream. Second, we should rapidly curtail the gross inefficiencies plaguing the cash-generating end of the sector, i.e., the distribution segment. These two tasks, in a way, are akin to the wheels of a bicycle, and in order to go forward we should ensure progress on both fronts - in tandem! In this context, I welcome the Ministry of Power s move to give fillip to generation capacity through the UMPP initiative. I also hope that this time we would be able to put in place more effective ways to deal with the vexed issues of payment security and sustainability through, say, a more robust and equitable structuring of the project - an ingredient that was missing in our earlier quest for adding generation capacity. I would urge the Ministry of Power to consider complementing the UMPP strategy by unveiling an equally ambitious plan for the distribution business, so that we not only achieve growth but also impart sustainability to it. In urban development, land is emerging as a critical resource forcing the state governments to make an intelligent choice between (a) maximising short term revenues by simply selling land to the highest bidder; and (b) making land available at reasonable rates (or even free) to attract institutions and industries that could underpin accelerated development in future. Mumbai and Hyderabad respectively provide live examples of these contrasting choices. While Mumbai seems to be inclined towards exploiting immediate returns - very little or nothing of which, incidentally, is flowing back into local urban development - the focus in Hyderabad has been on creating state-ofthe-art infrastructure so that large tracts of land in and around the city could become a preferred location for reputed institutions and growth-oriented services and manufacturing facilities. Enthused by the notable success already achieved by this strategy in attracting the likes of Indian School of Business and the Fab City project, the state government is now reportedly planning to provide a plug and play and walk-towork kind of environment for attracting IT, ITES and Hardware industries through an integrated cluster / township development. Apart from challenges that are unique to each sector, I see at least two cross-cutting issues that are likely to become missioncritical in most infrastructure projects. These are: construction technology and land acquisition. Construction, it is often said, could be viewed as the infrastructure of infrastructure industries. Our ability to meet the mammoth requirement of infrastructure services in a timely and cost-effective manner would be contingent, inter alia, on the capabilities of our construction industry. It is well known that construction of, say, roads and urban amenities just take too long in India in comparison to international benchmarks. Therefore, it is imperative that our construction industry gears up to attain world class standards of performance, particularly through rapid adoption of technological advances and other best practices. Land, on the other hand, is arguably the most important resource for establishing additional capacity in almost all infrastructure sectors, viz., power plants, roads, ports and SEZs. If recent developments in the country are any indication, obtaining land for infrastructure projects is already highly contentious. At the launch of our India Infrastructure Report 2006, the Union Minister for Urban Development, too, highlighted the imperative of establishing equitable mechanisms for land acquisition. In view of this, IDFC would strive to initiate a debate on this topic and work in concert with key stakeholder groups to develop a robust policy framework for expediting land acquisition in a fair and transparent manner. PROMISING PORTENTS The good news is that the government seems to be diligently working at ways to alleviate each of the aforementioned constraints. More importantly, it is keen to ensure that a considerable share of additional capacity comes through the private sector route. For instance, in case of the National Highways Development Project (NHDP), the government has decided to adopt only BOT (Toll) method for Phase III and rely mainly on Public-Private Partnership (PPP) in future. The resilience with which the government pursued and concluded privatisation of Delhi and 6

9 The private sector has further consolidated its position as an important player in sectors as varied as telecom, roads, ports and, more recently, in airports. Mumbai airports provides yet another pointer to its keenness to enhance the role of private players. The government also approved a new Special Economic Zones (SEZs) law, which intends to provide a uniform policy regime and cover all aspects of establishment and operation of SEZs in a comprehensive manner under a single legislation. In urban infrastructure too, the launch of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), aimed at improving urban service levels in a financially sustainable manner, is expected to open up opportunities for private participation. In the meantime, the private sector has further consolidated its position as an important player in sectors as varied as telecom, roads, ports and, more recently, in airports. In power too, each of the private power distribution companies in Delhi have achieved Aggregate Technical and Commercial loss reductions that are higher than the targeted levels. I am confident that the size as well as stature of private sector in infrastructure service provision will continue to grow and the trend is likely to extend to the level of states, too, as more and more citizens and ratepayers start appreciating the benefits of private participation. PREPARATION Many experts from the orient as well as the occident have prophesied that this century belongs to Asia, and, that India is poised to play a prominent role on the world stage. These predictions are founded on expectations of robust and durable economic growth for which adequate availability of affordable infrastructure facilities is sine qua non. Bringing private capital and expertise to infrastructure projects is a complex task, which requires a variety of skill sets ranging from appraisal, structuring, documentation and syndication. Moreover, it requires an acute understanding of the policy and regulatory frameworks governing the infrastructure sectors, and finely honed appreciation of what works (to spot the opportunities early on) and what does not. Today, the Indian infrastructure space is abuzz with excitement of burgeoning opportunities everywhere and there is a veritable rush of existing and new players, from India as well as abroad, to get a piece of the action. It is in this context that IDFC has to conduct its business and find opportunities for growth. The thorough man of business knows that only by years of patient, unremitting attention to affairs can he earn his rewards, which is the result, not of chance, but of welldevised means for the attainment to ends. Andrew Carnegie Over nine years since its inception, IDFC has assiduously acquired and nurtured an enviable pool of human talent, with an impressive repertoire of skills and perspectives that are well-honed to address challenges in all aspects of infrastructure. This talent pool, I believe, enables us to offer end-to-end infrastructure financing, policy and advisory solutions and compete with the best-inbusiness. I see exciting times ahead and I am confident that we are well equipped to negotiate the future to the best advantage of all our stakeholders. Deepak S. Parekh Chairman IDFC ANNUAL REPORT

10 BOARD OF DIRECTORS MR. DEEPAK S. PAREKH Chairman MR. VINOD RAI MR. S. S. KOHLI (w.e.f. April 27, 2005) MR. V. P. SHETTY (w.e.f. August 18, 2005) MR. DONALD PECK (w.e.f. April 27, 2005) MR. DIMITRIS TSITSIRAGOS MR. S. H. KHAN MR. GAUTAM KAJI MR. SHARDUL SHROFF DR. OMKAR GOSWAMI DR. RAJIV B. LALL Managing Director & CEO 8

11 CORPORATE INFORMATION CORPORATE OFFICES COMPANY SECRETARY Mr. Mahendra N. Shah SOLICITORS & ADVOCATES Amarchand & Mangaldas & Suresh A. Shroff & Co. Wadia Ghandy & Co. AUDITORS S. B. Billimoria & Co. Chartered Accountants PRINCIPAL BANKERS State Bank of India HDFC Bank Limited Deutsche Bank REGISTERED OFFICE ITC Centre, 3rd Floor, 760 Anna Salai, Chennai T /48/56 F MUMBAI Ramon House, 2nd Floor, H. T. Parekh Marg, 169, Backbay Reclamation, Mumbai T F NEW DELHI The Capital Court, 6th Floor, Olof Palme Marg, Munirka, New Delhi T /7/8 F BANGALORE No. 39, 5th Cross, 8th Main, RMV Extension, Sadashivnagar, Bangalore T /15 F DEBENTURE TRUSTEES IDBI Trusteeship Services Ltd. SICOM Ltd. IDFC ANNUAL REPORT

12 INFRASTRUCTURE REVIEW There is now a broad consensus that the current growth momentum of the economy cannot be sustained unless the bottlenecks created by the infrastructure sectors are swiftly and adequately addressed. Further, a view is gaining ground that deficiencies in infrastructure are hurting the poor the most. Realising the significance of infrastructure, the Government has been showing increasing commitment to ensure growth and sustainable delivery of infrastructure services at low prices. 10

13 WHILE TRADITIONALLY the public sector has been the dominant provider of infrastructure services, the focus in recent years has been shifting to private provision and competition and the Government has been progressively taking the role of a facilitator. Indeed, getting private capital into infrastructure services has become the cornerstone of the infrastructure development strategy in India. Following is a brief account of the key developments and issues in each of the important infrastructure sectors in , which led to or were caused by the adoption of this strategy. TELECOM The dramatic performance of the telecom sector that began a few years ago continued during This has been most spectacularly manifested in the improvement in coverage. The cellular subscriber base, for example, grew by about 72 per cent in and reached a figure of 90 million in March India has become one of the fastest growing mobile markets in the world. In fact, the performance of the Indian mobile sector is better than China (which launched its commercial mobile services 7 years ahead of India), if one compares the first 11 years of India vs. China. As a result of sustained growth in subscriber base in the past few years, the tele-density in India has risen from 2.8 in March 2000 to 9.1 in March 2005 and further to 12.7 in March The year also saw a strengthening of the earlier trends of wireless segment accounting for most of the growth, and the private sector providing the impetus to growth. In the first nine months of , for example, the growth in the basic service segment, which is mainly in the public sector domain, was insignificant as compared to the cellular segment (mainly in the private domain). (see Table 1). It may also be seen from Table 1 that while the share of PSUs has fallen from 98.7 per cent in to 85.3 per cent by December 2005 in fixed lines, it has risen from 4 per cent to 21.1 per cent in the mobile segment during the same period. In the fixed line segment, PSUs have actually seen a decline in absolute number, while private players are making deeper inroads. It may, however, be noted that PSUs are responding positively to the competitive environment and have actually been growing much faster now than in the period when competition was absent. The dramatic rise in tele-density has been possible mainly because of decline in tariff, which in turn has resulted from rising competition. During the year, tariffs for all telecom services have shown a significant downward trend. The extent of tariff cut FIXED LINES SHARE MOBILE INCLUDING WLL SHARE YEAR (in million) OF PSUs (in million) OF PSUs PSUs PVT. TOTAL (%) PSUs PVT. TOTAL (%) (first 9 months) IDFC ANNUAL REPORT

14 can be gauged from the fact that the public sector operators -- Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) -- have launched the One-India Plan, under which, customers can call from one end of India to another at a cost of Re.1 per minute, any time of the day to any phone. Not surprisingly, private operators have since launched similar plans. Low-end handsets have also become cheaper. Motorola, for example, has launched a mass market phone at a price of Rs. 1,700/-, to cater to low-end users. The tariff cuts have been facilitated by a number of regulatory measures such as changes in Access Deficit Charge (ADC) regime and reduction in annual license fee for National Long Distance (NLD) and International Long Distance (ILD) licenses. To facilitate greater competition and a more market-based approach to growth, the following major policy initiatives were taken: Entry fees for NLD and ILD licenses have been reduced substantially. Future applicants for NLD and ILD service licenses would have to have minimum networth and paid-up capital of Rs. 25 million only. Mandatory roll out obligations for existing and future NLD licensees and ILD licensees (with some exceptions) have been withdrawn. NLD service providers can access the subscribers directly for provision of leased circuits and can provide last mile connectivity. Access service provider can provide internet telephony, internet services and broadband services. If required, access service providers can use the network of NLD/ ILD licensee. Along with measures that resulted in reduced tariff, some initiatives were taken to protect the interests of consumers. For example, following the mobile operators marketing and offering tariff schemes promising lifetime validity (with free incoming calls), the Telecom Regulatory Authority of India (TRAI) has given an order that bars cellular operators from changing the tariff of the lifetime (prepaid) offer as long as the operator is in business. The order assumes significance in the light of claims made by the cellular operators that they were free to change the tariff plan after six months of launching the scheme. As the sector continues to grow, two major problems have emerged. Firstly, congestion levels arising out of lack of interconnection between networks are rising in many cities. The private operators, while claiming that interconnection between them is adequate, have blamed the lack of proper interconnectivity with state-owned BSNL for the poor quality of service. The Department of Telecom (DoT) has started meeting service providers in this regard. Secondly, with unprecedented growth in mobile telephony and the pursuit of a technology-neutral policy in the telecom sector, spectrum is becoming increasingly scarce. It may be noted that despite a rapid growth in subscriber base, the tele-density in India continues to be low by international standards: even in comparison to some other developing countries. In financing further growth in tele-density, Foreign Direct Investment (FDI) would have to play a much larger role than in the past. Realising this, the Government of India (GoI) has liberalised the FDI regime relating to the sector. While the FDI ceiling has been raised from 49 per cent to 74 per cent in a wide range of telecom services, 100 per cent FDI is now allowed in respect of some services (subject to certain conditions) as well as in the area of telecom equipment manufacturing. Following the liberalisation, Vodaphone has announced its entry into the sector with acquisition of 10 per cent shares in Bharti Televenture. The new FDI regime is expected to pave the way for world renowned telecom companies to set up their R&D / manufacturing base in India. In October 2004, the GoI announced the Broadband Policy with the objective of accelerating the growth of Broadband and Internet services, so as to promote e-governance, further integrate India into the world economy and lower the prices for NLD and ILD traffic. Broadband is a nascent segment of the industry. With increase in volume and competition in this segment, cost of service provision has already declined, leading to an accelerated growth; broadband connections in the country have risen from 0.2 million in March 2005 to 13.1 million in March There has been substantial change in the ADC regime. Under the new regime, the ADC-- paid by private operators to BSNL- 12

15 will be charged on a revenue-share basis as opposed to the prevailing per-minute per-call practice. An ADC of 1.5 per cent of the adjusted gross revenue will be applicable on all fixed line, and mobile calls. In the ILD segment, the TRAI has retained ADC on a per-call basis; ADC on both incoming and outgoing international calls has been reduced substantially. This is expected to lead to a drastic cut in both NLD and ILD tariff. The reduction in the ADC on incoming calls would make calls to India cheaper and thereby help in curbing the grey market. The TRAI has also reduced the carriage charge for national long-distance calls. For example, for calls beyond 500 km, the ceiling has been reduced to Re per minute from Rs per minute. While consumers would benefit the most from this move, BSNL would suffer an annual revenue loss of about Rs. 18 billion. The rural-urban divide continued to widen during the year. Between 1998 and 2005, the tele-density rose sharply from 5.8 to 26.2 in urban areas, but only marginally from 0.4 per cent to 1.7 per cent in rural areas. Unlike in urban areas, the mobile coverage in rural areas is negligible and the growth is PSU-driven. Out of 6.07 lakh villages in the country, 5.39 lakh villages had been provided Village Public Telephones (VPTs) by December To boost rural tele-density, the TRAI has sent a set of recommendations to the GoI. Notable among them is the recommendation to change the form of subsidy where the emphasis shifts from the present VPT and individual DELbased subsidy to infrastructure growthempowering subsidy. POWER The turnaround that was seen during , following the enactment of the Electricity Act, has been shaky. Although the rate of return of State Electricity Boards (SEBs) improved to (-)26 per cent in (RE) from (-)32 per cent in , it is still at an unsustainable level. The direct subventions received by the SEBs from the State Governments in remained large (over Rs. 110 billion) and uncovered subsidy even larger, indicating the extent to which the fiscal position of the states is being impacted by the electricity sector. During April-December 2005, power generation by utilities grew by 4.7 per cent on a year-on-year basis as compared to 6.5 per cent achieved during the same period in the previous year, partly due to lower Power Load Factor (PLF). The PLF of SEBs declined marginally during the year, while that of the central sector and private sector remained broadly unchanged. Of the three classes, the private sector continued to demonstrate the best performance and the SEBs the worst (see Chart 1). Capacity addition during the year 2005 (5177 MW) was also below expectation. It is almost evident that even the revised (lower) Tenth Plan ( ) capacity addition target (36,956 MW) would not be achieved. The anticipated addition during the Plan is 34,024 MW. In addition to the traditional factors afflicting the sector, non-availability of the desired level of coal has emerged as a matter of concern. (see Table 2). To give a major boost to generation, the GoI has taken three significant initiativesnotable among them is the one to facilitate the development of large sized Ultra Mega (million tonnes) PARTICULARS Coal requirement 338 * 365 ** Availability Shortfall from indigenous sources *Including 28 million tonnes for captive power plants ** Including 33 million tonnes for captive power plants IDFC ANNUAL REPORT

16 Getting private capital into infrastructure services has become the cornerstone of the infrastructure development strategy in India. Power Projects (4000 MW each) at coal pitheads and coastal locations to reap economies of scale. These projects are to be implemented by developers who would be selected through tariff-based competitive bidding. Coordination efforts are being made at the apex level to ensure that the projects are completed in a stipulated time frame. Further, there were renewed efforts to boost hydel production, whose share in total power generation has declined over the years. Preparation of pre-feasibility reports of 162 schemes with aggregate installed capacity of 47,930 MW has already been completed by the Central Electricity Authority (CEA). In 2005, hydro projects with an aggregate capacity of 4420 MW involving anticipated investment of about Rs. 190 billion were awarded. Finally, the revival of the Dabhol Power Project, which was shut down in June 2001 has begun. A joint venture company with the shareholding of NTPC, GAIL, Indian Financial Institutions and MSEB has been constituted to restart the power plant and complete the construction of Phase-II and the associated LNG terminal. The project is expected to start generation of power by the middle of Meanwhile, the distribution segment, which is primarily responsible for poor performance of the power sector, received little attention despite several provisions in the Electricity Act to rejuvenate the segment. It may be noted, however, that the Electricity Act can only be a facilitating factor; how much the sector benefits from the Act would depend on how the states respond. Regrettably, the reform performance at the state level continues to be sluggish barring a few exceptions, although all states have expressed their commitment to undertake reforms by signing MOUs with the GoI. This is evidenced by the continuing high levels of Aggregate Technical and Commercial (AT&C) losses. Within the limited reforms undertaken, tariff rationalisation and metering have been more in focus than sector restructuring or distribution privatisation. So far, 24 states have set up State Electricity Regulatory Commissions (SERCs) and 20 states have issued tariff orders, while only two states (Orissa and Delhi) have privatised their distribution system. During the year, no state undertook privatisation, while three states (Maharashtra, Madhya Pradesh and Assam) unbundled their SEBs. This is despite the fact that the privatisation of the power sector in Delhi is proving to be successful with each distribution company achieving higher cuts in AT&C losses than targeted. (North Delhi Power Limited, for example, has reduced AT&C loss level to 33.8 per cent by against the target level of 40.9 per cent.) Further, the June 2005 deadline imposed by the National Electricity Policy for SERCs to notify regulations relating to open access in distribution and intrastate transmission, was breached. Even now, not all states have notified these regulations. The delay has been partly due to the fact that the National Tariff Policy (NTP) -- which is expected to provide guidance to states on matters relating to computation of open access surcharge-- was announced only in January A delayed beginning of the open access process would effectively squeeze the period over which open access is to be phased in. Towards realising the goal of providing access to electricity to all households in five years, the Government introduced the scheme Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) in April The scheme provides for 90 per cent capital subsidy from the GoI for the projects sanctioned under the scheme. During the year, the pace of implementation of the scheme was much slower than envisaged. Out of 10,000 villages scheduled to be covered under the 14

17 scheme in , only 1941 villages were covered by December 2005, raising concerns about the sustainability of the revenue model of the scheme. The most significant policy development during the year was the announcement of the NTP, which would guide the Central Electricity Regulatory Commission (CERC) and SERCs in discharging their functions. To promote competition, the policy provides that all future requirements of power be procured competitively with only a few exceptions. All private sector players would develop projects on the basis of competitive bidding, but state-owned companies would be allowed a five-year transition period to do the same; until then, the tariffs for public sector projects would be determined by performance norms. Another significant contribution of the NTP is in the area of computation of cross subsidy surcharge, which is critical for the implementation of open access. The NTP stipulates that cross subsidy would be so reduced as to get tariffs within a band of 20 per cent of the average cost of supply by March Another important initiative taken during the year to impact tariff was the capping of trading margins by the CERC. The CERC has decided to fix the trading margin at 4 paise per unit for traders, who have been given licenses for engaging in inter-state trading of electricity. This move, while bringing some relief for consumers, would affect a number of trading firms who have been charging much higher margins. It may be noted that in the absence of a ceiling, the average trading margin had been rising and the weighted average of trading margins during the first half of was as high as 10 paise per unit. TRANSPORTATION CIVIL AVIATION The civil aviation sector saw unprecedented activity during the year, marked by significant developments across a wide front, including rapid traffic growth, liberalisation, massive fleet orders, a plethora of new airlines and airport modernisation. During April-December 2005, domestic and international passenger traffic grew by 24.2 per cent and 18 per cent respectively. This growth, among the highest in the world, has been possible partly because of the policy initiatives facilitating the entry of Low-Cost Carriers (LCCs). By offering no-frills flights that are significantly cheaper than regular flights, LCCs have stimulated passenger traffic demand to such an extent that they have begun to impose discipline and induce efficiency in other modes of transport such as the Railways. In addition to allowing entry of LCCs, the GoI has facilitated traffic growth in other ways too. In particular, it adopted a liberal approach for enhancing traffic rights with several countries including Australia, China, Singapore, UK, Canada and Germany to provide for more flights and better connectivity. Similarly, under a revised air services agreement signed with the USA, both countries can designate any number of services to any point in the territory of the other country. Furthermore, to ease the peak period shortage of seats, an open sky policy was adopted for a limited period (December 1, 2005 to January 31, 2006), under which designated foreign airlines were allowed unlimited number of services to the available points of call, subject to the terms and conditions of the existing commercial arrangements between the airlines of both sides. The high traffic growth has attracted new entrants. The year saw five new carriers : Air India Express, Spicejet, Kingfisher Airlines, IDFC ANNUAL REPORT

18 MUNDRA INTERNATIONAL CONTAINER TERMINAL LTD. The Project was to develop, operate and maintain a 1.2 mn TEU p.a. capacity container terminal at Mundra port,gujarat. IDFC was the only Indian lender invited for participation in the term loan bid process by P&O for the Project. The commercial operation at the Container terminal started in July IDFC has provided loan of Rs. 2,000 million. 16

19 Paramount Airways and Go Air. While LCCs are proliferating, there has been a trend of consolidation among the full cost carriers. Jet Airways purchased Air Sahara for an enterprise value of $ 500 million in January Also, a proposed merger of Indian Airlines and Air India has already been cleared by the Government. To take advantage of the prospective growth, both new and incumbent carriers have been ordering aircraft at an astounding rate. This grabbed the world s attention during the Paris Air Show in June 2005, when Indian carriers ordered more aircraft than any other country. Notable among these were (i) an order for 100 aircraft by a new entrant (Indigo) and (ii) the first Indian order for A380 aircraft (by Kingfisher). The national carriers, Indian Airlines and Air India, have responded positively to the prospect of higher growth for the sector and the challenge of competition from private airlines. The proposed merger of the two airlines is expected to make them more competitive. Further, Air India s subsidiary Air India Express -- created to compete with LCCs -- has begun operations since April Both Air India and Indian Airlines have started several new services during the year to expand their market share. Major fleet acquisition is under way for both carriers. The GoI has approved the proposal for acquisition of 43 Airbus aircraft by Indian Airlines and given in-principle approval for Air India s proposal for acquisition of 50 long-range aircraft. In a significant initiative --perhaps the biggest in recent times -- to attract private participation in infrastructure, the Government awarded the contracts for modernisation of Mumbai and Delhi airports, which account for over 50 per cent of passenger traffic, to the private consortia GVK and GMR respectively after a protracted bidding process. GVK and GMR have acquired the right to operate, manage and develop the airports after agreeing to share their respective revenue shares of 38.7 per cent and 46.0 per cent with the Airport Authority of India (AAI). The two airports are to be developed through the joint venture route with 74 per cent participation by the winning consortium and 26 per cent by AAI. The AAI will retain the ownership of the airports assets and continue with certain key functions such as air traffic services, customs, immigration, security and meteorological services, while the private operators would be responsible for the entire investment, which together is estimated to be Rs. 140 billion. The concession agreements for both airports are for a period of 30 years. The move would not only rejuvenate the aviation sector, but also inspire other sectors to attract private investment. Further, construction work at the two greenfield airports (at Bangalore and Hyderabad) with private participation has commenced. They are expected to be operational by the middle of the year An in-principle approval has been given to set up a similar greenfield airport in Goa. The GoI is also working on a plan to develop 10 non-metro airports, namely, Ahmedabad, Amritsar, Goa, Guwahati, Lucknow, Madurai, Jaipur, Mangalore, Trivandrum and Udaipur. In this regard, two consultants - Indian Financial Consultants and Global Technical Advisors - who had been appointed to assist the AAI, have prepared a techno-economic feasibility study for all the 10 airports. RAILWAYS The Railways continued to gain from the robust growth of the economy as well as from the tariff rationalisation -- albeit limited -- undertaken in recent years. In terms of revenue from goods traffic and passenger traffic, the first nine months of the year saw a growth of over 18 per cent and 7 per cent respectively over corresponding period of the previous year. The freight performance is particularly noteworthy, as the Tenth Plan targets of 624 million tonne loading and 396 billion tonne kilometers have been surpassed one year in advance. According to the revised estimates of , Indian Railways internal resources before dividend would reach a historic level of Rs. 130 billion. During April-December 2005, the growth in revenue earning freight traffic per cent over the corresponding period of was uneven across sectors. During the period, the most significant increase in freight traffic was in raw materials (excluding coal) for steel plants (21.8 per cent) and iron ore for export (16.4 per cent), while traffic volume actually declined for food grains. As a result of continuing high growth in traffic, the network connecting the four metro cities of Chennai, Delhi, Kolkata and Mumbai has got saturated at several locations, underlining the need for additional freight corridor. During the year, the Railways took several initiatives to improve its commercial orientation. For example: Rationalisation of freight structure continued. The number of classes in the freight tariff schedules was reduced from 27 in to 19 in Following the decision taken in to end the monopoly of CONCOR, a subsidiary of Railways, licenses have been given to private organisations to operate container trains. The licenses have 20- year validity with the option of a 10-year extension. Railways launched its first Double Stack Container Train from Kanakpura in Rajasthan to Pipavav Port in Gujarat. Such trains would lead to faster evacuation of containers from ports and Inland Container Depots. IDFC ANNUAL REPORT

20 A fully-computerised cost accounting system organised along business lines has been developed. The two major challenges facing the Indian Railways are (i) raising the service standards to match customer expectations; and (ii) keeping pace with the rapidly changing technology. The Railway Budget has done little in these directions; in that sense it probably lost an excellent opportunity offered by increased economic activity. The most notable initiative taken by the latest budget is the introduction of a dynamic pricing policy. As per this policy, the freight rates as well as passenger fares would be lower than the general rates for non-peak seasons and higher for peak seasons. ROADS The road sector has continued to maintain its momentum, although the performance has fallen short of expectation. The implementation of the National Highway Development Project (NHDP), continued to remain the focus of road sector activities. The first phase of NHDP (covering the Golden Quadrilateral (GQ)) has fallen behind schedule, missing even the extended deadline of December By March 2006, about 9 per cent of GQ was still under implementation. With the GQ nearing completion, the focus of the GQ NS-EW CORRIDOR PHASE I & II National Highway Authority of India (NHAI), the implementing authority for NHDP, has shifted to the NorthSouth-EastWest (NS-EW) corridor. In the NS-EW corridor, only about 820 km (out of a total of 7,300 km) were 4-laned during March 2006, although about 80 per cent has already been awarded. The deadline for completion is December Simultaneously, the awarding of contracts under Phase-III has also commenced. Not much progress has been made in port connectivity and other national highway projects (see Table 3). The constraints impeding timely completion include delays in land acquisition, law and order problems in some states and poor performance of some contractors. From its experience in GQ, the NHAI has learnt important lessons, which are being put to use in the NS-EW corridor projects. For instance, following the cancellation of some contracts due to submission of forged bank guarantees, the scrutiny of bank guarantees has been tightened. Similarly, to address the problems relating to land acquisition, a Committee of Secretaries has been set up. Further, NHAI is ensuring better Detailed Project Reports (DPRs) by making amendments in DPR contracts. Most importantly, a new document of model concession agreement for Build Operate Transfer (BOT) projects has been approved. NHDP PHASE III PORT CONNECTIVITY & OTHER PROJECTS TOTAL Total Length (km.) 5,846 7,300 4,015 1,211 18,372 Already 4-Laned (km.) 5, ,561 Under Implementation (km.) 527 4,892 1, ,280 Balance length for award (km.) - 1,481* 2,889* 50 4,420* * The difference in balance length is because of change in length after award of works. Source: National Highways Authority of India The private sector s response to NHDP has been positive, with several projects being implemented by private parties through BOT, annuity and Special Purpose Vehicle (SPV) formats. (The SPV format has been restricted to mainly port connectivity projects.) The private sector s share in the overall financing has been relatively small. With the NHDP broadening its scope, private financing is expected to play a greater role. Projects under NHDP Phase IIIA are being taken up only on BOT (toll) basis and the GoI is providing the required viability gap funding limited to 40 per cent of project cost. In fact, it has been decided that from Phase III onwards all future works of NHDP would be taken up on a BOT basis. The Pradhan Mantri Gram Sadak Yojana (PMGSY), the flagship program of the GoI for rural roads, which was launched in December 2000, continued in full swing during the year. Performance under the scheme, however, has not been uniform across the states. Some initiatives have been taken in states where the progress has been sluggish due to lack of state machinery. In Bihar, for instance, central agencies have been engaged for the implementation of PMGSY on behalf of the State Government. PORTS AND SHIPPING In , all major ports together handled million tonnes (mt) (provisional) of cargo traffic up from mt in , thus posting 10.3 per cent growth. During the year, the Visakhapatnam Port emerged as the highest cargo handling port (in volume terms). In terms of traffic growth rate, however, the Mumbai Port topped the list of all major ports in the country. The Mumbai Port handled a total of 44 mt in up from 35 mt in , thus registering around 25 per cent growth. In line with the current thinking that the Government should be concerned with 18

21 The telecom sector and the aviation sector made rapid progress in response to the ongoing liberalisation policies, the road sector is showing promise under the aegis of GoI-led programs to scale up. policy making, resource generation and regulation rather than with implementation and day-to-day administration, the Government has drafted a policy for the maritime sector (ports, shipping and inland water transport). The policy first drafted in August 2004 and later modified, has not yet been finalised and is currently under the consideration of a Committee of Secretaries. The proposed policy is comprehensive, covering issues relating to integrated development of major and minor ports, private sector participation, land matters, dredging, regulatory framework and institutional changes. Corporatisation has not made much headway, primarily on account of opposition from port trust unions. Ennore remains the sole corporatised major port, although at one point a strong case was made to corporatise all major ports. The Government has instead taken some initiatives to augment the ports autonomy by enhancing the financial and operational powers of the Port Trust Boards. For example, the Boards will not be required to seek the Government s clearance for deciding on the terms of loans if these are obtained from scheduled banks. They can now raise loans up to 20 per cent of their approved annual budget. They have also been given more powers to write off losses, compound or compromise claims and execute works and contracts. There have been a number of operational initiatives in the sector, significantly: The Government has approved the establishment of a port-based Special Economic Zone (SEZ) within the Kochi Port Trust area at Vallarpadam and Puthuvypeen. This would be the first port-based SEZ in India. POSCO, the South Korean steel company, has submitted a formal application to the Orissa Government to develop a captive port at Jatadhari near Paradeep port. The Paradeep Port Trust has opposed the move. The State Government would finalise its decision only after feasibility studies are complete. JNPT has decided to invite global tenders for developing the fourth container terminal at the port. The feasibility study for the terminal, which would be based on a BOT basis and involve an investment of over Rs. 30 billion has been completed. To promote inland water transport in Eastern India, the Kolkata Port Trust has reduced port-related charges and has also given concessions relating to berth hire and vessel-related wharfage charges. Nine companies have shown interest in the Rs. 11 billion Machillipatnam deep water port project in Andhra Pradesh, while five companies have evinced interest in developing a ship repair facility in Chennai port on a BOT basis. The Rs. 17 billion Gangavaram port in Andhra Pradesh has achieved financial closure. Fourteen companies, including some foreign companies, have submitted tenders for the development of a business plan for Chennai port. Mundra Port, India s largest privately developed port, has put in place high-tech mechanised facilities that measure up to international standards. To take advantage of the ongoing boom in the shipping industry, Mundra Port has decided to set up a Rs. 10 billion modern ship-building yard. URBAN INFRASTRUCTURE Although investment requirements in urban infrastructure are enormous, very little investment has been materialising because of two main reasons. First, the Urban Local Bodies (ULBs) have neither the financial resources nor the capacity to undertake large investment programme. Second, there has been a vicious cycle of low investment, poor service and low willingness to pay. There has been little progress in municipal finance mechanisms, which continue to be based on the traditional budgetary systems. The municipal bond market has not taken off as was expected after the first bond issues. While it is recognised that user-charge financed approach can facilitate a major thrust to urban infrastructure investment, economic pricing of services has not been possible mainly because of political reasons. The most significant development in the urban sector during the year has been the launch of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which aims at improving urban service levels in a financially sustainable manner. The Mission would subsume the ongoing urban schemes such as Infrastructure Development in Mega Cities and Integrated Development of Small and Medium towns and would last for seven years beginning The GoI will provide central assistance of Rs. 500 billion for this purpose. Urban reforms (such as repeal of Urban Land Ceiling Act, abolition of rent control, etc.) are incorporated in the form of conditionality for receiving central IDFC ANNUAL REPORT

22 In any given sector, the larger the scope of competition and private participation, the more efficient is the service delivery. assistance, which would be used predominantly for project expenditure. The Mission constitutes a departure in the GoI s approach to funding city development in three important ways. First, in the earlier schemes, transfers followed a checklist approach to reforms, while JNNURM entails a focus on reform outcome and not just on compliance. Second, the potential transfers under the Mission are much larger and far more attractive than under the past schemes. Third, the transfers are all grants; there is no loan component, as in the past. Under the Mission, funds for 63 identified cities (cities with million-plus population or state capitals or towns with religious / tourist significance) would be released to the designated state nodal agencies, which in turn would leverage additional resources from financial institutions, private sector and the capital market. The admissible projects under the Mission include urban renewal, water supply (including de-salination plants), sewerage and solid waste management, urban transport etc. In urban transport, the most important development is the growing popularity of metro rail systems. While the Metro Rail Transit System (MRTS) in Delhi continued to expand its network during the year, there have been proposals for MRTS in Mumbai, Bangalore and Hyderabad. Meanwhile, the GoI has approved the adoption of a national urban transport policy to ensure safe, affordable and quick transport access for the growing number of city residents. The objectives of the policy include encouraging integrated land use and transport planning to minimise travel distances, promoting public transport, improving the access of business to markets and fostering a more equitable allocation of road space with people -- rather than vehicles -- as its main focus. To promote public transportation, the GoI would offer equity participation and/or viability gap funding. The Cabinet also approved the recommendations of a Group of Ministers for giving State Governments the authority to decide on metro rail systems in municipal areas. While attempts to attract private investment to urban infrastructure continued during the year -- albeit with limited success-the process suffered a setback when the Andhra Pradesh Government decided to take over the joint venture Visakhapatnam Industrial Water Supply company (VIWSCo) from Larsen & Toubro (L&T), reversing thereby the first ever application of the Public Private Partnership (PPP) model on water supply management. (L&T has 51 per cent equity in VIWSCo and the rest is held by the Visakhapatnam Municipal Corporation and the Andhra Pradesh Industrial Infrastructure Corporation.) COMMERCIAL INFRASTRUCTURE Commercial infrastructure in the form of Special Economic Zones (SEZs) was heavily under focus during the year. The Government approved the much-awaited new SEZs law and framed rules to operationalise it. The new law is intended to provide a uniform SEZ policy regime and covers all aspects of establishment and operation in a comprehensive manner under a single legislation. Although old Government laws did permit the establishment of SEZs, the response of investors was very poor. Under the new law, the period of corporate income tax exemptions has been increased to 15 years from the existing 10 years. The new law offers not only expanded fiscal benefits, but also a single window clearance relating to FDI, procurement of goods / services from domestic tariff area, etc. These provisions have elicited strong investor response: the Government has already approved some 140 SEZs, involving a total investment of about Rs. 1,000 billion. All these are 20

23 expected to be operational within three years in order to be entitled to the benefits being offered under the new framework. As regards hotel infrastructure, there is already a huge unmet demand. The problem is likely to be further accentuated by the rise in demand due to certain developments such as privatisation of some of India s key airports, the growth of mega township projects, preparations for the Commonwealth Games and the forthcoming celebrations of 60 years of our Independence. The flow of projects in this sector has been hampered mainly by the difficulties in securing appropriate land. Sharp increases in real estate prices have skewed the growth of the sector towards the luxury segments to the detriment of the mid-market and budget segments. This underlines the need to introduce flexibility in changing land use patterns to facilitate the process of projects getting implemented in time and within budgets. In this context, it is worth noting that the attempts to offer prime railway land to private parties to develop budget hotels by structuring PPP models received a setback when the first three sites put on the block received no bids, as the private parties perceived the conditions to be too stringent to achieve commercial viability. PUBLIC PRIVATE PARTNERSHIP (PPP) Recognising the benefits of PPP, especially those relating to cost saving and access to expertise and proprietary technology, the Government has been increasingly turning to Public Private Partnerships to execute infrastructure projects. To expedite the appraisal of PPP projects in the central sector, the Government has set up a PPP Appraisal Committee and notified an appraisal mechanism. Also, to meet the financing needs of the potential investors, two significant initiatives have been taken: (i) provision of viability gap funding, and (ii) establishment of an SPV, India Infrastructure Finance Company Limited (IIFCL). The viability gap funding would be in the form of a capital grant at the stage of project construction. To be eligible for viability gap support, the PPP must be implemented by an entity with at least 51 per cent private equity. IIFCL is a wholly owned government company -- with an authorised capital of Rs. 10 billion -- which would provide financial assistance through (i) direct lending, and (ii) refinance to banks and financial institutions. In addition to its equity, IIFCL would be funded through long-term debt from the open market. To help IIFCL raise long-term debt, the Government would extend guarantee for the repayment of principal and interest. CONCLUSION It is clear from the Report that infrastructure developments in presented a mixed picture. While the telecom sector and the aviation sector made rapid progress in response to the ongoing liberalisation policies, the road sector is showing promise under the aegis of GoI-led programs to scale up. Turnaround in the power sector, which began in , appears to be slow and faltering and has become a major source of concern. In the urban sector, there was only limited progress, as deeper issues have yet to be addressed, although the JNNURM is a major step towards addressing the longstanding issues. In ports, railways, and tourism sectors, more and more initiatives are being taken, but reform efforts have remained sporadic and modest. Public Private Partnerships are moving to the center-stage with more and more governments and sectors adopting them as the prime mode of institutional structure for service delivery. The review of infrastructure developments in reiterates the conclusion yet again that in any given sector, the larger the scope of competition and private participation, the more efficient is the service delivery. This will, hopefully, strengthen the Government s resolve to pursue the strategy of attracting private investment into infrastructure sectors and also create a wider political consensus in its favour. IDFC ANNUAL REPORT

24 DIRECTORS REPORT Your Directors have pleasure in presenting the Ninth Annual Report together with the audited accounts for the year ended March 31, FINANCIAL RESULTS Income from operations increased by 34 per cent from Rs. 6,818 million in to Rs. 9,138 million in , while income from treasury operations increased by 139 per cent from Rs. 364 million in to Rs. 871 million in IDFC s total income, increased by 40 per cent from Rs. 7,276 million in to Rs. 10,157 million in On the expenditure side, total expenses increased by Rs. 1,917 million in over the previous financial year. This overall increase in expenses was largely on account of a 61% increase in interest expenses. Profit Before Tax (PBT) increased by 30 per cent from Rs. 3,229 million in to Rs. 4,193 million in After providing for Rs. 437 million as tax, the Profit After Tax (PAT) increased by 24 per cent from Rs. 3,040 million in to Rs. 3,756 million in IDFC s quality of assets continued to be good with nil Net NPAs as on March 31, DIVIDEND Your Directors are pleased to recommend a dividend of 10% for the year ended March 31, OPERATIONS REVIEW In lending activities, IDFC recorded its highest ever gross approvals in Over the last five financial years, gross approvals grew at a Compounded Annual Growth Rate (CAGR) of 36 per cent and the cumulative approvals as on March 31, 2006 were Rs. 352 billion for 259 projects and approvals net of cancellations were worth Rs. 227 billion. In , IDFC also recorded its highest ever gross disbursements. Over the last five financial years, gross disbursements grew at a CAGR of 51 per cent and the cumulative disbursements as on March 31, 22

25 IDFC recorded its highest ever gross approvals in Over the last five financial years, gross approvals grew at a Compounded Annual Growth Rate (CAGR) of 36 per cent. PARTICULARS FINANCIAL YEAR RUPEES (in million) FINANCIAL YEAR Operating Income 9,138 6, 818 Treasury Income Other Income Provision for Diminution in value of Investments written back TOTAL INCOME 10,157 7,276 Less: Administrative Expenses* Less: Provision for assets and losses PROFIT BEFORE INTEREST AND TAXES 9,201 6,348 Less: Interest and Other Charges 5,008 3,119 PROFIT BEFORE TAX 4,193 3,229 Less: Provision for Tax ** PROFIT AFTER TAX 3,756 3,040 Note: * Administrative expenses include staff expenses; travelling & conveyance; postage telephone & telex; establishment expenses; other expenses and depreciation ** Provision for Tax is net of Deferred Tax 2006 were Rs. 166 billion for 160 projects and outstanding disbursements were worth Rs. 114 billion. As on March 31, 2006, IDFC s total exposure to infrastructure projects was Rs. 175 billion of which Energy was the highest (37%), followed by Transportation (28%) and Telecommunication & IT (18%). IDFC s exposure to the State of Gujarat was the highest (Rs. 38 billion) followed by Maharashtra (Rs. 31 billion). In terms of outstanding disbursements, Gujarat (Rs. 30 billion) holds the top position, followed by Maharashtra (Rs. 19 billion). These two states alone account for 39% of IDFC s total exposure. During the year under review, considering market conditions, IDFC s treasury operations yielded satisfactory results. The investment portfolio was classified into three categories, Held to Maturity, Available for Sale, and Held for Trading. The investment strategy continues to ensure adequate levels of liquidity to support core business requirements, and optimise levels of return while maintaining a high degree of safety. During the year the various advisory assignments being handled across the various sector groups were brought together under a common advisory services team constituted for this purpose. The assignments are concentrated in 3 broad client groups - state & local government, central government and multilateral, and corporate advisory services. The advisory assignments are largely in the areas of urban services and urban renewal projects (parking lots & area development), transportation (roads and ports), telecom infrastructure, and energy. The Policy Advisory Group continued to contribute to IDFC s mandate of leading private capital to infrastructure projects, by providing impetus to rationalisation of policy and regulatory frameworks through the following activities. IDFC Private Equity Company Limited managed the India Development Fund which was set up in 2003 with contributions of Rs. 8,430 million. Looking at the opportunities in the infrastructure space, a new venture capital private equity fund - IDFC Private Equity Fund - II was set up which raised funds from domestic and international investors during the year with commitments of approximately Rs. 19 billion. The total corpus of the two funds as at March 31, 2006 was Rs. 25,511 million. Asset management business remains to be a key focus area. During the year fee income increased substantially on account of increasing focus on asset management business and structured deals in debt syndication and private equity placement. IDFC ANNUAL REPORT

26 RESOURCE MOBILISATION During the year the Company raised resources by borrowing on Non Convertible Debentures, bonds, short term commercial papers, etc. The total gross borrowing made during the year was Rs. 42 billion. The resources raised during the year have been utilised for the purposes as stated in the Offer Document. NON PERFORMING ASSETS (NPAS) As at March 31, 2006 the gross Non Performing Assets were at Rs. 0.5 billion and net NPAs were NIL. IDFC is a knowledgedriven organisation and its greatest asset is the experience and skills of its people. We recognise the fact that our workforce provides the critical competitive edge in our growth endeavours. INITIAL PUBLIC OFFER (IPO) During the year, IDFC made an IPO of 403,600,000 shares of Rs. 10 each (offer for sale of 283,600,000 shares and fresh issue of 120,000,000 shares) through book-building process. The issue was priced at Rs. 34 per share. The issue was oversubscribed 36.7 times with over 630,000 applications. Total fresh capital raised was Rs. 4,080 million. SUBSIDIARY COMPANIES IDFC has three subsidiary companies - IDFC Private Equity Company Limited, IDFC Trustee Company Limited and Feedback First Urban Infrastructure Development Company Limited. IDFC Private Equity Company Limited manages infrastructure private equity funds like the India Development Fund and the IDFC Private Equity Fund II. IDFC Trustee Company Limited acts as trustee to new private equity funds. A statement of particulars of IDFC s subsidiaries as required under Section 212 of the Companies Act, 1956 is annexed to this Report. Detailed analysis of the performance of IDFC and its businesses - financing and advisory, including initiatives in the area of Human Resources, Information Technology, 24

27 and Risk Management has been presented in the section on Management Discussion and Analysis of this Annual Report. JOINT VENTURES IDFC has two joint ventures - Infrastructure Development Corporation (Karnataka) Limited (ideck) in the state of Karnataka and Uttaranchal Infrastructure Development Company Limited (UDeC) in the state of Uttaranchal. These joint venture companies are engaged in advisory and project development work in the area of infrastructure at respective state levels. 3i NETWORK The 3i Network was jointly established by IDFC, IIT, Kanpur and IIM, Ahmedabad, in 1999, to provide a platform for interaction between practitioners and academicians on issues related to infrastructure development in the country. Over the years, the network has emerged as an important institution catalysing thinking on critical infrastructure topics, by drawing them to the attention of policy analysts and researchers from several reputed organisations. INDIA INFRASTRUCTURE REPORT URBAN INFRASTRUCTURE (IIR 2006) IIR the fifth annual edition of the India Infrastructure Report produced by IDFC - dealt extensively with issues related to urban infrastructure and also contained a review of the progress of various infrastructure sectors. It, inter alia, explored the growth of urbanisation in India, governance structure of urban local bodies and state of municipal finances. The Report examined the status and concerns related to main urban infrastructure services such as water, sewage, solid waste management, local transport, urban energy management, primary education and health. It also contained a critical overview of urban environment and factors responsible for environment pollution. The Report was released by Shri Jaipal Reddy, Union Minister for Urban Development, in March On that occasion, we organised a seminar on urban infrastructure to introduce the Report to a wider audience. PARTICULARS OF EMPLOYEES Particulars of employees as required to be furnished pursuant to Section 217(2A) of Companies Act, 1956 read with the rules thereunder, forms part of this Report. However, as per provision of Section 219(1)(b)(iv) of the Companies Act, 1956, the reports and accounts are being sent to all the shareholders of Company excluding the statement of particulars of employees. Any shareholder interested in obtaining a copy may write to the Company Secretary of the Company. EMPLOYEE STOCK OPTION SCHEME (ESOS) The Employee Stock Option Scheme was implemented with an objective of securing greater employee participation; motivating the employees to contribute to the growth and profitability of the Company; enabling them to participate in the long-term growth and financial success of the organisation, and with a common objective of maximising the shareholder value. This would not only enable the Company to reward past loyalty and performance, but also to attract and retain the best talent besides enabling the employees to develop a greater sense of ownership with the organisation. The IDFC Employee Stock Option Scheme 2005 provides up to 17,500,000 options to be granted to permanent employees to purchase equity shares. We have granted 12,698,517 options during the financial year in eight different grants, based on period of service with the Company, seniority and functions. All options vest over three years, vesting 30% each on the first and the second anniversary of each grant and 40% on the third anniversary. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model. For purposes of disclosures as per the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines 1999, the estimated fair value of the options is amortised to expense over the options vesting period. Disclosures as required by Clause 12 of the SEBI Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines 1999 are annexed to this Report. CORPORATE GOVERNANCE Separate detailed chapters on Corporate Governance, Additional Shareholder Information and Management Discussion IDFC ANNUAL REPORT

28 and Analysis are attached herewith and form a part of this Annual Report. HUMAN RESOURCE IDFC is a knowledge-driven organisation and its greatest asset is the experience and skills of its people. Recognising the fact that our workforce will provide the critical competitive edge in our growth endeavours, IDFC has laid major emphasis on acquiring, maintaining and developing our human asset base. During , we have recruited several individuals at the senior level and assigned them specific functional leadership positions. Apart from these, several professionals continued to join the Company at the operational level. Keeping in mind the growth objectives there was a major restructuring undertaken in the organisational structure. The key objectives of the new organisation structure were separation of business development and execution functions which were hitherto not differentiated; launching of new products; a focussed approach to advisory services; and continuance of an independent platform for objective policy advice. Subsequently, professionals were allocated across various functions in a manner that leveraged existing competencies. IDFC had engaged Cerebrus Consultants Private Limited to design, structure and implement a variable compensation system that is focussed on deliverables and rewards performance. The design focuses on a competitive compensation structure and retention of talent. IDFC had staff strength of 125 employees as on March 31, 2006 as compared to 103 employees at the beginning of the year. PUBLIC DEPOSITS During , your Company has not accepted any deposits from the public within the meaning of the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, LISTING OF SHARES The Company s shares got listed on the NSE and BSE on August 12, 2005 after an Initial Public Offer (IPO). PARTICULARS REGARDING CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND EXPENDITURE The particulars regarding foreign exchange earnings and expenditure appear as Item No. 10 and 11 in the Notes to the Accounts. Since IDFC does not own any manufacturing facility, the other particulars relating to conservation of energy and technology absorption as stipulated in the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 are not applicable. DIRECTORS During the year, the Board of Directors was reconstituted in line with the revised Shareholders Agreement following the Initial Public Offer. Accordingly Mr. A. K. Purwar, Mr. K. Chinniah, Mr. A. Idris, Mr. Ken Borda (Alternate Director to Mr. K. Chinniah), Mr. Peter Robertson (Alternate Director to Mr. Dimitris Tsitsiragos) and Mr. Donald Peck (Alternate Director to Mr. A. Idris) resigned from the Board. Mr. V. P. Shetty and Mr. Donald Peck were appointed as Directors during the year. The following Directors retire by rotation and being eligible offer themselves for re-appointment: 1 Mr. Vinod Rai 2 Mr. Shardul Shroff 3 Dr. Omkar Goswami INTERNAL CONTROL SYSTEMS The Company has in place adequate systems of internal control to ensure compliance with policies and procedures. Internal Audits of all the units of the Company are regularly carried out to review the internal control systems. The Internal Audit Reports along with implementation and recommendations contained therein are constantly reviewed by the Audit Committee of the Board. AUDITORS Messrs S. B. Billimoria & Co., Chartered Accountants, Mumbai, retire as Auditors of the Company and have given their consent for re-appointment. The shareholders will be required to appoint the Auditors and fix their remuneration. 26

29 India Infrastructure Report 2006 dealt extensively with issues related to urban infrastructure and also contained a review of the progress of various infrastructure sectors. It, inter alia, explored the growth of urbanisation in India, governance structure of urban local bodies and state of municipal finances. As required under the provisions of Section 224 of the Companies Act, 1956, the Company has obtained a written certificate from the Auditors proposed to be re-appointed to the effect that their re-appointment, if made, would be in conformity with the limits specified in the said Section. DIRECTORS RESPONSIBILITY STATEMENT The Directors confirm: that in the preparation of the annual accounts, the applicable accounting standards have been followed; that they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent, 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 profits of the Company for the year; 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; and that they have prepared the annual accounts on a going concern basis. the Planning Commission; IIT (Kanpur); IIM (Ahmedabad); the State Governments and all IDFC s Shareholders. The Board of Directors wishes to gratefully acknowledge the assistance and guidance received from all of them. IDFC could make the progress it has in these years due to the dedication and creativity of its staff at all levels. The Board of Directors wish to place on record their warm appreciation for these efforts. For and on behalf of the Board Deepak S. Parekh Chairman Mumbai June 15, 2006 ACKNOWLEDGEMENTS IDFC has developed close relationships with the Ministry of Finance (MoF), Banking Division-MoF, Ministry of Surface Transport, National Highways Authority of India, Ministry of Power, Department of Telecommunications, Ministry of Petroleum and other Ministries of the Government of India involved with infrastructure development; the Reserve Bank of India and regulatory bodies, TRAI, the Central Electricity Regulatory Commission and State Electricity Regulatory Commissions; IDFC ANNUAL REPORT

30 Annexure PARTICULARS OF DISCLOSURE AS REQUIRED UNDER SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, Options granted during the year 12,698, Total Options vested Nil 3. Total Options exercised during the year Nil 4. Total number of shares arising as a result of exercise of Options Nil 5. Total Options lapsed (due to resignations, etc.) as on March 31, ,560, Money realised by exercise of Options Nil 7. Total number of Options outstanding as on March 31, ,138, Variation in terms of Options None 9. Pricing formula for the grant Price is based on valuation of shares as approved by shareholders. 10. Employee-wise details of Options granted to: Employees who were in receipt of grants amounting to 5% or more of total Options granted during the year: Dr. Rajiv B. Lall Employees who were granted Options during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant: NIL Details of Options granted to Senior Management during the year under review: NAME OF EMPLOYEE NO. OF OPTIONS (OF RS. 10 EACH) Dr. Rajiv B. Lall 858,320 Mr. A. K. T. Chari 288,130 Mr. L. K. Narayan 387,415 Mr. M. K. Sinha 460,056 Mr. Urjit Patel 378,611 Mr. Vikram Limaye 431,440 Mr. Cherian Thomas 295,146 Mr. Anupam Srivastava 236,451 Mr. Sadashiv Rao 236,451 Mr. V. Ravikumar 220,000 Mr. Atulya Sharma 220, Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of Option calculated in accordance with AS 20 Earnings per Share Rs per share. 12. Pro Forma Adjusted Net Income and Earning Per Share RUPEES (in million) Net Income 3, As Reported Add: Intrinsic Value Compensation Cost 2.22 Less: Fair Value Compensation Cost 2.65 ADJUSTED PRO FORMA NET INCOME 3, RUPEES EARNING PER SHARE: Basic As Reported 3.48 Adjusted Pro Forma 3.48 EARNING PER SHARE: Diluted As Reported 3.45 Adjusted Pro Forma Weighted average exercise price of Options granted during the year whose: - exercise price equals market price exercise price is greater than market price NA - exercise price is less than market price

31 RUPEES 14. Weighted average fair value of Options granted during the year whose: - exercise price equals market price exercise price is greater than market price NA - exercise price is less than market price Description of method and significant assumptions used to estimate the fair value of Options The fair value of the Options granted has been estimated using the Black-Scholes option-pricing Model. Each tranche of vesting has been considered as a separate grant for the purpose of valuation. The assumptions used in the estimation of the same have been detailed below: STOCK PRICE: The latest available valuation as per the independent valuer has been considered for the purpose of option valuation for the Options granted prior to the listing of the shares. The highest range of offer of shares have been considered for the valuation of options granted after the close of the issue, but prior to the listing of the shares and closing price on NSE as on the previous day of grant has been considered for valuing the grant after listing. RISK-FREE RATE OF RETURN: The risk-free interest rate being considered for the calculation is the interest rate applicable for a maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities. Exercise Price: Options have been granted at a price of Rs arrived at by the independent valuer pre-listing. TIME TO MATURITY: Time to Maturity / Expected Life of Options is the period for which the Company expects the Options to be live. The minimum life of a stock option is the minimum period before which the Options cannot be exercised and the maximum life is the period after which the Options cannot be exercised. EXPECTED DIVIDEND YIELD: Expected dividend yield has been calculated as an average of dividend yields for the four financial years preceding the date of the grant. 1. Number of shares issued 2,453, Price RS Employee-wise details of shares issued granted to: Employees who were in receipt of shares amounting to 5% or more of total shares issued under ESPS during the year: Employees who were issued shares during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of issuance: Details of shares issued to Senior Management during the year under review: Dr. Rajiv B. Lall & Mr. A. K. T. Chari NAME OF EMPLOYEE NO. OF SHARES (OF RS. 10 EACH) Dr. Rajiv B. Lall 171,664 Mr. A. K. T. Chari 288,129 Mr. L. K. Narayan 77,483 Mr. Urjit Patel 75,722 Mr. Vikram Limaye 86,288 Mr. Cherian Thomas 59,029 Mr. Anupam Srivastava 47,290 Mr. Sadashiv Rao 47, Diluted Earnings Per Share pursuant to issue of shares under ESPS Since shares were issued at fair value, there is no dilution of Earnings Per Share on account of shares issued under ESPS 5. Consideration received against the issuance of shares Rs million NIL IDFC ANNUAL REPORT

32 MANAGEMENT DISCUSSION & ANALYSIS IDFC ( the Company ) was conceptualised and incorporated as a specialised financial intermediary for mobilising and directing private resources to commercially viable infrastructure projects. From its inception, the Company s ethos was built around the concept of Growing for India - of doing all that was needed to accelerate the development of India s physical infrastructure and, in the process, build critical capabilities for infrastructure finance institutions. IDFC BEGAN mainly as a Government of India (GoI) initiative supported by government-held financial intermediaries, multilateral agencies and some leading domestic private sector financial houses. The structure of ownership changed in (hereafter FY2006). The initial sponsors of the Company, led by the GoI, divested a part of their shareholding through an Initial Public Offer (IPO) - thus making way for a much wider body of institutional and retail shareholders to profit from the fortunes of India s premier, dedicated infrastructure finance company. Over 400 million equity shares with a face value of Rs. 10, including 120 million fresh shares, were sold through a 100 per cent book-building route. The issue received a phenomenal response, and was oversubscribed 36.7 times. Today, therefore, while IDFC continues Growing for India, it stresses on a business strategy that maximises long term shareholder value and helps the shareholders to Grow with India. That shows up in the superior performance of the Company in FY2006, the key features of which are given below. 30

33 IDFC S CONSOLIDATED PERFORMANCE - FY2006 Loan book grew by 43 per cent to Rs. 103,210 million in FY2006. IDFC s asset book, comprising loans as well as equity participation stood at Rs. 106,899 million as at March 31, Revenue from operations increased by over 41 per cent to Rs. 10,496 million in FY2006. Net Interest Income grew by 18 per cent to Rs. 3,029 million. Non Interest Income rose by 32 per cent to Rs. 2,292 million. Fee-based Income increased by 96 per cent to Rs. 954 million. Profit Before Tax (PBT) was higher by 34 per cent at Rs. 4,426 million. Profit After Tax (PAT) increased by over 26 per cent to Rs. 3,908 million. Return On Net Worth (RONW) stood at 17.5 per cent for FY2006. Fully Diluted Earning Per Share was Rs PROFIT THINK GROW INNOVATE IDFC S 4X4 STRATEGY FY 2006 saw the beginning of the implementation of IDFC Management s 4x4 Strategy for growth. The key elements of this Strategy are shown in the box. The actual elements of this Strategy are highlighted while reviewing each of IDFC s individual businesses in subsequent 1 DELIVER PROFITABILITY GROWTH BY - achieving transaction leadership in key infrastructure projects by working closely with clients, right from the pre-bidding stage to project commissioning. diversifying IDFC s revenue stream to include fee-based income and other non-interest related incomes, by offering a portfolio of asset management, non-fund based products and debt and equity capital market related services that leverage the Company s deep and wide exposure to various aspects of infrastructure finance. expanding our product range to participate in the more profitable parts of the capital structure of any infrastructure project. maintaining high levels of operational efficiency to retain our low expense to assets ratio. 2 ACHIEVE ROBUST BALANCE SHEET GROWTH BY - building on our strong relationships with the sponsors of infrastructure projects to continue expanding our business activities and financing opportunities. focusing on our key sectors - such as energy, transportation, telecommunications and industrial and commercial infrastructure - while simultaneously diversifying into emerging areas such as urban services, rural infrastructure, education and healthcare. offering a broader array of financing solutions tailored to different risk appetites, and thus expand funding options for infrastructure projects. leveraging IDFC s conservative capital structure and long-term funding resources to expand financing operations while ensuring competitive cost of funds. 3 PURSUE INNOVATION BY - using our structuring skills and knowledge of domestic and international capital markets to develop and launch new products suitable for a wider array of domestic and international investors and lenders. working with regulators and market participants to further the development of capital markets in India, and so expand the market for new products across the entire risk spectrum. 4 PROMOTE THOUGHT LEADERSHIP BY - advocating policy and regulatory frameworks that tailor global best practices to the Indian context. delivering high quality advisory services to clients, and working with government entities in India as well as multilateral and bilateral development agencies to remove bottlenecks and encourage private investment into infrastructure. IDFC ANNUAL REPORT

34 CHART 5% OTHERS 12% COMMERCIAL/INDUSTRIAL 18% TELECOM & IT 28% TRANSPORTATION 37% ENERGY BSECTORWISE DISTRIBUTION OF IDFC S TOTAL EXPOSURE sections of this chapter. Even so, it is useful to analyse the broad contours of IDFC s business value creation proposition. The Company focuses on leveraging infrastructure finance to create additional value for its shareholders - the metric of which is improvement in the RONW. RONW has two fundamental components: (i) Return On Assets (ROA), and (ii) the financial gearing of a company. With a consolidated ROA of 3.82 per cent in FY2006, IDFC enjoys one of the highest returns - if not the highest - in its business space. However, given margin pressures on almost all interest-bearing project finance transactions, IDFC believes that such a level of ROA is not sustainable if the Company were to be a pure loan-based project financier. This is not just an IDFC phenomenon, but holds true for all entities that are engaged in lending to infrastructure. Increasing competition for lending to infrastructure projects is driving margins lower. To compensate for what might be an expected reduction in ROA from declining margins on loan-based infrastructure finance, IDFC has put in place a strategy to rapidly develop and increase the size and scope of its portfolio of higher ROA generating Non Interest fee-based incomes. As a pointer, the Company s Non Interest Income, which generates higher ROAs, increased by 38 per cent to Rs. 2,292 million in FY2006. IDFC is, therefore, beginning to exploit its vast knowledge base in infrastructure projects to become a one-stop-shop for infrastructure finance. This will allow IDFC to differentiate itself from the competition on the basis of products and services other than just its balance sheet. The Company s 4x4 Strategy has structured its different businesses to occupy every space in infrastructure financing and advisory chain. IDFC is also keenly aware of the need for equity participation in infrastructure projects and the huge scope of such investments. Its equity investment focus will be channelled through its whollyowned asset management companies, and is expected to be a key driver of growth in fee-based incomes. Now to the leveraging. IDFC is one of the least financially leveraged financing companies in India. The Company believes that as its ROA gets ring-fenced through an increasing focus on equity investments and fee-based income streams, there will be considerable scope for increasing IDFC s financial leverage. This ought to be helped by the excellent quality of the Company s loan asset portfolio. As of March 31, 2006, IDFC s net Non Performing Assets (NPAs) were zero - and its gross NPA as low as Rs. 531 million. Indeed, this happens to be the best in the industry. In short, stabilising and protecting the Company s ROA and therefore, its long term competitive advantage through greater fee-based incomes, and increasing financial gearing from a low base, is expected to help IDFC deliver significantly improved returns on shareholders wealth in the future. As a company, we expect our investors to judge us by how we achieve targets in these parameters. To execute the 4x4 Strategy, IDFC reorganised its workforce in FY2006. Our staff has been broadly segregated into two distinct functions - business development and execution. The former consists of relationship managers dealing with sector verticals, while different execution teams focus on processing deals and delivery of different products catering to both the debt and equity financing requirements of clients. In addition, specialised groups look after advisory and support functions. 32

35 This reorganisation has brought in functional focus through specialised delivery mechanisms, which has enhanced the Company s ability to offer a wider portfolio of infrastructure financing products and services. IDFC s offerings can be divided into four broad business activities: Project Finance Asset Management Financial Markets : Proprietary Equity, Debt Syndication and Equity Placements Advisory services These businesses, in turn, are supported by two related groups - the Environment Management and Social Development Group, and the Policy Advisory Group. The next few sections examine IDFC s performance in each of these businesses during FY2006. PROJECT FINANCE As an infrastructure finance company, the core business of IDFC is project finance. The objective of balance sheet expansion, spelt out in the 4x4 Strategy framework, is being driven primarily by this business. There was a 62 per cent growth in gross disbursements - from Rs. 37,230 million in FY2005 to Rs. 60,450 million in FY2006. This covered 85 projects, compared to 77 projects in FY2005. Moreover, there has been a 66 per cent growth in gross approvals to Rs. 106,310 million in FY2006 covering 88 projects. Though there were instances of prepayment, IDFC grew its infrastructure loan book by over 43 per cent. As of March 31, 2006, the Company s total exposure in infrastructure project finance was Rs. 175,300 million. Chart A shows the growth in IDFC s approvals and disbursements over the last four years. The Company s thrust is on four main infrastructure sectors: (i) energy, (ii) transportation, (iii) telecommunication and IT, and (iv) commercial and industrial infrastructure. During FY2006, energy and transportation were the two fastest growing sectors in IDFC s portfolio, with gross approvals increasing by 61 per cent and 86 per cent in both these sectors respectively. As on March 31, 2006, these two sectors accounted for a major proportion of the Company s total exposure - with energy enjoying a 37 per cent share, while transportation had a 28 per cent share. Chart B gives the sectorwise distribution of IDFC s exposure as on March 31, ENERGY As on March 31, 2006, IDFC s total exposure in this sector was Rs. 64,360 million. During FY2006, IDFC made gross disbursements to 32 energy related projects, while gross approvals were provided to 34 such projects. Gross disbursements increased by 28 per cent - from Rs. 16,390 million in FY2005 to Rs. 21,010 million in FY2006. Gross approvals grew by 61 per cent - from Rs. 20,790 million in FY2005 to Rs. 33,390 million in FY2006. Chart C shows the growth in IDFC s approvals and disbursements in the energy sector over the last four years. Growth in business has been mainly in power generation, and not so much in transmission or distribution. The impetus for power generation came from the regulatory support provided by the Electricity Act 2003, which further enables captive power generation and Independent Power Plants (IPPs). Within generation, the thrust has been in pithead based coal-fired power plants and hydroelectric projects. IDFC has been actively financing players in these businesses. In addition, the Company has IDFC ANNUAL REPORT

36 also financed power projects in the renewable energy, particularly in wind power. In power distribution, which has not seen much incremental growth, IDFC continues to assist distribution companies in metropolitan Indian cities and is playing an active role in advising bidders in a first of its kind private transmission project. While the demand driven growth in energy related projects is expected to continue, this sector still remains mired with regulatory issues that prevent it from really taking off. Even so, we expect significant opportunities in FY2007 and FY2008. IDFC firmly believes in the symbiotic relationship that the Company has with the Indian growth story. While the need for infrastructure development is clearly understood, the challenge is even greater to attract private participation. TRANSPORTATION In transportation, IDFC deals mainly in financing roads, aviation, ports and container terminals. As on March 31, 2006, IDFC s total exposure in this sector was Rs. 49,700 million. During FY2006, the Company made gross disbursements to 25 projects in this sector, while gross approvals were provided to 24 projects. Gross disbursements in transportation increased by over 251 per cent from Rs. 5,660 million in FY2005 to Rs. 19,860 million in FY2006; gross approvals grew by 86 per cent to Rs. 35,060 million. Chart D plots the growth in IDFC s approvals and disbursements in transportation over the last four years. Within transportation, the major impetus came from the rapid growth in aviation. IDFC played a role in financing aircraft acquisitions of two leading domestic airlines and is a lead financer for a greenfield airport project in the country. The Company has also actively financed private players in ports, mainly on the west coast. The roles here range from securitisation of debt and receivables to being a lead arranger of senior and subordinated debt. It has also financed 34

37 Container Forwarding Stations (CFS) and continues to finance road projects both in the annuity scheme and the BOT scheme. The Company expects the transportation sector to be an important growth driver in the next financial year. Roads should continue with their robust growth, and we should also see increased activity in aviation and ports. The new thrust in bringing the private sector into railways opens up a completely new window of opportunity for financing. But that is still in the future. TELECOMMUNICATIONS AND IT As on March 31, 2006, IDFC s total exposure in this sector was Rs. 31,400 million. During FY2006, IDFC made gross disbursements to 11 projects in telecommunication and IT, while gross approvals were provided to 12 such projects. Gross disbursements increased by 41 per cent to Rs. 13,010 million in FY2006; and gross approvals increased by 26 per cent to Rs. 16,700 million. Chart E depicts IDFC s approvals and disbursements in the telecommunication and IT sector over the last four years. Telecommunication in India has developed tremendously in the last few years. It is now a fairly matured segment that is entering a new phase - one that will involve increasing reach in the second and third tier towns of semi-urban India as well as growth in penetration of the rural heartland. While IDFC will continue to be involved in all aspects of financing the usual mobile and fixed line telecom infrastructure, its new focus will be the next generation of convergent communication infrastructure, like cable, broadband and Voice Over Internet Protocol (VOIP). The Company is advising a client at the State level on fibre optics and helping companies with acquisition financing in telecom. COMMERCIAL AND INDUSTRIAL The commercial and industrial sector is fairly new for the Company and works on financing deals with project-based lending for private initiatives in tourism, Special Economic Zones (SEZs), townships, IT parks as well as selected commercial and retail real estate projects. As of March 31, 2006, IDFC s total exposure to this sector was Rs. 21,100 million. The Company made gross disbursements to 10 projects, and gross approvals to 16 such projects. Gross disbursements increased by 2 per cent to Rs. 5,010 million in FY2006; gross approvals grew by almost 50 per cent to Rs. 13,440 million. In tourism, IDFC finances hotels and other accommodations. We believe that there are large investment opportunities in the midpriced segment in primary as well as secondary metropolitan areas of India, and we have participated in several such financing opportunities. We also intend to explore possibilities utilising the Public Private Partnership (PPP) framework for state-owned tourist accommodation facilities, tourism opportunities related to the Golden Quadrilateral highways programme and the development of convention facilities in large cities. We also believe that there will be an overlap of tourism with healthcare as India develops itself as a destination for medical tourism. SEZ projects focus on the development of infrastructure in targeted areas, and are intended to provide internationally competitive duty-free environments for export with minimum formalities. In FY2006, IDFC participated with a leading industrial house in its development of a SEZ in western India. More such projects are to follow in the future. Commercial and retail real estate and industrial parks have been showing very high growth rates over the last couple of years. The IDFC ANNUAL REPORT

38 GUJARAT PIPAVAV PORT LIMITED A container terminal capable of handling 1 million TEUs p.a. and 5 million tonnes p.a. of bulk cargo. The first private sector port in India, GPPL, under the management of the AP Moller-Maersk group, is implementing this project in 3 phases (to be completed by 2009) at a cost of Rs. 10,850 million IDFC has provided Rs. 4,460 million of the term debt, and arranged the balance debt requirement of Rs. 1,500 million. 36

39 development of IT-enabled services and BPO operations have given rise to demand for quality commercial real estate and industrial parks, especially in metropolitan areas. We are advising a number of cities on setting up combined car park and commercial complexes on a PPP basis. We believe that the demand for commercial and retail real estate will continue to increase due to liberalisation in entry norms for Foreign Direct Investment (FDI), and the potential liberalisation of such norms in the retail sector. Going forward, IDFC is expected to participate selectively in such projects with reputed developers and builders. Apart from these, IDFC also finances projects in urban services, healthcare, food and agriculture and education. We expect to pursue innovative opportunities for municipal financing as well as participate more aggressively in financing the development of healthcare facilities in the country. In the food and agriculture sector, the focus is on financing of logistics infrastructure to help deliver farm produce to the market, whereas, our foray in financing education is more in the nature of opportunistic investments and depends, most of all, on the quality and reliability of the promoters. ASSET MANAGEMENT This business deals with long term equity investments in infrastructure. Third party funds are mobilised and managed through our wholly-owned subsidiary, IDFC Private Equity Company Limited, formerly known as IDFC Asset Management Company Limited (IDFC Private Equity). The business generates returns in terms of fees paid for managing a fund, and a portion of the potential gains on the invested portfolio which is called the carry. IDFC Private Equity is the investment manager of the India Development Fund (IDF), which was formed in FY2003 with IDFC being a sponsor investor. IDF is one of the largest domestic private equity infrastructure focused funds in India and has invested mainly in power generation, gas pipelines, hotels and port projects. The objective of the private equity business is to secure attractive returns by providing equity risk capital to early stage and rapidly growing infrastructure focused companies. IDFC Private Equity has a panel of well regarded advisors and Board members, an independent Investment Committee, and an experienced team that leverages the client relationships and domain expertise of IDFC. It also receives a management fee from the IDF for asset management services. During the year the Company raised its second fund - IDFC Private Equity Fund II (IDF II) - from domestic and international investors. Both funds are registered with the Securities and Exchange Board of India (SEBI). As on March 31, 2006 the total corpus of our two funds (IDF and IDF II) amounted to Rs. 25,510 million. This is the largest corpus among the dedicated private equity funds focused on Indian infrastructure. The key financials of IDFC Private Equity for FY2006 are: Total Income - Rs. 293 million. Profit Before Tax - Rs. 215 million. Profit After Tax - Rs. 138 million. IDFC is presently building on its experience in infrastructure investing by exploring opportunities to raise other kinds of third party fee-generating funds, including an equity fund for investing in listed equities and pre-ipo opportunities. The best-in-class talent pool in IDFC with its deep knowledge of infrastructure is being further leveraged to develop other fee generating businesses. There are two broad areas of these activities: (i) proprietary equity, debt syndication and equity placements, and (ii) advisory services. FINANCIAL MARKETS : PROPRIETARY EQUITY, DEBT SYNDICATION AND EQUITY PLACEMENTS PROPRIETARY EQUITY Infrastructure projects often require innovative financing structures. Thus, it is imperative for a project finance provider to explore opportunities of generating higher returns by accepting a higher level of risk and providing equity. IDFC s proprietary equity business plays a pivotal role in developing such opportunities and also generates Non Interest Income for the Company. Proprietary equity invests in projects where IDFC has true proprietary knowledge - being involved with the promoters from the stage of inception. These opportunities are generally not available to the broader market and help facilitate financial closure for the underlying projects. The investments are generally made when the company is close to market and the lock-in period is short. IDFC invested in Gujarat State Petronet Limited, GTL Infrastructure and Green Gas Limited and in the public issues of Royal Orchid Hotels and GVK Power and Infrastructure Limited. The Company realised significant equity gains through the sale of its holdings in Bharti Televentures Limited, Indraprastha Gas Limited and PTC India Limited. As on March 31, 2006, IDFC s total equity book including strategic investments was valued at Rs. 4,983 million at cost. Of this, Rs. 875 million is invested in companies that are now listed; and there has been Rs. 2,803 million unrealised capital appreciation on these assets. While IDFC s proprietary equity investments include shorter term plays with relatively short lock-in periods, the long term IDFC ANNUAL REPORT

40 IDFC needs to leverage its vast knowledge base in infrastructure projects to become a one-stop-shop for infrastructure. opportunities in equity placements in infrastructure are pursued through a focused and dedicated asset management business. DEBT SYNDICATION Debt syndication involves seeking and obtaining the role of lead arranger for select projects. This will allow IDFC to utilise its expertise in structuring and assessing projects. As the lead arranger, the Company will appraise and structure projects, syndicate the debt commitments among other financial institutions, and also participate in the financing. It will further leverage its syndication capabilities to securitise loans originated by the Company. EQUITY PLACEMENTS The equity placement business is a further extension of our service of assisting companies in structuring finance by helping them raise equity. In FY2006, we placed equity worth Rs. 1,500 million for a construction company and road developer and generated fee income for the Company. We are pursuing these businesses aggressively and expect them to develop into strong fee-generating businesses. ADVISORY SERVICES IDFC also provides a wide range of other feeearning advisory services to infrastructure development projects and their sponsors. These principally comprise three types of activities: Corporate Advisory Services: These are generally provided through engagements with corporate clients, and typically involve advising on risk assessment, feasibility analysis, project structuring, financial modelling and developing appropriate financing structures and solutions for achieving successful financing of infrastructure projects. Some major projects undertaken by IDFC are: 1 Evaluation of the feasibility of investment in the ports sector for Larsen and Toubro Limited (L&T). 2 Evaluation of the feasibility of bids for BOT road projects for L&T, Unitech Limited and Gayatri Projects Limited; an elevated expressway in Hyderabad for the GMR group; and the Mumbai port BOT container terminal for the Mitsui OSK Lines. 3 Analysis of the business plans for a broadband services project in Andhra Pradesh (AP Aksh Broadband), a telecom infrastructure services project and an e-governance project on behalf of Intel. Government Advisory Services: The government advisory services are generally provided through engagements with government entities and their nominated agencies. These typically involve advising on and managing the process of privatisation and commercialisation of infrastructure assets. These projects are done at the central level or the state level and many of them involves the association of multilateral agencies. Some key assignments undertaken or being undertaken are: A. Central Government and Multi-laterals 1 Feasibility studies for the development of an automotive components cluster at a location in Karnataka on behalf of the Ministry of Commerce and Industry. 2 Project development services to Kandla Port Trust for setting up a bulk cargo berth under a PPP structure. 3 Review of the institutional, policy and regulatory framework for the ports sector on behalf of World Bank. B. State and Local Government 1 Development of Solid Waste Management (SWM) collection and transportation projects under PPP framework for the Municipal Corporation of Delhi (MCD) and New Delhi Municipal Council (NDMC). 38

41 2 Development of commercial parking facilities under PPP for MCD, NDMC and Delhi Development Authority (DDA). Project Development and Consulting Services: These services are also provided through our joint ventures with the States of Karnataka and Uttaranchal to promote investments in infrastructure through PPP. The joint venture with Karnataka - Infrastructure Development Corporation (Karnataka) Ltd. (or ideck) - was set up in FY2001 to promote and develop infrastructure projects in the State, utilising private capital and professional management with strong public sector support. The joint venture with Uttaranchal, under the rubric of the Uttaranchal Infrastructure Development Company Ltd. (UDec), was created in FY2003 to assist the Government of Uttaranchal and its agencies in developing appropriate policy and legal frameworks for infrastructure and encourage viable infrastructure projects in the private sector. In FY2006, to build on the strong synergies, IDFC acquired 19.5 per cent stake in Feedback Ventures Private Limited (Feedback Ventures), a company that has a strong presence in the infrastructure advisory and project development space in India. Consequently, IDFC will have two seats on the Board of Feedback Ventures. Apart from these services, IDFC s Policy Advisory Group focuses on creating the enabling environment for development of infrastructure in India, which in turn enhances opportunities for the Company in its business of infrastructure finance. These are the services rendered in Environment Management and Social Development and the Policy Advisory function. POLICY ADVISORY IDFC firmly believes in the symbiotic relationship that the Company has with the Indian growth story. While the need for infrastructure development is clearly understood, the challenge is even greater to attract private participation. To make PPP a success, it is imperative to develop an enabling regulatory framework. The Policy Advisory function at IDFC plays a critical role in working with government agencies to rationalise policies and regulatory frameworks to attract private capital to commercially viable infrastructure projects. Specifically, the group identifies global best practices in each of the sectors, and then transforms these in an Indian context. The lessons and cases are then disseminated among key stakeholders, including central and state governments, regulatory agencies and investors through expert groups and committees, position papers and presentations. The underlying focus is to : Develop competition in production and distribution of services. Create effective and independent regulation. Allocate risks appropriately. Build in transparency in addressing stakeholder issues. In energy, as a member of the Government of India s Expert Committee on Integrated Energy Policy, IDFC assisted in firming up views on fostering a paradigm shift in the energy sector that increases reliance on market forces, encourages private participation, institutionalises independent regulation and moves towards transparent subsidy regimes. The Company also shared its views on the proximate challenges in reforms in the energy sub-sectors with senior policy makers at a National Energy Conclave, organised by the Observer Research Foundation (ORF). At the State level, it sought to give fillip to power sector reforms in Rajasthan, through active participation as a member of the State s Economic Policy and Reforms Council. In urban infrastructure, the Company participated in the first technical consultation workshop on National Urban Renewal Mission (NURM) organised by the Union Ministry of Urban Development. At the state level, as part of its continued engagement aimed at addressing various issues at different levels of government in Maharashtra, IDFC collaborated with the State government on amendment of the Rent Control Act, and with McKinsey & Company on fiscal options for Brihanmumbai Municipal Corporation (BMC). IDFC ANNUAL REPORT

42 NOIDA TOLL BRIDGE COMPANY LIMITED The Noida Toll Bridge Company Ltd. has been promoted as a Special Purpose Vehicle to develop, construct, operate and maintain the DND Flyway on a Build Own Operate Transfer basis. The project was commissioned on February 7, 2001, almost 4 months ahead of schedule and broadly within the budget. 40

43 In water, IDFC is a member of an Expert Committee of the Planning Commission to review issues on ownership of ground water. As part of our effort to disseminate wider understanding of the fact that last mile matters are critical for infrastructure development at the ground level, we prepared a paper on the status and issues relating to open access, including an interstate comparison of relevant regulations, and a note on treatment of cross subsidy in National Electricity Policy. We also assessed the Model (Road) Concession Agreement put out by the Planning Commission. In telecom, where a major part of the first level of reforms has been undertaken, we interacted with the Telecom Regulatory Authority of India (TRAI) and shared our views on the need as well as the optimal means for accelerating next level of policy reform in critical areas such as spectrum allocation and management, and rural telephony. We also provided comments on TRAI s consultation papers on key issues such as convergence, competition in broadcasting and telecom, and tariff plans with lifetime validity. The Company also released the fifth annual edition of the India Infrastructure Report 2006 (IIR). The IIR reviewed the progress of various infrastructure sectors and dealt extensively with issues related to urban infrastructure. It explored the growth of urbanisation in India, governance structure of urban local bodies and state of municipal finances. The IIR examined the status and concerns related to main urban infrastructure services such as water, sewage, solid waste management, local transport, urban energy management, primary education and health. It also contained a critical overview of urban environment and factors responsible for environment pollution. The underpinning quest of the IIR is to explore effective ways to improve urban infrastructure services, with an eye on replicability of the solutions. The IIR was released by Shri Jaipal Reddy, Union Minister for Urban Development, in March On that occasion, we organised a seminar on urban infrastructure to introduce the IIR to a wider audience. TREASURY IDFC s infrastructure financing is supported by strong treasury operations. This is critical to the liability management function of the Company. Funds need to be sourced at the least cost and deployed in the most profitable manner. There are two objectives of treasury operations. First, to provide adequate liquidity to the Company to support its core business requirement of lending money. Second, to utilise the excess liquid assets to generate returns while maintaining safety parameters. Consequently, the Company has two treasury books - the liquidity book and the proprietary treasury book. The former covers assets that have no credit risk and the objective is to maintain funds for the liquidity needs of the Company. The proprietary treasury book attempts to maximise returns on its assets within permissible risk limits. A revised, updated and comprehensive Treasury Policy was approved by the Board at its meeting in October 2005, which has laid down guidelines for the permissible type of investments. IDFC generally funds its assets, largely comprising infrastructure loans, through market borrowings of various maturities and subordinated debt. Market borrowings include bonds, debentures, term loans from banks and financial institutions, commercial paper, term money borrowings and certificates of deposit. The Company focused on its resource raising activities from the domestic market through issuance of medium to long-term bonds, term loans and short-term market instruments such as commercial paper, certificate of deposits and term money borrowings. There was a healthy appetite among investors for IDFC Bonds, and the Company continued to achieve benchmark rates among AAA corporate borrowers in the market. CRISIL, ICRA and Fitch awarded their highest safety rating to IDFC s borrowing programme. IDFC has now turned to exploring a more diverse source of funds including international funding. During FY2006, the Company made its first foreign currency denominated borrowing by drawing USD 25 million from State Bank of India (Manama Branch) for a term of five years. It also completed an agreement to borrow USD 150 million in a combined A and B loan facility from the International Finance Corporation (IFC). The B loan component of USD 100 million was syndicated to offshore commercial banks. Since treasury activity revolves around the main operations of the Company, treasury is no longer considered as a separate reportable segment under relevant accounting standard. HUMAN RESOURCES IDFC is a knowledge-driven organisation, and its greatest asset is the experience and skills of its people. Recognising that the workforce will provide the critical competitive edge in its growth endeavours, IDFC has laid major emphasis on acquiring, maintaining and developing its human asset base. During FY2006, we recruited several individuals at the senior level and assigned them specific functional leadership positions. Apart from these, several professionals continued to join the Company at the operational level. IDFC ANNUAL REPORT

44 Keeping in mind the growth objectives, there was a major restructuring undertaken in the organisational structure. The aim was to make long term opportunities more attractive for IDFC professionals with a focus on encouraging motivated and qualified people to grow within the organisation. Employees were clearly distinguished by different levels of responsibility and accountability. From July , IDFC s staff were reorganised under seven specific grades - Analyst, Specialist, Senior Specialist, Lead Specialist, Principal, Director and Senior Director. Professionals were assigned their respective grades based on an evaluation of their experience, skill sets and performance records. These grades were assigned by a Management Committee. We are also exploring different variable pay mechanisms to enhance incentives and further align our employees pay with the performance of the Company. IDFC had 125 employees as at March 31, INFORMATION TECHNOLOGY (IT) Information Technology is the backbone that enables IDFC to function effectively in teams across tasks, functions and offices. In line with the different dimensions of business growth, the IT group has also stepped up its RUPEES (in million) FY 2006 FY 2005 TOTAL INCOME 10,496 7,421 of which Interest from Infrastructure 7,192 5,302 Fees Profits on sale of Investments and Dividends 1,317 1,154 Income from Treasury TOTAL EXPENDITURE 6,031 4,074 of which Interest and other charges 5,008 3,119 Staff expenses Other expenses Provisions and contingencies PBDT 4,465 3,347 Depreciation PBT 4,426 3,307 PROVISION FOR TAX of which Current tax Deferred tax Fringe Benefit Tax 8 - Share of profit of minority interest 2 1 PAT NET OF MINORITY INTEREST 3,907 3,093 EPS: Basic (in Rupees) EPS: Diluted (in Rupees) efforts to ensure adequate support to users. The focus is on application implementation and process improvements while enhancing the overall security of the information assets of the Company. Significant upgrading has been done in the operating and messaging system software to support the increasing business needs and to keep pace with technological changes. There has also been substantial enhancement to the connectivity bandwidth. The IT group also played a key role in setting up the new offices and establishing the new state-of-the-art dealing room of IDFC. Software applications are core to business functioning. Three new application implementations in the areas of Treasury, Risk Management and Document Management were initiated during the year. The IT group provided the necessary support to enable these implementations. In order to improve the Company s IT governance to adhere to global standards, a comprehensive internal review of the IT policies and process manual was undertaken. This was subsequently reviewed and approved by the Board. A formal implementation and monitoring process has also been initiated which includes an internal IT audit. The IT group continued its practice of engaging an internationally reputed audit firm for an independent review of system applications and to assess the robustness of the IT infrastructure. The audit and the subsequent implementation of the recommendations provide reassurance on IT systems and processes. FINANCIAL REVIEW We begin with the consolidated results of IDFC and then move on to the stand-alone numbers. The consolidated results are given in Table 1. 42

45 As Table 1 shows, in FY2006, IDFC s revenue (or income) increased by over 41 per cent to Rs. 10,496 million. Of this, gross interest income from infrastructure loans accounted for 69 per cent, or Rs. 7,192 million, Non Interest Income accounted for 22 per cent, or Rs. 2,292 million of which Fee Income grew by 96 per cent to Rs. 954 million while Profit on sale of Investments and Dividend increased by 14 per cent to Rs. 1,317 million. Revenue from treasury operations, including net profit on the sale of treasury investments was Rs. 883 million, and constituted another 8 per cent of total income. TABLE 2 NET INTEREST INCOME & NON INTEREST INCOME As far as the Company s expenses go, staff expense as a share of total income has marginally increased from 2.5 per cent to 3 per cent in FY2006. Despite the increase, this proportion is small compared to many other players in the financial services industry - and it reflects greater staff strength and some much needed salary corrections that occurred in the course of the year. Other expenses have remained more or less in line with the previous year. And despite IDFC consistently maintaining very strict provisioning standards that go beyond stipulated norms, the quantum of provisioning has actually reduced from Rs. 648 million in FY2005 to Rs. 516 million in FY2006 RUPEES (in million) NET INTEREST INCOME 3,029 2,571 Net Interest Income from Infrastructure 2,937 2,564 Net Interest Income from Treasury 92 7 NON INTEREST INCOME 2,292 1,731 Fee Income Profit on sale of Investments and Dividend 1,317 1,153 Other Income NET TOTAL INCOME 5,321 4,302 FY 2006 FY 2005 PBDT to total income 43% 45% PBT to total income 42% 45% PAT to total income 37% 42% RONW 18% 17% - which reflects on the excellent asset quality of the Company. This and higher income has led to a fall in the provisioning ratio from 9 per cent of total income in FY2005 to 5 per cent in FY2006. What has risen, however, is interest outgo - both in absolute amounts and as a share of total income. In proportional terms, interest expense as a share of total income has increased from 42 per cent in FY2005 to 48 per cent in FY2006. This emphasises the fact that we have stated towards the beginning of this chapter: that net interest margins on fund based activities are turning southwards for the industry as well as IDFC. Hence, the need to build a strong portfolio of fee-based services is paramount. As Table 2 shows, in FY2006, IDFC s Net Interest Income from infrastructure increased by over 15 per cent to Rs. 2,937 million, while Non Interest Income from treasury increased to Rs. 92 million. Non Interest Income constituted 43 per cent of Net Total Income comprising of Profit on sale on investments and dividend which grew by 14 per cent to Rs. 1,317 million and fee income grew by 96 per cent to Rs. 954 million. This is the area where the Company intends to focus on more rapid growth. Although the proportionate fall in Net Interest Income has adversely affected margins, IDFC still enjoys excellent profitability. As Table 3 shows, PBDT to total income still exceeds 42 per cent; the PBT ratio is in excess of 42 per cent; PAT to total income is over 37 per cent; and despite lower levels of financial gearing, IDFC s RONW is a creditable 17.5 per cent. As the financial leveraging is increased, we expect improvement in IDFC s RONW. It needs reiterating that the challenge will be to rapidly leverage various profitable non-fund based opportunities to steer these ratios northwards. We now move on to the stand-alone results for IDFC, which are summarised in IDFC ANNUAL REPORT

46 Table 4. It is of note that the basic difference between IDFC s stand-alone results and its consolidated results is its fee income. As has been described earlier, this is a critical growth segment and the business is structured through the company s focused subsidiaries. This further explains why the consolidated results better explain IDFC s overall company strategy. RISK MANAGEMENT IDFC has well-established systems and procedures for risk management which function under the close supervision of an in-house expert committee called the Risk Group. This group is actively engaged in areas of loan portfolio assessment, assetliability management, and loan pricing. In addition, it focuses on developing various market risk modules. Regarding portfolio review, the Risk Group comprehensively examines the entire project assets and equity investments on a semi-annual basis. Each credit is analysed individually and then integrated at the portfolio level. The overall portfolio risk report is regularly presented to an independent committee of the Board. The Risk Group also closely focuses on Asset Liability Management (ALM). To further enhance the effectiveness of the current process of regular monitoring of liquidity and interest rate risks, IDFC has sourced a sophisticated software based ALM system. RUPEES (in million) FY 2006 FY 2005 TOTAL INCOME 10,157 7,276 of which Interest from Infrastructure 7,183 5,295 Fees Profits on sales of Investments and Dividends 1,317 1,154 Income from Treasury TOTAL EXPENDITURE 5,930 4,010 of which Interest and other charges 5,008 3,119 Staff expenses Other expenses Provisions and contingencies PBDT 4,227 3,266 Depreciation PBT 4,193 3,230 PROVISION FOR TAX of which Current tax Deferred tax Fringe Benefit Tax 7 - PAT 3,756 3,040 EPS: Basic (in Rs. ) EPS: Diluted (in Rs. ) This will enable the Company to capture data from various disparate platforms, and allow for more detailed and comprehensive analysis. Given the rising volatility of interest rates as well as introduction of new products in the treasury portfolio, IDFC has also increased the level of monitoring of market risk. This involves measuring interest rate risk on a regular basis as well as testing newer models for analysis. With the regulatory framework for banks and financial institutions currently in transition to a Basel II environment, the risk measurement and monitoring framework is also being enhanced accordingly. IDFC has initiated efforts to align the capital allocation to different asset categories along the framework suggested under emerging regulatory guidelines. The Risk Group works in close coordination with the Credit Policy Committee of the Board through presentations and deliberations on significant issues in risk management. Feedback and advice from the Credit Policy Committee are incorporated in various applications. 44

47 While IDFC continues Growing for India, it stresses on a business strategy that maximises long term shareholder value and helps you - the shareholders - to Grow with India. INTERNAL CONTROLS AND THEIR ADEQUACY IDFC has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition, and that transactions are authorised, recorded and reported correctly. Internal controls are supplemented by an extensive programme of internal audits, review by management, and documented policies, guidelines and procedures. These controls are designed to ensure that financial and other records are reliable for preparing financial information and other reports, and for maintaining regular accountability of the Company s assets. CAUTIONARY STATEMENT Statements in this Management Discussion and Analysis describing the Company s objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Company s operations include unavailability of finance at competitive rates - global or domestic or both, reduction in number of viable infrastructure projects, significant changes in political and economic environment in India or key markets abroad, tax laws, litigation, exchange rate fluctuations, interest and other costs. IDFC ANNUAL REPORT

48 CORPORATE GOVERNANCE In FY2006, Infrastructure Development Finance Company Limited ( IDFC or the Company ) transformed from a closely held to a publicly traded company by listing its shares at the National Stock Exchange of India Limited (NSE) and the Bombay Stock Exchange Limited (BSE) after an Initial Public Offering(IPO) BEING A PROFESSIONALLY run company since its inception with no single promoter group, IDFC has always believed in transparency and accountability. These have been the touchstones of the Company s commitment to high standards of Corporate Governance - even at a time when it was a closely held entity. With a much wider investor base today, IDFC is all the more committed to appropriate disclosures, transparent accounting policies, strong and independent Board practices, and highest levels of ethical standards. These principles are critical to retaining and enhancing investor trust; and they help in creating the DNA of a company that is committed to generating sustainable corporate value. Corporate Governance rules and procedures of companies listed on the Indian stock exchanges are regulated by the Securities and Exchange Board of India (SEBI) under Clause 49 of the Listing Agreement of all stock exchanges in the country. As of December 31, 2005, the SEBI substantially enhanced the scope of Corporate Governance of listed companies by amending the then existing provisions of Clause 49 of the Listing Agreement. IDFC is fully compliant with all aspects of the revised Clause 49. This chapter, along with the chapters on Additional Shareholders Information and Management Discussion and Analysis, reports IDFC s compliance with the revised Clause 49 of the Listing Agreement. BOARD OF DIRECTORS COMPOSITION OF THE BOARD In FY2006, IDFC reconstituted its Board and reduced the number of Directors from 15 (including 3 Alternate Directors) at the beginning of the year to 11 as on March 31, Mr. Deepak S. Parekh, the Chairman of the Board is non-executive; while Dr. Rajiv B. Lall, the Managing Director & 46

49 CEO is a whole-time Executive Director. Of the remaining non-executive Directors, four are independent. Two Directors are nominees of the Government of India. Since the Government of India owns per cent stake in the Company, they are not considered as independent. Three Directors, nominated by domestic and foreign institutional investors are not considered as independent Directors. Four of IDFC s eleven Board members are entirely independent. BOARD MEETINGS The meetings are normally held at IDFC s Corporate Office in Mumbai. These are scheduled well in advance and notice of each Board meeting is given in writing to each Director. A detailed agenda for the meetings is prepared by the Company Secretary in consultation with the Chairman and the Managing Director & CEO. Members of the Board have complete access to all information of the Company, and can also recommend any matter in the agenda for discussion. Senior Management is invited to Board meetings to provide additional inputs on agenda items. During FY2006, IDFC s Board met five times: on April 27, 2005, June 16, 2005, August 18, 2005, October 28, 2005 and January 20, The maximum gap between any two Board meetings was less than three months. Table 1 gives the details of IDFC s Board of Directors, including their attendance at Board meetings, number of outside directorships and Committee memberships. There are no Directors having any materially significant pecuniary relationship or business transaction with the Company. INFORMATION SUPPLIED TO THE BOARD The following information is regularly placed before the Board: Annual operating plans and budgets and updates. Capital budgets and their updates. Quarterly results of the Company, in aggregate and in detail. Minutes of the meetings of the Audit Committee and other committees of the Board Information on recruitment and remuneration of senior officers just below the level of Board. NAME OF DIRECTOR POSITION NUMBER OF MEETINGS HELD IN NUMBER OF MEETINGS ATTENDED IN ATTENDED LAST AGM ON JUNE 16, 2005 NUMBER OF OUTSIDE DIRECTORSHIPS OF PUBLIC COMPANIES NO. OF COMMITTIEE MEMBERSHIPS NO. OF CHAIRMANSHIPS OF COMMITTEES Mr. Deepak Parekh Non-Executive Chairman 5 5 YES Mr. Vinod Rai Nominee Non-Executive 5 5 YES Mr. S.S.Kohli* Nominee Non-Executive 5 5 YES Mr. V.P.Shetty*** Nominee Non-Executive 5 2 NA Mr. D.Tsitsiragos Nominee Non-Executive 5 1 NO Mr. Donald Peck** Nominee Non-Executive 5 5 YES Mr. S.H.Khan Independent Director 5 5 YES Mr. Shardul Shroff Independent Director 5 2 NO Mr. Gautam Kaji Independent Director 5 5 YES Dr. Omkar Goswami Independent Director 5 4 YES Dr. Rajiv B. Lall Managing Director & CEO 5 5 YES Note 1: Excluding the directorships mentioned above, Mr. Deepak Parekh is alternate director in 4 companies. Note 2: * Mr.S. S. Kohli was appointed as a Director on April 27, ** Mr.Donald Peck was appointed as a Director on April 27, ***Mr. V. P. Shetty was appointed as a Director on August 18, Note 3: For the purpose of classification, an Independent Director is one who: apart from receiving Director s remuneration, does not have any material pecuniary relationships or transactions with the Company, its promoters, its Directors, its Senior Management or its holding Company, its subsidiaries and associates which may affect independence of the Director is not related to promoters or persons occupying management positions at the Board level or at one level below the Board has not been an executive of the Company in the immediately preceding three financial years is not a partner or executive or was not a partner or an executive during the preceding three years of the: statutory audit firm or the internal audit firm that is associated with the Company legal firm(s) and consulting firm(s) that have a material association with the Company is not a material supplier, service provider or customer or lessor or lessee of the Company, which may affect independence of the Director is not a substantial shareholder of the Company i.e. does not own two per cent or more of the block of voting shares is a nominee Director appointed by an institution which has invested in or lent to the Company Note 4: For determining the membership of Committees, only Audit Committee and Shareholders / Investors Grievance Committee are considered. IDFC ANNUAL REPORT

50 Materially important show cause, demand, prosecution and penalty notices, if any. Details of any joint venture or collaboration agreement Significant development in human resources. Sale of material nature of investments, subsidiaries, assets, which is not in the normal course of business Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material. Minutes of the Board meetings of subsidiary companies. Statement showing significant transactions and arrangements entered into by the subsidiary companies. Credit risk and portfolio risk analysis on a quarterly basis. The Company has established procedures to enable its Board to periodically review compliance reports of all laws applicable to the Company, as well as steps taken by the Company to rectify instances, if any, of non-compliances. REMUNERATION OF DIRECTORS Table 2 gives the details of the remuneration of Directors for FY2006, with its components. Mr.V.P.Shetty owns 531 shares of the Company. Apart from him, no other non- Executive Director holds any shares as on March 31, CODE OF CONDUCT IDFC s Board has laid down a Code of Conduct for all Board members and Senior Management of the Company. The Code of Conduct is available on the website of the Company. All Board members and Senior Management personnel have affirmed compliance with the Code of Conduct. The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have signed a declaration to this effect as part of the CEO/CFO certification, which is enclosed at the end of this Report. RISK MANAGEMENT Being a financial intermediary, IDFC has well established risk assessment and minimisation procedures that are regularly reviewed by the Board, especially the Credit Policy Committee. The focus is on different types of sensitivity analysis and on improving methods of computing risk weights and capital charges. Salient features of risk management at IDFC have been covered in the chapter on Management Discussion and Analysis. Given the importance of risk management, IDFC has a Credit Policy Committee, comprising Board members, which regularly monitors risk management in the Company. The Committee consists of Mr. Gautam Kaji (Chairman), Mr.Shardul Shroff, Mr. S.H. Khan and Dr. Rajiv B. Lall. AUDIT COMMITTEE As on March 31, 2006, IDFC s Audit Committee comprises Mr.S.H.Khan (Chairman), Mr.Shardul Shroff, Dr.Omkar Goswami and Mr.Gautam Kaji, all of whom are Independent Directors. The Committee IN RUPEES NAME OF THE DIRECTOR SITTING FEES SALARY AND PERQUISITES CONTRIBUTION TO PROVIDENT AND OTHER FUNDS PERFORMANCE LINKED INCENTIVE OTHER REMUNERATION Mr.Deepak Parekh* 9,00,000 9,00,000 Mr.S.S.Kohli 1,10,000 1,10,000 Mr.S.H.Khan 2,80,000 2,80,000 Mr.Shardul Shroff 40,000 40,000 Mr.Gautam Kaji 1,70,000 1,70,000 Dr.Omkar Goswami 1,70,000 1,70,000 Dr. Rajiv B. Lall** 50,07,288 4,86,683 2,55,761 57,49,732 * Mr. Deepak Parekh, non-executive Chairman, was paid remuneration of Rs. 9,00,000/- in terms of approval of shareholders and Department of Company Affairs, GoI. His appointment is for a period of 3 years w.e.f. May 14, There are no other payments to any other non-executive Director. **Dr. Rajiv B. Lall has been granted 1,71,664 shares under ESPS and 8,58,320 Options under ESOS. He is appointed for a period of 5 years, w.e.f. January 10, His appointment is approved by shareholders and Department of Company Affairs, GoI. TOTAL 48

51 met five times during the year: on April 27, 2005, August 18, 2005, August 27, 2005, October 28, 2005 and January 20, Minutes of the Audit Committee meetings were placed before and discussed by the Board. The attendance record of IDFC s Audit Committee is listed in Table 3. All the members of Audit Committee are financially literate and have accounting and financial management expertise. The Committee invites Senior Management personnel, internal and statutory auditors to attend these meetings. The Company Secretary acts as the Secretary to the Audit Committee. The functions of the Audit Committee include the following: Review 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. Recommending to the Board the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and fixing of audit fees. Approval of payment to statutory auditors for any other services rendered by the statutory auditors. Reviewing with the Management, the annual financial statements before submission to the Board for approval, with particular reference to: 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, Changes, if any, in accounting policies and practices and their reasons. Major accounting entries involving estimates based on the exercise of judgment by management. Significant adjustments made in the financial statements arising out of audit findings, if any. Compliance with listing and other legal requirements relating to financial statements. Disclosure of related party transactions, if any. Qualifications in the draft audit report, if any. Reviewing with the Management the quarterly financial statements before submission to the Board for approval. Reviewing with the Management the performance of statutory and internal auditors, and adequacy of internal control systems. Reviewing the adequacy of internal audit function, including the structure, coverage and frequency of internal audit. Discussion with internal auditors on any significant findings and their follow up. Reviewing findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or failure of internal control systems of a material nature, if any, and reporting the matter to the Board. Discussion with statutory auditors before commencement of audit on the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. NAME OF THE MEMBER POSITION NO. OF MEETINGS HELD NO. OF MEETINGS ATTENDED SITTING FEES (in Rupees) Mr.S.H.Khan Independent Director ,000 Mr.Shardul Shroff Independent Director ,000 Dr.Omkar Goswami Independent Director ,000 Mr.Gautam Kaji Independent Director ,000 IDFC ANNUAL REPORT

52 Carrying out any other function as is mentioned in the terms of reference of the Audit Committee. The Company has systems and procedures in place to ensure that the Audit Committee reviews the following: Management Discussion and Analysis of financial condition and results of operations. Statement of significant related party transactions submitted by Management. Management letters / letters of internal control weaknesses, if any, issued by the statutory auditors, wherever applicable. Internal audit reports relating to internal control weaknesses, if any, wherever applicable. NAME OF THE MEMBER POSITION Appointment, removal and terms of remuneration of the Internal Auditors. Uses/applications of funds raised through public issues, rights issues, preferential issues by major category (capital expenditure, sales and marketing, working capital, etc), as part of the quarterly declaration of financial results, whenever applicable. Statement detailing the use of funds raised through public issues, rights issues, preferential issues for purposes other than those stated in the offer document/prospectus/notice - on an annual basis, whenever applicable. Review of financial statements and investment of subsidiary companies. NO. OF MEETINGS HELD NO. OF MEETINGS ATTENDED SITTING FEES ( in Rupees) Mr.S.H.Khan Independent Director ,000 Dr.Omkar Goswami Independent Director ,000 Dr. Rajiv B. Lall Managing Director & CEO NATURE OF QUERY/COMPLAINT PENDING AS ON AS APRIL RECEIVED DURING THE YEAR ADDRESSED DURING THE YEAR PENDING AS ON AS MARCH Transfer / Transmission / Duplicate Non-receipt of Dividend Dematerialisation /Rematerialisation of shares Complaints received from: - Securities and Exchange Board of India Stock Exchanges Registrar of Companies/Department of Company Affairs Others TOTAL The Audit Committee is also presented with the following information on related party transactions, whenever applicable: A summary statement of transactions with related parties in the ordinary course of business. Details of material individual transactions with related parties which are not in the normal course of business. Details of material individual transactions with related parties or others, which are not on an arm s length basis along with Management s justification for the same. COMPENSATION COMMITTEE In the beginning of FY 2006, the Committee included Mr. Deepak Parekh, Mr. Y.S.P. Thorat and Mr. K. Chinniah. This Committee met once during FY 2006 on April 15, On April 27, 2005, this Committee was reconstituted to comprise of Mr. Deepak Parekh, Mr. S.S. Kohli and Mr. Donald Peck. On January 20, 2006, the Committee was reconstituted to comprise of Mr. Deepak Parekh (Chairman), Dr. Omkar Goswami and Mr. S.H. Khan. This Committee is mandated to determine the compensation plan and review annual appraisals of Senior Management personnel. INVESTORS GRIEVANCE COMMITTEE The Committee looks into redressing shareholders and investors complaints related to transfer of shares, non-receipt of annual reports, non-receipt of declared dividend, and also ensures expeditious share transfers. Minutes of the Committee meetings are placed before and discussed by the Board. As on March 31, 2006, IDFC s Investors Grievance Committee comprised Mr.S.H.Khan (Chairman), Dr.Omkar Goswami and Dr. Rajiv B. Lall. The Committee met once during FY2006 on January 20, The attendance record 50

53 Being a professionally run company since its inception with no single promoter group, IDFC has always believed in transparency and accountability. These have been the touchstones of the company s commitment to high standards of Corporate Governance of IDFC s Investors Grievance Committee is listed in Table 4. Details of queries and grievances received and attended by the Company during FY2006 are given in Table 5. Mr. Mahendra N. Shah, Company Secretary, IDFC, is the Compliance Officer. No penalties have been imposed on the Company by any of the Stock Exchanges, SEBI or any other statutory authority on any matter relating to capital markets during last three years. EXECUTIVE COMMITTEE Being a finance company, IDFC involves its Board in all high value deals. For the specific purpose of getting such deals evaluated by the Board, the Company has a six-member Executive Committee that looks into all cases of financial assistance that are valued over Rs. 2 billion. This Committee comprises Mr.Deepak Parekh, Dr.Rajiv B. Lall, Mr.S.S.Kohli, Mr.Donald Peck, Mr.S.H.Khan and Dr.Omkar Goswami. MANAGEMENT MANAGEMENT DISCUSSION AND ANALYSIS This Annual Report has a detailed chapter on Management Discussion and Analysis. PREVENTION OF INSIDER TRADING The Company has instituted a comprehensive Code for prevention of insider trading for its Management staff and relevant business associates. It lays down guidelines, and advises all concerned on proper procedures to be followed, and disclosures to be made, while dealing with shares of IDFC, and cautions them on consequences of violations. DETAILS OF RELATED PARTY TRANSAC- TIONS The Notes to Accounts has a detailed summary of all related party transactions of the Company under Accounting Standard 18 - none of which is materially significant. DISCLOSURES BY MANAGEMENT TO THE BOARD Senior Management personnel have confirmed that they have not entered into any material financial or commercial transaction where they have personal interest that may have potential conflict with the interest of Company at large. PROCEEDS OF PUBLIC ISSUE During the year, the Company made a fresh issue of shares, proceeds of which have been utilised for the purposes as stated in the Offer Document. These details were placed before the Audit Committee. SHAREHOLDERS SUBSIDIARY COMPANIES The revised Clause 49 defines a material non-listed Indian subsidiary as an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20 per cent of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. The Company does not have a material non-listed Indian subsidiary. DISCLOSURE OF ACCOUNTING TREAT- MENT IN PREPARATION OF FINANCIAL STATEMENTS The Company has followed the guidelines of accounting standards laid down by the Institute of Chartered Accountants of India (ICAI) in preparation of its financial statements. IDFC ANNUAL REPORT

54 CEO/ CFO CERTIFICATION The CEO and CFO certification of the financial statements and the cash flow statement for FY2006 are enclosed at the end of this report. REAPPOINTMENT/APPOINTMENT OF DIRECTORS Ten of the Directors are liable to retire by rotation. Of the retiring Directors, at least one-third retire every year and if eligible, qualify for re-appointment. Mr. Vinod Rai, Mr. Shardul Shroff and Dr. Omkar Goswami are retiring by rotation and being eligible, offer themselves for re-appointment at PARTICULARS the Annual General Meeting. Their brief resumés are given below. MR. VINOD RAI, 58, an Indian national, has been a Director since January An officer of the Indian Administrative Services (batch of 1972), Mr. Rai holds a Masters degree in Economics from Delhi School of Economics and a Masters degree in Public Administration from Harvard University, U.S.A. Mr. Rai has held senior posts with the State Government of Kerala and the Government of India. Prior to his present posting in the Banking Division, Government of India, he was Principal Secretary (Finance), Government of Kerala. Mr. Rai has been CLAUSE OF LISTING AGREEMENT COMPLIANCE STATUS I. BOARD OF DIRECTORS 49 I Compliant (A) Composition of Board 49(IA) Compliant (B) Non-executive Directors Compensation & Disclosures 49 (IB) Compliant (C) Other provisions as to Board and Committees 49 (IC) Compliant (D) Code of Conduct 49 (ID) Compliant II. AUDIT COMMITTEE 49 (II) Compliant (A) Qualified & Independent Audit Committee 49 (IIA) Compliant (B) Meeting of Audit Committee 49 (IIB) Compliant (C) Powers of Audit Committee 49 (IIC) Compliant (D) Role of Audit Committee 49 II(D) Compliant (E) Review of Information by Audit Committee 49 (IIE) Compliant III. SUBSIDIARY COMPANIES 49 (III) Compliant IV. DISCLOSURES 49 (IV) Compliant (A) Basis of related party transactions 49 (IV A) Compliant (B) Board Disclosures 49 (IV B) Compliant (C) Proceeds from public, rights, preference issues etc 49 (IV C) Compliant (D) Remuneration of Directors 49 (IV D) Compliant (E) Management 49 (IV E) Compliant (F) Shareholders 49 (IV F) Compliant V. CEO/CFO CERTIFICATION 49 (V) Compliant VI. REPORT ON CORPORATE GOVERNANCE 49 (VI) Compliant VII. COMPLIANCE 49 (VII) Compliant nominated as a Director by the Government of India. MR. SHARDUL SURESH SHROFF, 50, an Indian national, has been a Director since He holds a L.L.B. (Hons) degree from the Government Law College, Mumbai. He is the Managing Partner of the New Delhi office of M/s. Amarchand & Mangaldas & Suresh A. Shroff & Co., one of the leading law firms of India. Mr. Shroff has been a practising lawyer since 1980 and has vast experience in the areas of project finance, corporate and structured finance, insurance, telecom, joint ventures, mergers and acquisitions, disinvestment and a large body of corporate advisory work across sectors. He has been actively involved in important economic legislation, as a member of several high powered committees appointed by the Government of India, on diverse areas like Companies Act, Insolvency, Takeover Code including the J.J. Irani Committee. Mr. Shroff is an independent Director. DR. OMKAR GOSWAMI, 48, is the Founder and Chairperson of CERG Advisory Private Limited. A professional economist, Dr. Goswami did his Masters in Economics from the Delhi School of Economics in 1978 and his D.Phil (Ph.D) from Oxford in He taught and researched economics for 18 years at Oxford, Delhi School of Economics, Harvard, Tufts, Jawaharlal Nehru University, Rutgers University and the Indian Statistical Institute, New Delhi. In March 1997, Dr.Goswami became the Editor of Business India, one of the country s prestigious business magazines. From August 1998 up to March 2004, he served as the Chief Economist of the Confederation of Indian Industry, the premier apex industry organisation of India. Dr. Goswami has served on several government committees, such as the Committee on Industrial Sickness and Corporate Restructuring (as Chairman), the Work- 52

55 ing Group on the Companies Act, the CII Committee on Corporate Governance, the Rakesh Mohan Committee on Railway Infrastructure Reforms, the Vijay Kelkar Committee on Direct Tax Reforms, the Naresh Chandra Committee on Auditor-Company Relationship, and the N.R. Narayana Murthy SEBI Committee on Corporate Governance Reforms. He has also been a consultant to the World Bank, the IMF, the Asian Development Bank and the OECD. Dr. Goswami serves on the Boards of Dr. Reddy s Laboratories, Infosys Technologies, Crompton Greaves, SRF, Sona Koyo and DSP-Merrill Lynch Fund Managers. Other than his regular columns for newspapers and magazines, Dr. Goswami has authored three books and over 70 research papers in economics, finance and corporate governance. Dr. Goswami is an independent director. COMMUNICATION TO SHAREHOLDERS All important information relating to the Company and its performance, including financial results and shareholding pattern are posted on the website The website also displays all official press releases and presentation to analysts made by the Company. IDFC has also registered itself on March 2, 2006 for on-line submission of information / returns under the Electronic Data Information Filing And Retrieval (EDIFAR) System on SEBI s website, From March 2006, the Company has submitted the following information under EDIFAR : Financial statements, comprising Balance Sheet, Profit & Loss Account and full version of Annual Report; Half Yearly Financial Statements including Cash Flow statements and Quarterly Financial statements. Corporate Governance reports. Shareholding Pattern statement. Action taken against the Company by any regulatory agency, if any. The quarterly, half-yearly and annual results of the Company s performance are published in leading newspapers like The Economic Times, Business Standard and Dinamani (Tamil). COMPLIANCE WITH THE MANDATORY REQUIREMENTS The Company is fully compliant with all mandatory requirements of the revised Clause 49, the details of which are given in Table 6. Among the non-mandatory requirements, IDFC has set up a Compensation Committee along the lines of a Remuneration Committee. GENERAL BODY MEETINGS Table 7 lists the date and venue of IDFC s previous three Annual General Meetings. In addition, an Extraordinary General Meeting (EGM) was held at Ramon House, Mumbai on January 06, 2004 to approve enhanced borrowing limits. Another EGM was held on May 9, 2005, to approve ESOS, fresh issue of capital and appointment of Managing Director. SPECIAL RESOLUTIONS Since more than 25 per cent of IDFC is owned by the Government of India and affiliated financial institutions, appointment of auditors is done through a special resolution conforming to Section 224 A of the Companies Act, An enabling resolution was passed to increase the limit of borrowing under section 293(1)(d); and a special resolution considering ESOS was passed in the EGM held on May 9, DATE VENUE 6th Annual General Meeting July 15, 2003 Taj Coromandel, Chennai 7th Annual General Meeting June 17, 2004 ITC Park Sheraton, Chennai 8th Annual General Meeting June 16, 2005 Taj Coromandel, Chennai IDFC ANNUAL REPORT

56 ADDITIONAL SHAREHOLDER INFORMATION NSE BSE MONTH AND YEAR HIGH LOW VOLUMES HIGH LOW VOLUMES August, September, October, November, December, January, February, March, Notes: High and Low are in rupees per traded share. Volume is the total monthly volume of trade (in number) in IDFC s shares on the NSE and BSE. NUMBER OF SHARES (RS. 10/- EACH) NUMBER OF SHAREHOLDERS NUMBER OF SHARES HELD SHAREHOLDING (%) Upto % % % % % % % and above % TOTAL % 54

57 ANNUAL GENERAL MEETING Date: August 2, 2006 Venue: Narada Gana Sabha Hall, 314, T. T. K. Road, Chennai Time: 2.30 p.m. FINANCIAL CALENDAR Financial year: April 1 to March 31. For the year ended March 31, 2006, results were announced on: August 18, 2005 First Quarter October 28, 2005 Second Quarter January 20, 2006 Third Quarter April 29, 2006 Annual For the year ending March 31, 2007, results will be announced on: July 24, 2006 : First Quarter 3 rd week of October 2006 : Second Quarter 3 rd week of January 2007 : Third Quarter 4 th week of April 2007 : Annual BOOK CLOSURE The dates of book closure are from July 21, 2006 to August 2, 2006, both days inclusive. DIVIDEND DATE On April 29, 2006,the Board of Directors recommended a dividend of 10 per cent on the equity share capital of the Company. Subject to approval from shareholders at the Annual General Meeting, this dividend will be paid from August 3, 2006 onwards to all the shareholders whose names will appear in the Register of Members as on July 20, 2006 LISTING The Company s equity shares are listed on the National Stock Exchange of India Ltd. (NSE) and the Bombay Stock Exchange Limited (BSE). STOCK CODES NAME OF THE STOCK EXCHANGE The National Stock Exchange of India Limited, Mumbai (NSE) The Bombay Stock Exchange Limited, Mumbai (BSE) STOCK CODE IDFC EQ The ISIN Number or Demat number of IDFC on both NSDL and CDSL is INE043D STOCK DATA Table 1 gives the monthly high and low prices and volumes of equity shares of IDFC at The National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange Limited (BSE) for the period ended March 31, Chart 2 tracks the Company s share price performance versus the NSE Index (the NIF- TY) since IDFC got listed in August DISTRIBUTION OF SHAREHOLDING Tables 2 and table 3 (next page) give the distribution pattern of shareholding of IDFC as on March 31, SHARES HELD IN PHYSICAL AND DEMATERIALISED FORM As on March 31, 2006, 1,122,447,725 of IDFC s shares were held in dematerialised form and the remaining 5,787 in physical form. Thus per cent of IDFC s shares are in dematerialised form. OUTSTANDING GDRS/ADRS/ WARRANTS/ CONVERTIBLE INSTRUMENTS AND THEIR IMPACT ON EQUITY The Company has no outstanding GDRs, ADRs, warrants or any convertible instruments. IDFC ANNUAL REPORT

58 CATEGORY NO. OF EQUITY SHARES HELD (FACE VALUE OF RS. 10/- EACH) PERCENTAGE OF SHAREHOLDING A PROMOTERS HOLDING 1 PROMOTERS - Indian Promoters % - Foreign Promoters % 2 PERSONS ACTING IN CONCERT % B 3 NON-PROMOTERS HOLDING a) President of India % b) Banks, Financial Institutions, Insurance Companies (Central / State Gov. Institutions / Non-government % Institutions) c) Foreign Institutional Investors (FIIs) % d) Foreign Direct Investment (FDI) % e) Mutual Funds % f) Private Corporate Bodies % g) Indian Public % h) NRIs / OCBs % i) Any other - Clearing Members % - Trusts % GRAND TOTAL (1+2+3) % SHARE TRANSFER SYSTEM IDFC has appointed Karvy Computershare Pvt. Ltd. (Karvy) as its Registrar and Transfer Agent. All share transfers and related operations are conducted by Karvy, which is registered with SEBI as a Category 1 Registrar. The Company has constituted an Investors Grievance Committee for monitoring redressal of shareholders and investors complaints. Investor correspondence should be addressed to: 1 REGISTRAR AND TRANSFER AGENT (UNIT: IDFC) Karvy Computershare Pvt. Ltd. Karvy House, 46, Avenue 4, Street No.1, Banjara Hills, Hyderabad THE COMPANY SECRETARY, INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LTD. Ramon House, 2nd Floor, H. T. Parekh Marg, 169, Backbay Reclamation, Mumbai REGISTERED OFFICE 3rd Floor, ITC Centre 760 Anna Salai, Chennai

59 CERTIFICATION BY CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED We, Rajiv B. Lall, Chief Executive Officer and L. K. Narayan, Chief Financial Officer, of Infrastructure Development Finance Company Limited (the Company), to the best of our knowledge and belief certify that: 1. We have reviewed the Balance Sheet and Profit and Loss Account and all its Schedules and Notes on Accounts, as well as the Cash Flow Statement and Directors Report. a. Based on our knowledge and information, these statements do not contain any untrue statement of a material fact 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. We also certify, that based on our knowledge and the information provided to us, there are no transactions entered into by IDFC, which are fraudulent, illegal or in violation of the Company s Code of Conduct. 3. We are responsible for establishing and maintaining internal controls and procedures for the Company pertaining to financial reporting, and have evaluated the effectiveness of these procedures in IDFC. We have disclosed to the auditors and the Audit Committee, deficiencies, if any, in the design or operation of such internal controls, of which we are aware and the steps that we have taken or propose to take to rectify these deficiencies. 4. We have disclosed, based on our most recent evaluation, wherever applicable, to the Company s auditors and the Audit Committee of the Company s Board of Directors:- a. Significant changes in internal controls during the year: b. Significant changes in accounting policies during the year and that the same have been disclosed in the Notes to the financial statements; and c. Instances, if any, of significant fraud of which we have become aware and the involvement therein, if any, of the Management or an employee having a significant role in the Company s internal control system. 5. We affirm that we have not denied any personnel, access to the Audit Committee of the Company (in respect of matters involving misconduct, if any) 6. We further declare that all Board members and Senior Management have affirmed compliance with the Code of Conduct for the current year. Rajiv B. Lall Chief Executive Officer Mumbai April 29, 2006 L. K. Narayan Chief Financial Officer IDFC ANNUAL REPORT

60 Auditors Certificate TO THE MEMBERS OF INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED We have examined the compliance of conditions of Corporate Governance by INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED for the year ended on 31st March, 2006, as stipulated in Clause 49 of the Listing Agreements of the said Company, with the stock exchanges. The compliance of conditions of Corporate Governance is the responsibility of the Management. Our examination was limited to procedures and implementation thereof, adopted by the Company for ensuring the compliance of the conditions of the Corporate Governance as stipulated in the said Clause. It is neither an audit nor an expression of opinion on the financial statements of the Company. In our opinion and to the best of our information and according to the explanations given to us, we certify that the Company has complied with the conditions of Corporate Governance as stipulated in the abovementioned Listing Agreements. We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiency or effectiveness with which the Management has conducted the affairs of the Company. For S. B. Billimoria & Co. Chartered Accountants Nalin M. Shah Partner Mumbai 14th June, 2006 (Membership No ) 58

61 ACCOUNTS Auditors Report TO THE BOARD OF DIRECTORS OF INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED ON THE CONSOLIDATED FINANCIAL STATEMENTS OF INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED AND ITS SUBSIDIARIES 1. We have examined the attached Consolidated Balance Sheet of INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED (the Company ), its subsidiaries and jointly controlled entities ( the Group ) as at 31st March, 2006 and the Consolidated Profit and Loss Account of the Group for the year ended on that date, annexed thereto. The Consolidated Accounts include investments in joint ventures, accounted as jointly controlled entities in accordance with Accounting Standard 27 (Financial Reporting of Interest in Joint Ventures). 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 generally accepted auditing standards in India. These Standards require that we plan and perform the audit to obtain reasonable assurance 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. We did not audit the financial statements of two subsidiaries, whose financial statements reflect total assets of Rs million as at 31st March, 2006 and total revenues of Rs million for the year ended on that date and one joint venture, whose financial statements include the Company s share of assets amounting to Rs million as at 31st March, 2006 and the Company s share of revenues amounting to Rs million for the year ended on that date. The financial statements of these subsidiaries and the joint venture have been audited by other auditors whose reports have been furnished to us, and in our opinion, insofar as it relates to the amounts included in respect of these subsidiaries and the joint venture, is based solely on the reports of the other auditors. 4. We report that the consolidated financial statements have been prepared by the Company in accordance with the requirements of Accounting Standard 21 (Consolidated Financial Statements) and Accounting Standard 27 (Financial Reporting of Interests in Joint Ventures) issued by the Institute of Chartered Accountants of India. 5. Based on our audit and on consideration of reports of other auditors on separate financial statements of the subsidiaries and the joint venture referred to in paragraph 3 above and to the best of our information and according to the explanations given to us, we are of the opinion that the aforesaid consolidated financial statements give a true and fair view in conformity with the accounting principles generally accepted in India : (a) in the case of the Consolidated Balance Sheet, of the consolidated state of affairs of the Group as at 31st March, 2006; and (b) in the case of the Consolidated Profit and Loss Account, of the consolidated profit of the Group for the year ended on that date. For S. B. Billimoria & Co. Chartered Accountants Nalin M. Shah Partner Mumbai 29th April, 2006 (Membership No ) IDFC ANNUAL REPORT

62 AS AT MARCH 31, 2006 BALANCE SHEET CONSOLIDATED SOURCES OF FUNDS SCHEDULE RUPEES (in million) RUPEES (in million) Shareholders' Funds : Capital 1 11, Reserves and Surplus 2 14, , Subordinated Debt (Unsecured) 6, Loan Funds (Unsecured) 3 87, Minority Interest 2.51 Deferred Tax Liability (See Schedule 17 Note 9) , APPLICATION OF FUNDS Fixed Assets 4 Gross Block Less : Depreciation Investments 5 12, Infrastructure Loans 6 101, Deferred Tax Asset (See Schedule 17 Note 9) Current Assets, Loans and Advances Interest accrued on Investments Interest accrued on Infrastructure Loans Sundry Debtors Cash and Bank Balances 8 3, Loans and Advances 9 3, , Less : Current Liabilities and Provisions 10 4, Net Current Assets 3, , Notes to the Accounts 17 Schedules 1 to 17 form an integral part of the Accounts In terms of our report of even date For S. B. Billimoria & Co. Deepak S. Parekh Rajiv B. Lall Chartered Accountants Chairman Managing Director & CEO Nalin M. Shah L. K. Narayan Mahendra N. Shah Partner Chief Financial Officer Company Secretary Mumbai April 29,

63 FOR THE YEAR ENDED MARCH 31, 2006 PROFIT AND LOSS ACCOUNT CONSOLIDATED INCOME SCHEDULE RUPEES (in million) RUPEES (in million) Operating and Other Income 11 10, EXPENDITURE Interest & Other Charges 12 5, Staff Expenses Establishment Expenses Other Expenses Provisions and Contingencies Depreciation , Profit before Taxation 4, Less : Provision for Taxation Current Tax Less : Deferred Tax (See Schedule 17 Note 9) Add : Fringe Benefit Tax Less : Share of profit of Minority Interest 1.66 Profit after Taxation 3, Add : Balance as per last Balance Sheet 3, Available for Appropriation 7, Appropriations: Special Reserve u/s 36(1)(viii) of Income-tax Act, (See Schedule 17 Note 12) Special Reserve u/s 45-IC of RBI Act, Investment Fluctuation Reserve (See Schedule 17 Note 13) Proposed Dividend (See Schedule 17 Note 5) 1, Tax on Dividend (See Schedule 17 Note 5) Balance carried forward 4, , Earning per share (Face Value Rs. 10) (See Schedule 17 Note 10) Basic (Rs.) 3.62 Diluted (Rs.) 3.59 Notes to the Accounts 17 Schedules 1 to 17 form an integral part of the Accounts In terms of our report of even date For S. B. Billimoria & Co. Deepak S. Parekh Rajiv B. Lall Chartered Accountants Chairman Managing Director & CEO Nalin M. Shah L. K. Narayan Mahendra N. Shah Partner Chief Financial Officer Company Secretary Mumbai April 29, 2006 IDFC ANNUAL REPORT

64 ANNEXED TO AND FORMING PART OF THE ACCOUNTS SCHEDULES SCHEDULE 1 AS AT MARCH 31, 2006 RUPEES (in million) CAPITAL Authorised : 4,000,000,000 equity shares of Rs. 10 each 40, ,000,000 preference shares of Rs. 100 each 10, , Issued, Subscribed and Paid-up : (See Schedule 17 Note 3) 1,122,453,512 equity shares of Rs. 10 each, fully paid-up 11, AS AT MARCH 31, 2006 SCHEDULE 2 RUPEES (in million) RUPEES (in million) RESERVES AND SURPLUS Special Reserve u/s 36(1)(viii) of Income-tax Act,1961 (See Schedule 17 Note 12) Opening Balance 1, Add : Transfer from Profit & Loss Account , Special Reserve u/s 45-IC of RBI Act, 1934 Opening Balance 2, Add : Transfer from Profit & Loss Account , Securities Premium Account (See Schedule 17 Note 3) Opening Balance Add : Received during the year 2, Less : Share Issue Expenses , Employees' Stock Options Outstanding (See Schedule 17 Note 4) Opening Balance Add : Net charge for the year Investment Fluctuation Reserve (See Schedule 17 Note 13) Opening Balance Add : Transfer from Profit & Loss Account Capital Reserve (See Schedule 17 Note 13) General Reserve Profit and Loss Account 4, ,

65 AS AT MARCH 31, 2006 SCHEDULE 3 RUPEES (in million) RUPEES (in million) LOAN FUNDS (UNSECURED) From Government of Karnataka Bonds in the nature of Promissory Notes (Redeemable in 2006) 2, Debentures (Non Convertible) * (Redeemable between 2007 and 2026) 39, Term Loans From Banks 29, From Others 4, , Short Term Loans Commercial Paper 1, From Banks 9, , , * Rs. 38, million secured by a mortgage on certain immovable properties up-to a value of Rs million SCHEDULE 4 FIXED ASSETS RUPEES (in million) GROSS BLOCK DEPRECIATION NET BLOCK AS AT ADDITIONS DELETIONS AS AT AS AT ADDITIONS DELETIONS AS AT AS AT APRIL 1, MARCH 31, APRIL 1, MARCH 31, MARCH 31, DESCRIPTION Buildings Leasehold improvements Furniture and Fittings, Office Equipment etc Computers: Hardware Software Vehicles Total Note : Buildings include Rupees 500 being the cost of shares in co-operative housing societies. IDFC ANNUAL REPORT

66 SCHEDULE 5 AS AT MARCH 31, 2006 RUPEES (in million) INVESTMENTS Bonds 2, Pass Through Certificates 1, Certificate of Deposits 1, Commercial Paper Mutual Funds 2, Equity Shares 4, Preference Shares Venture Capital Units , Less : Provision for Diminution in Value of Investments , AS AT MARCH 31, 2006 SCHEDULE 6 RUPEES (in million) RUPEES (in million) INFRASTRUCTURE LOANS (SECURED) Loans 96, Debentures (Fully paid - Unquoted) 6, , Less : Provision for Doubtful Infrastructure Loans Provision against Restructured Loans , Whereof: (i) Considered good 102, (ii) Considered doubtful AS AT MARCH 31, 2006 SCHEDULE 7 RUPEES (in million) RUPEES (in million) SUNDRY DEBTORS (UNSECURED) Considered good Over six months Others Considered doubtful Over six months 5.99 Others Less : Provision for Doubtful Debts

67 AS AT MARCH 31, 2006 SCHEDULE 8 RUPEES (in million) RUPEES (in million) CASH AND BANK BALANCES Cash (includes Cheques in Hand Rs million) Balance with Scheduled Banks on Current Accounts on Deposit Accounts 3, , , SCHEDULE 9 AS AT MARCH 31, 2006 RUPEES (in million) LOANS AND ADVANCES Unsecured considered good : Interest accrued on Deposits and Loans Advances recoverable in cash or in kind or for value to be received Loan to Financial Institution Inter Corporate Deposit 1, Advance against Investments Other Deposits Advance payment of tax (Net of provision) 1, , AS AT MARCH 31, 2006 SCHEDULE 10 RUPEES (in million) RUPEES (in million) CURRENT LIABILITIES AND PROVISIONS Current Liabilities : Sundry Creditors Interest Accrued but not due on Loan Funds 1, Fees / Other Amounts Received in Advance Other Liabilities Provisions : Proposed Dividend 1, Tax on Proposed Dividend Provision for Retirement Benefits Contingent Provision against Standard Assets 1, , , , IDFC ANNUAL REPORT

68 APRIL 1, 2005 TO MARCH 31, 2006 SCHEDULE 11 RUPEES (in million) RUPEES (in million) OPERATING AND OTHER INCOME From Infrastructure Operations Interest 7, Other Fees Dividend Profit on Sale of Investments 1, From Other Operations Provision for Diminution in Value of Investments written back , From Treasury Operations Interest on Investments Interest on Bank Deposits Interest on Deposits and Loans Dividend from Units of Mutual Funds 8.47 Profit on sale of Treasury Investments (Net) Other Interest Received Profit on Sale of Assets 1.11 Miscellaneous Income , APRIL 1, 2005 TO MARCH 31, 2006 SCHEDULE 12 RUPEES (in million) RUPEES (in million) INTEREST On Fixed Loans 4, On Others , Other Charges , SCHEDULE 13 APRIL 1, 2005 TO MARCH 31, 2006 RUPEES (in million) STAFF EXPENSES Salaries Contribution to Provident and Other Funds Staff Welfare Expenses

69 APRIL 1, 2005 TO MARCH 31, 2006 SCHEDULE 14 RUPEES (in million) RUPEES (in million) ESTABLISHMENT EXPENSES Rent Rates & Taxes 0.72 Electricity 5.19 Repairs and Maintenance: Buildings 2.73 Equipments 1.91 Others Insurance Charges SCHEDULE 15 APRIL 1, 2005 TO MARCH 31, 2006 RUPEES (in million) OTHER EXPENSES Travelling and Conveyance Printing and Stationery 7.04 Postage, Telephone and Telex Advertising and Publicity 8.20 Professional Fees Loss on Foreign Exchange Fluctuation 0.49 Loss on Sale of Assets 0.16 Commission to Directors 2.16 Directors' Fees 0.96 Miscellaneous Expenses Auditors' Remuneration SCHEDULE 16 APRIL 1, 2005 TO MARCH 31, 2006 RUPEES (in million) PROVISIONS AND CONTINGENCIES Contingent Provision against Standard Assets Provision for Doubtful Loans, Debtors and Restructured Loans Provision for Diminution in Value of Treasury Investments IDFC ANNUAL REPORT

70 SCHEDULE 17 NOTES FORMING PART OF THE ACCOUNTS 1. SIGNIFICANT ACCOUNTING POLICIES A. SYSTEM OF ACCOUNTING The Group adopts the accrual concept in the preparation of the accounts. The preparation of 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. Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Future results could differ from these estimates. B. INFLATION Assets and liabilities are recorded at historical cost. These costs are not adjusted to reflect the changing value in the purchasing power of money. C. INVESTMENTS (i) Holding Company Investments are valued in accordance with the Reserve Bank of India guidelines on investment classification and valuation. n Investments are classified under three categories i.e. (i) 'Held to maturity' (ii) 'Available for sale' (iii) 'Held for trading' as per the RBI guidelines. n 'Held to maturity' securities are carried at acquisition cost. A provision is made for diminution other than temporary. n 'Available for sale' and 'Held for trading' securities are carried at the lower of cost and fair value determined by category of investments. (ii) Other than Holding Company Long term investments are valued at cost except where there is a diminution in value other than temporary in which case the carrying value is reduced to recognise the decline. Current investments are valued at lower of cost or market value. D. ADVANCES Holding Company n All advances are classified under four categories i.e. (i) Standard Assets, (ii) Sub-standard Assets, (iii) Doubtful Assets and (iv) Loss Assets in accordance with the RBI guidelines. n Specific provisions on advances (including restructured advances) are arrived at in accordance with the RBI guidelines / directives. n In respect of Loans and Debentures / Bonds in the nature of an advance, where interest is not serviced, provision for depreciation is made as per the method applicable to Non-Performing Advances (Income Recognition and Classification norms). n Provision on Standard Assets portfolio is made as per the provisioning policy, which is higher than the general provision of 0.40% in accordance with the RBI guidelines. E. FIXED ASSETS AND INTANGIBLE ASSETS Fixed assets / Intangible assets are stated at cost of acquisition, including any cost attributable for bringing the asset to its working condition, less accumulated depreciation / amortisation. F. DEPRECIATION AND AMORTISATION Depreciation on Fixed Assets is provided on the written down value method, at the rates prescribed by Schedule XIV of the Companies Act, Depreciation on additions during the year is provided on a pro-rata basis. Assets costing less than Rs. 5,000 each are written off in the year of capitalisation. Intangible assets are amortised over a period of 3 years on straight line method. Leasehold improvements are depreciated over the primary period of the lease. G. OPERATING LEASES Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the Profit and Loss Account, on a straight - line basis, over the lease term. H. RETIREMENT BENEFITS (a) The Group has taken superannuation policies for future payment of superannuation. Annual contributions are made as determined by the insurance company. 68

71 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS (b) (c) (d) The Group has taken group gratuity policies for future payment of gratuities. Annual contributions are made as determined by the insurance company, based on an actuarial valuation. The Group has provided for liability towards the encashment of leave salary on retirement on the basis of an actuarial valuation except in case of one of the subsidiary companies where the provision for leave salary is made on accrual basis. The Group's contribution to Provident Fund is deposited with Regional Provident Fund Commissioner and is charged to Profit and Loss Account every year. I. INCOME-TAX The accounting treatment for income-tax is based on the Accounting Standard 22 on 'Accounting for Taxes on Income' issued by the Institute of Chartered Accountants of India. The provision made for income-tax in the accounts comprises both, the current tax and deferred tax. The deferred tax assets and liabilities for the year, arising on account of timing differences, are recognised in the Profit and Loss Account and the cumulative effect thereof is reflected in the Balance Sheet. J. REVENUE RECOGNITION (a) Interest and other dues are accounted on accrual basis. (b) Dividend is accounted when the right to receive is established. (c) Front end fees on processing of loans are recognised upfront as income. (d) Premium on interest rate reduction is accounted on accrual basis over the residual life of the loan. (e) Management Fees accrue from the date of initial closing up to the date of winding up of the Fund. (f) Grants are accounted for on accrual basis. K. FOREIGN CURRENCY TRANSACTIONS Foreign currency transactions are accounted on the exchange rates prevailing at the date of the transaction. Foreign currency monetary items outstanding as at the Balance Sheet date are reported using the closing rate. Gains and losses resulting from the settlement of such transactions and translation of monetary assets and liabilities denominated in foreign currencies are recognised in the Profit and Loss Account. Premium in respect of forward contracts is accounted over the period of the contract. Forward contracts outstanding as at the Balance Sheet date are revalued at the closing rate. L. INTEREST RATE SWAPS Interest rate swaps classified as hedge are recorded on an accrual basis and these transactions are not marked to market. Any resultant gain or loss on termination of hedge swaps is amortised over the life of swap or underlying asset / liability whichever is short. Income or expenses on trade swaps are recorded on settlement date and are subjected to mark to market. Gain or loss on termination of trade swaps is recorded upfront. M. EMPLOYEE STOCK OPTION SCHEME The Holding Company has formulated an Employee Stock Option Scheme (ESOS) in accordance with SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, The Scheme provides for grant of options to employees to acquire the equity shares of the Company that vest in a graded manner and that are to be exercised within a specified period. In accordance with the SEBI Guidelines, the excess, if any, of the closing market price on the day prior to the grant of the options under ESOS over the exercise price is amortised on a straight - line basis over the vesting period. 2. BASIS OF CONSOLIDATION The Consolidated Financial Statements comprise the individual financial statements of Infrastructure Development Finance Company Limited, its subsidiaries and jointly controlled entities as on March 31, 2006 and for the year ended on that date. The Consolidated Financial Statements have been prepared on the following basis: i. The financial statements of the Company and its subsidiaries have been consolidated on a line by line basis by adding together the book values of like items of assets, liabilities, income and expenses, after eliminating intra - group balances and intra - group transactions resulting in unrealised profits or losses as per Accounting Standard 21 on 'Consolidated Financial Statements' issued by the Institute of Chartered Accountants of India. IDFC ANNUAL REPORT

72 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS ii. The financial statements of the jointly controlled entities have been considered on a line by line basis by adding together the book values of like items of assets, liabilities, income and expenses, after eliminating intra - group balances and intra - group transactions resulting in unrealised profits or losses as per Accounting Standard 27 on 'Financial Reporting of Interests in Joint Ventures' issued by the Institute of Chartered Accountants of India using the "proportionate consolidation" method. iii. The financial statements of the subsidiaries, the jointly controlled entities used in the consolidation are drawn up to the same reporting date as that of the Company, i.e. March 31, iv. The excess of cost to the Company, of its investment in the subsidiaries over the Company's portion of equity is recognised in the financial statements as Goodwill. v. Minority interest in the net assets of the subsidiaries consists of the amount of equity attributable to minorities at the date on which investment in a subsidiary is made. vi. Net Profit for the year of the subsidiaries attributable to minorities is identified and adjusted against the Profit After Tax of the Group. a. The financial statements of the following subsidiaries have been consolidated as per Accounting Standard 21 on 'Consolidated Financial Statements' issued by the Institute of Chartered Accountants of India: NAME OF SUBSIDIARY PROPORTION OF OWNERSHIP INTEREST (%) IDFC Private Equity Company Limited (Formerly IDFC Asset Management Company Limited) IDFC Trustee Company Limited Feedback First Urban Infrastructure Development Company Limited All the subsidiaries are incorporated in India. b. The financial statements of the following jointly controlled entities have been consolidated as per Accounting Standard 27 on 'Financial Reporting of Interests in Joint Ventures' issued by the Institute of Chartered Accountants of India. NAME OF JOINTLY CONTROLLED ENTITY PROPORTION OF OWNERSHIP INTEREST (%) Infrastructure Development Corporation (Karnataka) Limited Uttaranchal Infrastructure Development Company Limited 50.44* All the jointly controlled entities are incorporated in India. * By virtue of 1.10% holding by Infrastructure Development Corporation (Karnataka) Limited in Uttaranchal Infrastructure Development Company Limited, the effective proportion of ownership interest in Uttaranchal Infrastructure Development Company Limited is 50.44%. c. The following amounts are included in the Financial Statements in respect of the jointly controlled entities referred to in Note vi (b) above, based on the proportionate consolidation method: CURRENT YEAR RUPEES (in million) ASSETS Net Block 2.96 Investments Infrastructure Loans Deferred Tax Asset 0.33 Sundry Debtors 9.97 Cash and Bank Balances Loans and Advances

73 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS CURRENT YEAR RUPEES (in million) LIABILITIES Reserves and Surplus Unsecured Loans Current Liabilities and Provisions Deferred Tax Liability 0.03 INCOME From Infrastructure Operations Interest 9.17 Other Fees 0.10 From Other Operations From Treasury Operations Interest on Bank Deposits 5.09 Dividend from units of Mutual Funds 0.90 Profit on sale of Treasury Investments 0.44 Miscellaneous Income 0.17 EXPENSES Staff Expenses 9.29 Establishment Expenses 1.24 Other Expenses Provisions and Contingencies 0.09 Depreciation 0.80 Provision for Taxation 3.66 d. Infrastructure Development Corporation (Karnataka) Limited has made investment of 48% in a jointly controlled entity, Rail Infrastructure Development Company (Karnataka) Limited which has not been consolidated as per Accounting Standard 27 on 'Financial Reporting of Interests in Joint Ventures' issued by the Institute of Chartered Accountants of India since the amounts involved in respect of the same are not material. 3. On May 16, 2005, the Holding Company issued and allotted 2,453,512 equity shares of Rs. 10 each at a premium of Rs per share pursuant to Employees' Share Purchase Scheme. Further, on August 5, 2005, the Holding Company issued and allotted equity shares of Rs. 10 each at a premium of Rs. 24 per share pursuant to the public issue in July 2005 of 403,600,000 equity shares comprising of a fresh issue of 120,000,000 equity shares and an offer for sale of 283,600,000 equity shares by the selling shareholders. The issued share capital increased from Rs. 10, million to Rs. 11, million and an amount of Rs. 2, million (net of issue expenses) has been credited to Securities Premium Account. The proceeds of the issue have been utilised for general business purposes. 4. At the Extraordinary General Meeting held on May 9, 2005, the Holding Company had introduced ESOS for its employees. In furtherance thereof, an aggregate of 12,698,517 options were granted to eligible employees at Rs per share. The option shall vest over a period of 3 years commencing after one year from the date of the grant. Of these aggregate options granted, 1,560,138 options have lapsed on resignation of employees and balance 11,138,379 options remains outstanding as on March 31, In respect of equity shares issued pursuant to Employees' Share Purchase Scheme, the Holding Company paid dividend of Rs million for the year and tax on dividend of Rs million as approved by the shareholders at the Annual General Meeting held on June 16, IDFC ANNUAL REPORT

74 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS 6. The Group is engaged in providing finance for infrastructure projects and asset management. However, there is no reportable segment in terms of Accounting Standard 17 on 'Segment Reporting' issued by the Institute of Chartered Accountants of India since the revenues, profit or assets of the asset management segment do not exceed 10% of the Group's revenues, profit or assets. 7. Related party disclosures under Accounting Standard 18 n n Relationships: Key Management Personnel: Dr. Rajiv B. Lall - Managing Director and CEO Mr. Luis Miranda - President and CEO of IDFC Private Equity Company Limited The following transactions were carried out with the related parties in the ordinary course of business: CURRENT YEAR RUPEES (in million) Remuneration Dr. Rajiv B. Lall 5.75 Mr. Luis Miranda 6.23 Sale of Fixed Assets Dr. Rajiv B. Lall 0.28 Mr. Luis Miranda In accordance with the Accounting Standard 19 on 'Leases' issued by the Institute of Chartered Accountants of India, the following disclosure in respect of Operating Leases is made. Future minimum lease payments under non-cancellable operating leases in respect of IDFC Private Equity Company Limited are as follows: PARTICULARS CURRENT YEAR RUPEES (in million) Not later than one year 3.75 Later than one year and not later than five years 4.31 Later than five years Nil 9. In compliance with the Accounting Standard 22 relating to 'Accounting for Taxes on Income', issued by the Institute of Chartered Accountants of India, credit has been taken in the Profit & Loss Account towards deferred tax asset (net) on account of timing differences. The major components of deferred tax assets and liabilities arising on account of timing differences are: CURRENT YEAR RUPEES (in million) ASSETS LIABILITIES (a) Depreciation (23.37) 0.03 (b) Provisions Nil (c) Others 6.28 Nil In accordance with the Accounting Standard 20 on 'Earning Per Share' issued by the Institute of Chartered Accountants of India: i. The Basic Earning Per Share has been calculated based on the Net Profit After Tax of Rs. 3, million and weighted average number of shares during the year of 1,080,726,

75 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS ii. iii. The reconciliation between the Basic and the Diluted Earning Per Share is as follows: CURRENT YEAR RUPEES Basic Earning Per Share 3.62 Effect of Outstanding Stock Options (0.03) Diluted Earning Per Share 3.59 The Basic Earning Per Share has been computed by dividing the Net Profit After Tax by the weighted average number of equity shares for the respective periods; whereas the Diluted Earning Per Share has been computed by dividing the Net Profit After Tax by the weighted average number of equity shares, after giving dilutive effect of the outstanding Stock Options for the respective periods. The relevant details as described above are as follows: CURRENT YEAR Weighted average number of shares for computation of Basic Earning Per Share 1,080,726,367 Diluted effect of outstanding Stock Options 8,353,664 Weighted average number of shares for computation of Diluted Earning Per Share 1,089,080, Contingent liabilities not provided for in respect of : RUPEES (in million) (a) Uncalled Liability on partly paid venture capital units 1, (b) Claims not acknowledged as debts in respect of Income-tax demands under appeal amount to (c) Bank guarantees issued on behalf of the Company (d) Guarantees issued: 1. Financial Guarantees 5, Performance Guarantees Risk Participation Facility Take Out Facility Special Reserve has been created in terms of Section 36(1)(viii) of the Income-tax Act, 1961 out of the distributable profits of the Company. 13. Capital Reserve and Investment Fluctuation Reserve have been created in terms of RBI circular (Ref. DBS. FID. No. C9 / / , dated November 9, 2000). 14. As the current year is the first financial year for preparation of accounts in accordance with Accounting Standard 21 on 'Consolidated Financial Statements' issued by the Institute of Chartered Accountants of India, the comparative figures for previous year and cash flow statement have not been disclosed. Deepak S. Parekh Chairman Rajiv B. Lall Managing Director & CEO L. K. Narayan Mahendra N. Shah Chief Financial Officer Company Secretary Mumbai April 29, 2006 IDFC ANNUAL REPORT

76 74 INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED

77 Auditors Report TO THE MEMBERS OF INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED 1. We have audited the attached Balance Sheet of INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED as at 31st March, 2006, 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. These 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 give 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 : (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) as required by Article 215(4)(f) of the Articles of Association of the Company, we report that in our opinion, the transactions of the Company which have come to our notice have been within the powers of the Company; (e) 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; (f) 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 31st March, 2006; (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 from the directors, taken on record by the Board of Directors as on 31st March, 2006, and according to the information and explanations given to us, none of the directors is disqualified as on 31st March, 2006 from being appointed as a director under Section 274(1)(g) of the Companies Act, For S. B. Billimoria & Co. Chartered Accountants Nalin M. Shah Partner Mumbai 29th April, 2006 (Membership No ) IDFC ANNUAL REPORT

78 Annexure to the Auditors Report (REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE) (i) The nature of the Company s business / activities during the year is such that clauses (i)(c), (ii), (viii), (x) and (xiii) of CARO are not applicable. (ii) In respect of its fixed assets : (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets. (b) Some of 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. (iii) In respect of loans, secured or unsecured, to or from companies, firms or other parties covered in the Register maintained under Section 301 of the Companies Act, 1956, according to the information and explanations given to us: (a) The Company has granted loans to two parties and taken loans from seven parties. At the year-end, the outstanding balances of such loans granted and taken aggregated Rs. 1, million (number of parties - one) and Rs. 12, million (number of parties - two) respectively and the maximum amount involved during the year was Rs. 1, million and Rs. 20, million respectively. (b) The rate of interest and other terms and conditions of such loans are, in our opinion, prima facie not prejudicial to the interest of the Company. (c) The receipt and payment of principal amounts and interest have during the year been regular/as per stipulations. (iv) In our opinion and according to the information and explanations given to us, there is 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 sale of services. We have not observed any continuing failure to correct major weaknesses in such internal controls. (v) In respect of contracts or arrangements entered in the (vi) (vii) (viii) (ix) (x) 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) The particulars of contracts or arrangements referred to Section 301 that needed to be entered into the Register maintained under the said Section have been so entered. (b) Where each of such transactions [excluding loans reported under paragraph (iii) above] 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 wherever applicable, at the relevant time, except in respect of payments made for certain services wherein comparative rates are not available owing to their nature. The Company has not accepted any fixed deposits from the public. In our opinion, the internal audit functions carried out during the year by a firm of Chartered Accountants appointed by the Management have been commensurate with the size of the Company and the nature of its business. According to the information and explanations given to us in respect of statutory dues : (a) The Company has been regular in depositing undisputed dues including Provident Fund, Income Tax, Wealth Tax, Service Tax and any other material dues with the appropriate authorities during the year. (b) There were no undisputed amounts payable on account of the above dues, outstanding as at 31st March, 2006 for a period of more than six months from the date they became payable. (c) There were no disputed Income Tax, Wealth Tax and Service Tax dues which were not deposited as on 31st March, According to the information and explanations given to us, the Company has not defaulted in the repayment of dues to financial institutions, banks and debentureholders. In our opinion the Company has generally maintained adequate documents and records where it has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. 76

79 Annexure to the Auditors Report (continued) (xi) (xii) (xiii) (xiv) (xv) Based on our examination of the records and evaluation of the related internal controls, the Company has maintained proper records of transactions and contracts in respect of its dealing in shares, securities, debentures and other investments and timely entries have been made therein. The aforesaid securities have been held by the Company in its own name, except to the extent of the exemption granted under Section 49 of the Companies Act, 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 banks and financial institutions are not prima facie prejudicial to the interests of the Company. To the best of our knowledge and belief 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. According to the information and explanations given to us and on the basis of the maturity profile of assets and liabilities, funds raised on short-term basis have, prima facie, not been used for long-term investment. According to the information and explanations given to us, the price at which the Company has made preferential allotment of shares under the Employees Share Purchase Scheme to a party covered in the Register maintained under Section 301 of the Companies Act, 1956 is not prima facie prejudicial to the interests of the Company. (xvi) According to the information and explanations given to us and the records examined by us, securities/charges have been created in respect of all debentures issued except in respect of debentures aggregating Rs. 8, million for which securities/charges have been created subsequently. (xvii) We have verified the end use of money raised by public issue of equity shares as disclosed in the Note 2 of Schedule 17. (xviii) To the best of our knowledge and belief and according to the information and explanations given to us, no fraud on or by the Company was noticed or reported during the year. For S. B. Billimoria & Co. Chartered Accountants Nalin M. Shah Partner Mumbai 29th April, 2006 (Membership No ) IDFC ANNUAL REPORT

80 AS AT MARCH 31, 2006 BALANCE SHEET SCHEDULE AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 RUPEES (in million) RUPEES (in million) RUPEES (in million) SOURCES OF FUNDS Shareholders Funds : Capital 1 11, , Reserves and Surplus 2 14, , , , Subordinated Debt (Unsecured) 6, , Loan Funds (Unsecured) 3 87, , , , APPLICATION OF FUNDS Fixed Assets 4 Gross Block Less : Depreciation Investments 5 12, , Infrastructure Loans 6 101, , Deferred Tax Asset (See Schedule 17 Note 16) Current Assets, Loans and Advances Interest accrued on Investments Interest accrued on Infrastructure Loans Sundry Debtors Cash and Bank Balances 8 3, , Loans and Advances 9 3, , , , Less : Current Liabilities and Provisions 10 4, , Net Current Assets 3, , , , Notes to the Accounts 17 Schedules 1 to 17 form an integral part of the Accounts In terms of our report of even date For S. B. Billimoria & Co. Deepak S. Parekh Rajiv B. Lall Chartered Accountants Chairman Managing Director & CEO Nalin M. Shah L. K. Narayan Mahendra N. Shah Partner Chief Financial Officer Company Secretary Mumbai April 29,

81 FOR THE YEAR ENDED MARCH 31, 2006 PROFIT & LOSS ACCOUNT INCOME SCHEDULE APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 RUPEES (in million) RUPEES (in million) RUPEES (in million) Operating and Other Income 11 10, , EXPENDITURE Interest & Other Charges 12 5, , Staff Expenses Establishment Expenses Other Expenses Provisions and Contingencies Depreciation , , Profit before Taxation 4, , Less : Provision for Taxation Current Tax Less : Deferred Tax (See Schedule 17 Note 16) Add : Fringe Benefit Tax Profit after Taxation 3, , Add : Balance as per last Balance Sheet 3, , Available for Appropriation 7, , Appropriations: Special Reserve u/s 36(1)(viii) of Income-tax Act, (See Schedule 17 Note 22) Special Reserve u/s 45-IC of RBI Act, Investment Fluctuation Reserve (See Schedule 17 Note 23) Proposed Dividend 1, , (See Schedule 17 Note 13) Tax on Dividend (See Schedule 17 Note 13) Balance carried forward 4, , , , Earning per share (Face Value Rs. 10) (See Schedule 17 Note 18) Basic (Rs.) Diluted (Rs.) Notes to the Accounts 17 Schedules 1 to 17 form an integral part of the Accounts In terms of our report of even date For S. B. Billimoria & Co. Deepak S. Parekh Rajiv B. Lall Chartered Accountants Chairman Managing Director & CEO Nalin M. Shah L. K. Narayan Mahendra N. Shah Partner Chief Financial Officer Company Secretary Mumbai April 29, 2006 IDFC ANNUAL REPORT

82 FOR THE YEAR ENDED MARCH 31, 2006 CASH FLOW STATEMENT FOR THE YEAR ENDED FOR THE YEAR ENDED MARCH 31, 2006 MARCH 31, 2005 RUPEES (in million) RUPEES (in million) RUPEES (in million) RUPEES (in million) A. CASH FLOW FROM OPERATING ACTIVITIES Profit before tax 4, , Adjustments for : Depreciation Provision for Retirement Benefits (0.26) ESOS compensation cost 2.22 Contingent Provision against Standard Asset Provision for Doubtful Loans, Debtors and Restructured Loans Provision for Diminution in value of Investments written back (128.55) (3.58) Provision for Diminution in value of Investments (Profit) on sale of Investments (1,252.63) (1,113.02) (Profit) / Loss on sale of Assets (1.11) 0.66 Treasury Income (871.23) (364.83) Operating profit before Working Capital Changes 2, , Changes in : Current Assets, Loans and Advances (97.62) (53.80) Current Liabilities and Provisions Direct Taxes paid (825.68) (649.21) NET CASH FROM OPERATING ACTIVITIES 2, , B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets (32.17) (2.18) Sale of Fixed Assets Treasury Income Proceeds from / (Purchase) of Investments, Loans and Deposits (net) (6,919.63) 3, NET CASH (USED IN) / FROM INVESTING ACTIVITIES (6,165.97) 4, C. CASH FLOW FROM FINANCING ACTIVITIES Proceeds from fresh issue of shares (net of issue expenses) 4, Infrastructure Loans disbursed (net of repayment) (30,970.99) (26,608.05) Proceeds from Borrowings (net of repayment) 28, , Dividend paid (including dividend tax) (1,143.05) (1,130.69) NET CASH (USED IN) / FROM FINANCING ACTIVITIES (2,037.37) Net change in cash and cash equivalent (A+B+C) (3,922.47) 4, Cash and cash equivalent as at the beginning of the year as per Schedule 8 4, Cash and cash equivalent as at the end of the year (See Note Below) , , (4,226.83) Note to Cash Flow Statement: Cash and cash equivalents as at the end of the year Cash and cash equivalent as per Schedule 8 3, , Less: Bank deposits placed for more than 90 days 3, , In terms of our report of even date For S. B. Billimoria & Co. Deepak S. Parekh Rajiv B. Lall Chartered Accountants Chairman Managing Director & CEO Nalin M. Shah L. K. Narayan Mahendra N. Shah Partner Chief Financial Officer Company Secretary Mumbai April 29,

83 ANNEXED TO AND FORMING PART OF THE ACCOUNTS SCHEDULES AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 1 RUPEES (in million) RUPEES (in million) CAPITAL Authorised : 4,000,000,000 equity shares of Rs.10 each 40, , ,000,000 preference shares of Rs.100 each 10, , , , Issued, Subscribed and Paid-up : (See Schedule 17 Note 2) 1,122,453,512 (Previous Year 1,000,000,000) equity shares of Rs.10 each, fully paid-up 11, , AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 2 RUPEES (in million) RUPEES (in million) RUPEES (in million) RESERVES AND SURPLUS Special Reserve u/s 36(1)(viii) of Income-tax Act,1961 (See Schedule 17 Note 22) Opening Balance 1, Add : Transfer from Profit & Loss Account , , Special Reserve u/s 45-IC of RBI Act, 1934 Opening Balance 2, , Add : Transfer from Profit & Loss Account , , Securities Premium Account Opening Balance Add : Received during the year 2, Less: Share Issue Expenses (See Schedule 17 Note 2 & 9) , Employees Stock Options Outstanding (See Schedule 17 Note 3) Opening Balance Add : Net charge for the year Investment Fluctuation Reserve (See Schedule 17 Note 23) Opening Balance Add : Transfer from Profit & Loss Account Capital Reserve (See Schedule 17 Note 23) General Reserve Profit and Loss Account 4, , , , IDFC ANNUAL REPORT

84 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 3 RUPEES (in million) RUPEES (in million) RUPEES (in million) LOAN FUNDS (UNSECURED) Bonds in the nature of Promissory Notes Redeemable on September 04, , , (Previous Year: Redeemable from November 30, 2005 to September 04, 2006) Debentures (Non Convertible) * Redeemable from March 28, 2007 to January 17, , , (Previous Year: Redeemable from May 20, 2007 to March 23, 2015) Term Loans From Banks 29, , From Others 4, , , , , , Short Term Loans Commercial Paper 1, , (Maximum amount outstanding during the year Rs. 2, million; Previous Year Rs. 7, million) From Banks 9, , , , , * Rs. 38, million secured by a mortgage on certain immovable properties up-to a value of Rs.1.00 million SCHEDULE 4 FIXED ASSETS RUPEES (in million) GROSS BLOCK DEPRECIATION NET BLOCK AS AT ADDITIONS DELETIONS AS AT AS AT ADDITIONS DELETIONS AS AT AS AT AS AT APRIL 1, MARCH 31, APRIL 1, MARCH 31, MARCH 31, MARCH 31, DESCRIPTION Buildings Furniture and Fittings, Office Equipment etc Computers: Hardware Software Vehicles Total Previous Year Note : Buildings include Rupees 500 (Previous Year Rupees 500) being the cost of shares in co-operative housing societies. 82

85 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 5 RUPEES (in million) RUPEES (in million) INVESTMENTS A. Bonds - (Fully paid - Unquoted, Non Trade) (See Schedule 17 Note 4) AVAILABLE FOR SALE Number of Face Value Bonds Rupees 5.75% Export Import Bank 750 1,000, % Export Import Bank 150 1,000, % Housing Development Finance Corporation Limited 100 1,000, Floating Rate Bond ICICI Bank Limited % ICICI Bank Limited 200 1,000, % ING Vysya Bank Limited , Floating Rate Bond Indian Oil Corporation Limited 300 1,000, Floating Rate Bond LIC Housing Finance Limited 200 1,000, % National Bank for Agricultural and Rural Development % National Bank for Agricultural and Rural Development 750 1,000, % Oriental Bank of Commerce 50 1,000, % Power Finance Corporation Limited 150 1,000, % Power Grid Corporation Limited 90 1,100, % Reliance Telecom Limited {10(23G)} % State Bank of India 50 1,000, % State Bank of India 50 1,000, B. Pass Through Certificates - (Unquoted, Non Trade) (A) 2, , AVAILABLE FOR SALE Number of Face Value Certificates Rupees Class A pertaining to housing loans originated by Housing Development Finance Corporation Limited 14 28, Class A pertaining to housing loans originated by LIC Housing Finance Limited 25 37, BHPC Auto Securitisation Trust Loan Securitisation Trust (Series XVII) 10 7,460, India Loan Securitisation (Series IV) India MBS 2002 Certificates Series I D 10 3,027, Standard Chartered Bank Series A , Standard Chartered Bank Series A , Loan Securitisation Trust (Series IX) PGC 85 3,940, (B) 1, C. Certificate of Deposits - (Unquoted, Non Trade) - AVAILABLE FOR SALE (C) 1, D. Commercial Paper - (Unquoted, Non Trade) - AVAILABLE FOR SALE (D) IDFC ANNUAL REPORT

86 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 5 RUPEES (in million) RUPEES (in million) INVESTMENTS (CONTINUED) E. Mutual Funds - (Unquoted, Non Trade) Number of Face Value Units Rupees HELD TO MATURITY HDFC Fixed Investment Plan - March 2004 (1) Birla FMP - Annual Series I AVAILABLE FOR SALE ABN Amro Cash Fund - Institutional Plus - Growth 72,954, ABN Amro Equity Fund Birla Cash Plus - Institutional Premium Plan DSP Merrill Lynch Equity Fund HDFC Floating Rate Income Fund - Short Term Plan HDFC Liquid Fund Premium Plus Plan HSBC Cash Fund - Institutional Plus HSBC Floating Rate Fund - Long Term Plan JM Floater Fund - Short Term Plan JM High Liquidity Fund - Super Institutional Plan - Growth (94) 45,385, Kotak Flexi Fund of Fund - Growth 10,010, Kotak Floater Long Term Prudential ICICI Long Term Floating Rate Plan B Prudential ICICI Dynamic Plan Reliance Floating Rate Fund - Growth Plan Reliance Income Fund - Retail Plan - Growth Plan 19,437, Reliance Liquidity Fund - Growth Option 18,362, Standard Chartered Liquidity Manager - Growth 499, , Tata Infrastructure Fund (E) 2, , F. Equity Shares (Fully paid) (See Schedule 17 Note 4) AVAILABLE FOR SALE Number of Face Value Shares Rupees Quoted INFRASTRUCTURE Bharti Televentures Limited 725, (3,275,000 shares sold during the year) Gateway Distriparks Limited 7,500, Gujarat State Petronet Limited 15,000, Indraprashtha Gas Limited 1,490, (4,509,732 shares sold during the year) Carried forward

87 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 5 RUPEES (in million) RUPEES (in million) INVESTMENTS (CONTINUED) Jet Airways (India) Limited 160, Oil and Natural Gas Corporation Limited 45, National Thermal Power Corporation Limited 2,745, PTC India Limited 760, (Formerly Power Trading Corporation of India Limited) (4,300,000 shares sold during the year) Tata Consultancy Services Limited 40, Unquoted INFRASTRUCTURE Apollo Hospitals International Limited 8,000, (Formerly Akshaya Apollo Hospitals Limited) Asia Bio Energy (India) Limited 2,500, Ennore SEZ Company Limited 25, Green Gas Limited 10, GTL Infrastructure Limited 16,000, Hutchison Essar Limited 8,064, , (Subject to Call / Put option between April 1, 2006 to December 31, 2006 at a predetermined yield) Petronet CCK Limited 19,973, OTHERS Feedback Ventures Private Limited 2,000, Securities Trading Corporation of India Limited 5,000, National Stock Exchange of India Limited 1,000, HELD TO MATURITY Unquoted SUBSIDIARIES IDFC Private Equity Company Limited 49, (Formerly IDFC Asset Management Company Limited) IDFC Trustee Company Limited 49, Feedback First Urban Infrastructure Development Company Limited 21,000, JOINT VENTURES Number of Face Value Shares Rupees Brought forward Infrastructure Development Corporation (Karnataka) Limited 4,949, Uttaranchal Infrastructure Development Company Limited 239, (F) 4, , IDFC ANNUAL REPORT

88 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 5 RUPEES (in million) RUPEES (in million) INVESTMENTS (CONTINUED) Number of Shares Face Value Rupees G. Preference Shares (Fully paid) AVAILABLE FOR SALE Unquoted INFRASTRUCTURE Coromandel Electric Company Limited 4,000, GMR Tambaram Tindivanam Expressways Private Limited (Redeemed during the year) GMR Tuni Anakapalli Expressway Private Limited (Redeemed during the year) HELD TO MATURITY Unquoted OTHERS Feedback Ventures Private Limited (optionally convertible) 700, (G) H. Venture Capital Units (Partly paid) HELD TO MATURITY Number of Face Value Units Rupees India Development Fund - Class A (Rs. 60 paid up) 10,000, IDFC Private Equity Fund II - Class A (Re paid up) 135,000, (H) (A + B + C + D + E + F + G + H ) 13, , Less : Provision for Diminution in Value of Investments , , (1) Aggregate amount of quoted investments Cost Market Value 3, , (2) Aggregate amount of unquoted investments - Cost 12, , Note: Quoted investments include Rs million (Previous Year Rs million) in respect of equity shares which are subject to a lock-in period. Unquoted investments include Rs million (Previous Year Rs million) in respect of equity shares which are subject to a lock-in period. 86

89 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 6 RUPEES (in million) RUPEES (in million) RUPEES (in million) INFRASTRUCTURE LOANS (SECURED) A. Loans 96, , B. Debentures (Fully paid - Unquoted) (See Schedule 17 Note 5) 6, , , , Less : Provision for Doubtful Infrastructure Loans Provision against Restructured Loans , , , Whereof: (i) Considered good 102, , (ii) Considered doubtful AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 7 RUPEES (in million) RUPEES (in million) RUPEES (in million) SUNDRY DEBTORS (UNSECURED) Considered good Over six months Others Considered doubtful Over six months Others Less : Provision for Doubtful Debts AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 8 RUPEES (in million) RUPEES (in million) RUPEES (in million) CASH AND BANK BALANCES Cash (includes Cheques in Hand Rs million; Previous Year Rs million) Balance with Scheduled Banks on Current Accounts on Deposit Accounts 3, , , , , , IDFC ANNUAL REPORT

90 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 9 RUPEES (in million) RUPEES (in million) LOANS AND ADVANCES Unsecured considered good : Interest accrued on Deposits and Loans Advances recoverable in cash or in kind or for value to be received Loan to Financial Institution Inter Corporate Deposit 1, , Advance against Investments Other Deposits Advance payment of tax (Net of provision) 1, , , , AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 10 RUPEES (in million) RUPEES (in million) RUPEES (in million) CURRENT LIABILITIES AND PROVISIONS Current Liabilities : Sundry Creditors - Other than Small Scale Industrial Undertaking (See Schedule 17 Note 8) Interest Accrued but not due on Loan Funds 1, , Fees / Other Amounts Received in Advance Other Liabilities , , Provisions : Proposed Dividend 1, , Tax on Proposed Dividend Provision for Retirement Benefits Contingent Provision against Standard Assets 1, , , , ,

91 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 11 RUPEES (in million) RUPEES (in million) RUPEES (in million) OPERATING AND OTHER INCOME From Infrastructure Operations Interest 7, , Other Fees Dividend Profit on Sale of Investments 1, , (Tax deducted at source Rs million; Previous Year Rs million) From Other Operations (Tax deducted at source Rs million; Previous Year Rs million) Provision for Diminution in Value of Investments written back , , From Treasury Operations Interest on Investments (Gross) (Tax deducted at source Rs million; Previous Year Rs million) Interest on Bank Deposits (Gross) (Tax deducted at source Rs million; Previous Year Rs million) Interest on Deposits and Loans (Gross) (Tax deducted at source Rs million; Previous Year Rs million) Dividend from Units of Mutual Funds 7.57 Profit on sale of Treasury Investments (Net) (including Profit on cancellation of Trade Swaps Rs million; Previous Year Rs. Nil) Provision for Diminution in Value of Investments written back Other Interest Received (including interest on Income Tax Refund Rs million; Previous Year Rs million) Dividend on Shares (Others) Profit on Sale of Assets (Net) 1.11 Miscellaneous Income , , APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 12 RUPEES (in million) RUPEES (in million) RUPEES (in million) INTEREST On Fixed Loans 4, , On Others , , Other Charges , , IDFC ANNUAL REPORT

92 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 13 RUPEES (in million) RUPEES (in million) STAFF EXPENSES Salaries (See Schedule 17 Note 20) Contribution to Provident and Other Funds (including Provision for Gratuity Rs million; Previous Year Rs. Nil) Staff Welfare Expenses APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 14 RUPEES (in million) RUPEES (in million) RUPEES (in million) ESTABLISHMENT EXPENSES Rent Rates & Taxes Electricity Repairs and Maintenance: Buildings Equipments Others Insurance Charges APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 15 RUPEES (in million) RUPEES (in million) OTHER EXPENSES Travelling and Conveyance Printing and Stationery Postage, Telephone and Telex Advertising and Publicity Professional Fees (See Schedule 17 Note 7) Loss on Foreign Exchange Fluctuation 0.50 Loss on Sale of Assets (Net) 0.66 Directors Fees Miscellaneous Expenses (See Schedule 17 Note 21) Auditors Remuneration (See Schedule 17 Note 9) APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 16 RUPEES (in million) RUPEES (in million) PROVISIONS AND CONTINGENCIES Contingent Provision against Standard Asset Provision for Doubtful Loans, Debtors and Restructured Loans Provision for Diminution in Value of Treasury Investments Provision for Diminution in Value of Other Investments

93 SCHEDULE 17 NOTES FORMING PART OF THE ACCOUNTS 1. SIGNIFICANT ACCOUNTING POLICIES A. SYSTEM OF ACCOUNTING The Company adopts the accrual concept in the preparation of the accounts. The preparation of 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. Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Future results could differ from these estimates. B. INFLATION Assets and liabilities are recorded at historical cost to the Company. These costs are not adjusted to reflect the changing value in the purchasing power of money. C. INVESTMENTS Investments are valued in accordance with the Reserve Bank of India guidelines on investment classification and valuation. n n n D. ADVANCES n n n n Investments are classified under three categories i.e. (i) 'Held to maturity' (ii) 'Available for sale' (iii) 'Held for trading' as per the RBI guidelines. 'Held to maturity' securities are carried at acquisition cost. A provision is made for diminution other than temporary. 'Available for sale' and 'Held for trading' securities are carried at the lower of cost and fair value determined by category of investments. All advances are classified under four categories i.e. (i) Standard Assets, (ii) Sub-standard Assets, (iii) Doubtful Assets and (iv) Loss Assets in accordance with the RBI guidelines. Specific provisions on advances (including restructured advances) are arrived at in accordance with the RBI guidelines / directives. In respect of Loans and Debentures / Bonds in the nature of an advance, where interest is not serviced, provision for depreciation is made as per the method applicable to Non-Performing Advances (Income Recognition and Classification norms). Provisions on Standard Assets portfolio is made as per the provisioning policy of the Company, which is higher than the general provision of 0.40% in accordance with the RBI guidelines. E. FIXED ASSETS AND INTANGIBLE ASSETS Fixed assets / Intangible assets are stated at cost of acquisition, including any cost attributable for bringing the asset to its working condition, less accumulated depreciation / amortisation. F. DEPRECIATION AND AMORTISATION Depreciation on Fixed Assets is provided on the written down value method, at the rates prescribed by Schedule XIV of the Companies Act, Depreciation on additions during the year is provided on a pro-rata basis. Assets costing less than Rs. 5,000 each are written off in the year of capitalisation. Intangible assets are amortised over a period of 3 years on straight line method. G. RETIREMENT BENEFITS (a) (b) (c) (d) H. INCOME-TAX The Company has taken a superannuation policy for future payment of superannuation. Annual contributions are made as determined by the insurance company. The Company has taken a group gratuity policy for future payment of gratuities. Annual contributions are made as determined by the insurance company, based on an actuarial valuation. The Company has provided for liability towards the encashment of leave salary on retirement on the basis of an actuarial valuation. The Company's contribution to Provident Fund is deposited with Regional Provident Fund Commissioner and is charged to Profit and Loss Account every year. The accounting treatment for income-tax in respect of the Company's income is based on the Accounting Standard 22 on 'Accounting for Taxes on Income' issued by the Institute of Chartered Accountants of India. The provision made for income-tax in the accounts comprises both, the current tax and deferred tax. The deferred tax assets and liabilities for the year, arising on account of timing differences, are recognised in the Profit and Loss Account and the cumulative effect thereof is reflected in the Balance Sheet. IDFC ANNUAL REPORT

94 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS I. REVENUE RECOGNITION (a) (b) (c) (d) (e) Interest and other dues are accounted on accrual basis. Dividend is accounted when the right to receive is established. Front end fees on processing of loans are recognised upfront as income. Premium on interest rate reduction is accounted on accrual basis over the residual life of the loan. Grants are accounted for on accrual basis. J. FOREIGN CURRENCY TRANSACTIONS Foreign currency transactions are accounted on the exchange rates prevailing at the date of the transaction. Foreign currency monetary items outstanding as at the Balance Sheet date are reported using the closing rate. Gains and losses resulting from the settlement of such transactions and translation of monetary assets and liabilities denominated in foreign currencies are recognised in the Profit and Loss Account. Premium in respect of forward contracts is accounted over the period of the contract. Forward contracts outstanding as at the Balance Sheet date are revalued at the closing rate. K. INTEREST RATE SWAPS Interest rate swaps classified as hedge are recorded on an accrual basis and these transactions are not marked to market. Any resultant gain or loss on termination of hedge swaps is amortised over the life of swap or underlying asset / liability whichever is short. Income or expenses on trade swaps are recorded on settlement date and are subjected to mark to market. Gain or loss on termination of trade swaps is recorded upfront. L. EMPLOYEE STOCK OPTION SCHEME The Company has formulated an Employee Stock Option Scheme (ESOS) in accordance with SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, The Scheme provides for grant of options to employees to acquire the equity shares of the Company that vest in a graded manner and that are to be exercised within a specified period. In accordance with the SEBI Guidelines, the excess, if any, of the closing market price on the day prior to the grant of the options under ESOS over the exercise price is amortised on a straight - line basis over the vesting period. 2. On May 16, 2005, the Company issued and allotted 2,453,512 equity shares of Rs. 10 each at a premium of Rs per share pursuant to Employees' Share Purchase Scheme. Further, on August 5, 2005, the Company issued and allotted equity shares of Rs. 10 each at a premium of Rs. 24 per share pursuant to the public issue in July 2005 of 403,600,000 equity shares comprising of a fresh issue of 120,000,000 equity shares and an offer for sale of 283,600,000 equity shares by the selling shareholders. The issued share capital increased from Rs.10, million to Rs. 11, million and an amount of Rs. 2, million (net of issue expenses) has been credited to Securities Premium Account. The proceeds of the issue have been utilised for general business purposes. 3. At the Extraordinary General Meeting held on May 9, 2005, the Company had introduced ESOS for its employees. In furtherance thereof, an aggregate of 12,698,517 options were granted to eligible employees at Rs per share. The option shall vest over a period of 3 years commencing after one year from the date of the grant. Of these aggregate options granted, 1,560,138 options have lapsed on resignation of employees and balance 11,138,379 options remains outstanding as on March 31, During the year the following investments were purchased and sold / redeemed: FACE VALUE COST BONDS NO. OF BONDS RUPEES RUPEES (in million) Allahabad Bank ,000, Bank of Baroda 50 50,000, Bank of India 1,050 1,050,000,000 1, Bank of Maharashtra ,000, Bharat Petroleum Corporation Limited ,000, Canara Bank ,000, Cholamandalam Investment & Finance Company Limited ,000, Citifinancial Consumer Finance India Limited 1,000 1,000,000, Corporation Bank ,000, Export Import Bank of India ,000,

95 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS 4. During the year the following investments were purchased and sold / redeemed: (continued) FACE VALUE COST BONDS NO. OF BONDS RUPEES RUPEES (in million) Government of India Oil Bonds 1,200 1,200,000,000 1, Housing Development Finance Corporation Limited 1,880 1,880,000,000 1, ICICI Bank Limited ,000, ICICI Securities Limited 1,100 1,100,000,000 1, Indian Oil Corporation Limited ,000, Indian Railway Finance Corporation Limited ,000, Industrial Development Bank of India ,000, Infrastructure Leasing & Financial Services Limited 50 50,000, LIC Housing Finance Limited ,000, National Bank for Agricultural and Rural Development ,000, Power Finance Corporation Limited ,000, Rabo India Limited 1,000 1,000,000,000 1, Rural Electrification Corporation of India Limited ,000, SREI Infrastructure Limited ,000, State Bank of India ,000, Sundaram Home Finance Limited ,000, Ultratech Cement Limited ,000, FACE VALUE COST EQUITY SHARES NO. OF SHARES RUPEES RUPEES (in million) GVK Power & Infrastructure Limited 23, , Royal Orchid Hotels Limited 33, , INFRASTRUCTURE LOANS - DEBENTURES REDEEMABLE CURRENT YEAR PREVIOUS YEAR NUMBER OF FACE VALUE COST COST NAME OF COMPANY DEBENTURES RUPEES RUPEES (in million) RUPEES (in million) Aircel Limited 2,739, Apollo Infrastructure Projects Finance Company Limited Asia-net Satellite Communications Limited 805 1,000, Bharti Mobile Limited ,000,000 1, , BPL Mobile Communications Limited 50 10,000, CESC Limited 67 10,000, Noida Toll Bridge Company Limited Tata Power Company Limited 2,080 1,000,000 1, , Tamilnadu Urban Development Fund 8.00 Taj Lands End Limited 12,381, , Vishaka Container Terminal Private Limited 24 10,000, , , IDFC ANNUAL REPORT

96 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS 6. MANAGERIAL REMUNERATION: CURRENT YEAR RUPEES (in million) PREVIOUS YEAR RUPEES (in million) (i) Salary # * (ii) Contribution to Provident and Other Funds (iii) Perquisites # Excludes provision for bonus. * Including Rs million to the former Managing Director Professional fees include remuneration to the Chairman amounting to Rs million (Previous Year Rs million) paid in terms of Central Government approval dated 11th December, 2003 under Section 309(4)/310 of the Companies Act, Sundry Creditors includes amount due to a Director Rs million (Previous Year Rs. Nil) 9. AUDITORS' REMUNERATION: CURRENT YEAR RUPEES (in million) PREVIOUS YEAR RUPEES (in million) Audit Fees Tax Audit Fees Taxation Services Other Services Service Tax Out of Pocket Expenses The above is excluding Rs million (Previous Year Rs. Nil) net of service tax of Rs million (Previous Year Rs. Nil) debited to Securities Premium Account paid for Other Services in connection with the Initial Public Offer. 10. EXPENDITURE IN FOREIGN CURRENCIES: CURRENT YEAR RUPEES (in million) PREVIOUS YEAR RUPEES (in million) Interest and Other Charges Nil Travelling expenses Professional Fees Nil Others EARNINGS IN FOREIGN CURRENCIES: Other Fees Nil Interest on Bank Deposits 2.91 Nil CURRENT YEAR PREVIOUS YEAR 12. PARTICULARS OF DIVIDEND REMITTED IN FOREIGN CURRENCIES : Type of Dividend Final Final Number of non-resident shareholders 9 9 Number of shares held by them 400,000, ,000,000 Dividend relating to the year Gross amount of dividend (Rs. in million) * * * The above includes an amount of Rs million remitted in Indian Rupees in respect of one non-resident shareholder. 94

97 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS 13. In respect of equity shares issued pursuant to Employees' Share Purchase Scheme, the Company paid dividend of Rs million for the year and tax on dividend of Rs million as approved by the shareholders at the Annual General Meeting held on June 16, The Company's main business is to provide finance for infrastructure projects. All other activities revolve around the main business. As such, there are no separate reportable segments as per Accounting Standard 17 on 'Segment Reporting' issued by the Institute of Chartered Accountants of India. Hence, no segment disclosure has been made relating to the treasury activity, which was given in the previous year. 15. RELATED PARTY DISCLOSURES UNDER ACCOUNTING STANDARD 18 n Relationships: I. Subsidiaries: Feedback First Urban Infrastructure Development Company Limited IDFC Private Equity Company Limited (Formerly IDFC Asset Management Company Limited) IDFC Trustee Company Limited II. Jointly Controlled Entities: Infrastructure Development Corporation (Karnataka) Limited Uttaranchal Infrastructure Development Company Limited III. Key Management Personnel: Dr. Rajiv B. Lall - Managing Director and CEO n The following transactions were carried out with the related parties in the ordinary course of business: CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) I. Subsidiaries: (a) Other services rendered IDFC Private Equity Company Limited Nil 0.19 (b) Purchase of Fixed Assets Feedback First Urban Infrastructure Development Company Limited Nil 0.10 II. Jointly Controlled Entities: (a) Other services rendered Infrastructure Development Corporation (Karnataka) Limited Nil 2.98 Uttaranchal Infrastructure Development Company Limited Nil 0.81 (b) Other services taken Infrastructure Development Corporation (Karnataka) Limited (c) Sale of Fixed Assets Infrastructure Development Corporation (Karnataka) Limited Nil 1.34 (d) Deputation charges recovered Infrastructure Development Corporation (Karnataka) Limited (e) Deputation charges paid Infrastructure Development Corporation (Karnataka) Limited 1.31 Nil (f) Balances outstanding as at the year end Payable Infrastructure Development Corporation (Karnataka) Limited 3.36 Nil III. Key Management personnel: Remuneration Sale of Fixed Asset 0.28 Nil IDFC ANNUAL REPORT

98 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS 16. In compliance with the Accounting Standard 22 relating to 'Accounting for Taxes on Income' issued by the Institute of Chartered Accountants of India, the Company has taken credit in the Profit and Loss Account towards deferred tax asset (net) on account of timing differences. The major components of deferred tax assets and liabilities arising on account of timing differences are: CURRENT YEAR PREVIOUS YEAR CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) RUPEES (in million) RUPEES (in million) Assets Assets Liabilities Liabilities (a) Depreciation Nil Nil (b) Provisions Nil Nil (c) Others Nil Nil Net Deferred Tax Asset INTERESTS IN JOINT VENTURES UNDER ACCOUNTING STANDARD 27: I. Names (a) Infrastructure Development Corporation (Karnataka) Limited (b) Uttaranchal Infrastructure Development Company Limited II. Description (a) Jointly Controlled Entity (b) Jointly Controlled Entity III. Proportion of ownership interest (a) 49.50% (b) 49.90% IV. Country of Incorporation (a) India (b) India V. Aggregate amounts of assets, liabilities, income and expenses related to the interest in the jointly controlled entities based on last audited accounts: INFRASTRUCTURE DEVELOPMENT CORPORATION UTTARANCHAL INFRASTRUCTURE DEVELOPMENT (KARNATAKA) LIMITED COMPANY LIMITED CURRENT YEAR PREVIOUS YEAR CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) RUPEES (in million) RUPEES (in million) (i) Assets (ii) Liabilities (iii) Income (iv) Expenses In accordance with the Accounting Standard 20 on 'Earning Per Share' issued by the Institute of Chartered Accountants of India: i. The Basic Earning Per Share has been calculated based on the Net Profit After Tax of Rs. 3, million (Previous Year Rs. 3, million) and weighted average number of shares during the year of 1,080,726,367 (Previous Year 1,000,000,000). ii. The reconciliation between the Basic and the Diluted Earning Per Share is as follows: CURRENT YEAR PREVIOUS YEAR RUPEES RUPEES Basic Earning Per Share Effect of outstanding Stock Options (0.03) Nil Diluted Earning Per Share

99 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS iii. The Basic Earning Per Share has been computed by dividing the Net Profit After Tax by the weighted average number of equity shares for the respective periods; whereas the Diluted Earning Per Share has been computed by dividing the Net Profit After Tax by the weighted average number of equity shares, after giving dilutive effect of the outstanding Stock Options for the respective periods. The relevant details as described above are as follows: CURRENT YEAR PREVIOUS YEAR Weighted average number of shares for computation of Basic Earning Per Share 1,080,726,367 1,000,000,000 Diluted effect of outstanding Stock Options 8,353,664 Nil Weighted average number of shares for computation of Diluted Earning Per Share 1,089,080,031 1,000,000,000 CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) 19. CONTINGENT LIABILITIES NOT PROVIDED FOR IN RESPECT OF : (a) Uncalled Liability on partly paid venture capital units 1, (b) Claims not acknowledged as debts in respect of Income-tax demands under appeal amount to (c) Bank guarantees issued on behalf of the Company (d) Guarantees issued: As a part of project assistance, the Company has also provided the following guarantees: 1. Financial Guarantees 5, , Performance Guarantees Risk Participation Facility Take Out Facility (e) Guarantee given on behalf of a third party Nil Expenditure on account of Salaries is after adjusting Rs million (Previous Year Rs million) recovered from a Jointly Controlled Entity. 21. Miscellaneous expenses include Provision for Wealth Tax amounting to Rs million (Previous Year Rs million) and Securities Transaction Tax amounting to Rs million (Previous Year Rs million). 22. Special Reserve has been created in terms of Section 36(1)(viii) of the Income-tax Act, 1961 out of the distributable profits of the Company. 23. Capital Reserve and Investment Fluctuation Reserve have been created in terms of RBI circular (Ref. DBS. FID. No. C9 / / , dated November 9, 2000). 24. Previous year's figures have been regrouped / rearranged wherever necessary to conform to the current year's classification. 25. The following additional information is disclosed in terms of RBI circular (Ref. No. DBOD.No.FID.FIC.2/ / dated August 13, 2005): A CURRENT YEAR PREVIOUS YEAR % % Capital (a) Capital to Risk Assets Ratio (CRAR) (i) Core CRAR (ii) Supplementary CRAR RUPEES (in million) RUPEES (in million) (b) The amount of subordinated debt raised and outstanding as Tier - II Capital 6, , (c) Risk Weighted Assets On Balance Sheet Items 117, , Off Balance Sheet Items 9, , IDFC ANNUAL REPORT

100 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS (d) The shareholding pattern as on the date of the Balance Sheet CURRENT YEAR PREVIOUS YEAR NO. OF SHARES % NO. OF SHARES % Government of India 261,400, ,000, Foreign Direct Investment 280,000, ,000, Foreign Institutional Investors 218,699, Banks 122,022, ,000, Indian Financial Institutions 78,918, ,000, Resident Individuals 111,453, Others 49,959, ,122,453, ,000,000, B CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) Asset quality and credit concentration (e) Total Net NPA Assets Nil Nil Total Net Loan Assets 101, , Percentage of net NPAs to net loans and advances Nil Nil (f) Amount and percentage of net NPAs under the The Company does The Company does prescribed asset classification categories not have any net NPAs not have any net NPAs AS ON MARCH 31, 2006 AS ON MARCH 31, 2005 RUPEES (in million) % TO TOTAL ASSETS RUPEES (in million) % TO TOTAL ASSETS Asset Classification (i) Standard Nil Nil (ii) Sub-standard Nil Nil (iii) Doubtful Nil Nil (iv) Loss Asset Nil Nil (g) (h) RUPEES (in million) RUPEES (in million) Amount of provisions made during the year towards Standard Assets, NPAs, Investments (other than those in the nature of an advance), and Income-tax. Provision for Standard Assets Provision for Sub-standard, Doubtful and Loss Assets (including provision for restructured assets) Provision for Investments Provision for Income-tax (net of Deferred Tax) Movement in net NPAs Opening Balance Nil Nil Additions during the year Nil Provisions during the year Nil Deductions / Adjustments during the year Nil Nil Closing balance Nil Nil 98

101 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS (i) Credit exposure as percentage to capital funds and as percentage to total assets in respect of: CURRENT YEAR PREVIOUS YEAR % TO CAPITAL % TO TOTAL % TO CAPITAL % TO TOTAL FUNDS EXPOSURE FUNDS EXPOSURE The largest single borrower The largest borrower group The 10 largest single borrowers No No No No No No No No No No The 10 largest borrower groups No No No No No No No No No No (j) Credit exposure to the five largest industrial sectors (if applicable) as percentage to total loan assets % TO TOTAL EXPOSURE % TO TOTAL EXPOSURE No. 1 - Energy No. 2 - Transportation No. 3 - Telecommunications and IT No. 4 - Commercial / Industrial No. 5 - Others C Liquidity (k) Maturity pattern of rupee assets and liabilities; and (l) Maturity pattern of foreign currency assets and liabilities IDFC ANNUAL REPORT

102 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS CURRENT YEAR RUPEES (in million) LESS THAN OR MORE THAN 1 YEAR MORE THAN 3 YEARS MORE THAN 5 YEARS MORE THAN TOTAL EQUAL TO 1 YEAR UP TO 3 YEARS UP TO 5 YEARS UP TO 7 YEARS 7 YEARS Rupee Assets 24, , , , , , Foreign Currency Assets Total Assets 24, , , , , , Rupee Liabilities 19, , , , , Foreign Currency Liabilities , , Total Liabilities 19, , , , , PREVIOUS YEAR RUPEES (in million) LESS THAN OR MORE THAN 1 YEAR MORE THAN 3 YEARS MORE THAN 5 YEARS MORE THAN TOTAL EQUAL TO 1 YEAR UP TO 3 YEARS UP TO 5 YEARS UP TO 7 YEARS 7 YEARS Rupee Assets 23, , , , , , Foreign Currency Assets Total Assets 23, , , , , , Rupee Liabilities 10, , , , , , Foreign Currency Liabilities Total Liabilities 10, , , , , , D Operating Results CURRENT YEAR PREVIOUS YEAR E (m) Interest income as a percentage to average working funds 7.42% 7.85% (n) Non-interest income as a percentage to average working funds 2.29% 2.50% (o) Operating profit as a percentage to average working funds 4.01% 4.59% (p) Return on average assets 3.59% 4.32% (q) Net profit per employee (Rs. in million) Definitions 1 Average working funds is the half yearly average of total assets during the year. 2 Operating Profits = Profits Before Tax. 3 Productivity Ratio is based on number of employees at the year end. RUPEES (in million) RUPEES (in million) Movement in the provisions I. Provisions for Non-Performing Assets (comprising loans, bonds and debenture in the nature of advance and inter-corporate deposits) (excluding provision for standard and restructured assets) (a) Opening balance as at the beginning of the financial year Add: Provision made during the year Less: Write off, write back of excess provision (b) Closing balance as at the close of the financial year II. Provision for depreciation in investments (c) Opening Balance as at the beginning of the financial year Add: (i) Provision made during the year (ii) Appropriation, if any, from Investment Fluctuation Reserve Account during the year Less: (i) Write back during the year (ii) Transfer, if any, to Investment Fluctuation Reserve Account (d) Closing balance as at the close of the financial year

103 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS F Restructured Accounts CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) RUPEES (in million) RUPEES (in million) FOR THE YEAR CUMULATIVE FOR THE YEAR CUMULATIVE Standard Assets subjected to restructuring 1, , , , Sub-standard Assets subjected to restructuring Nil Nil Nil Nil G H Assets sold to Securitisation Company / Reconstruction Company (a) Number of Accounts Nil Nil (b) Aggregate value (net of provisions) of accounts sold to SC / RC Nil Nil (c) Aggregate consideration Nil Nil (d) Additional consideration realised in respect of accounts transferred in earlier years Nil Nil (e) Aggregate gain / loss over net book value Nil Nil Derivatives (a) Structure and organisation for management of risk in derivative trading, the scope and nature of risk management, risk reporting and risk monitoring systems and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants: The Company enters into derivative transactions for trading or hedging purposes. The Investment Guidelines, Foreign Exchange and Derivative Dealing Policy ('the Policy') of the Company defines the frame-work for carrying out the Derivatives business and lays down the policies and processes adopted to measure, monitor and report risk arising from derivative transactions. The Investment committee is responsible for implementing the Policy. To effect this, the Investment committee: approves a new derivative product; determines appropriate limits for different derivative product within broad policy framework; and reviews the limit breaches and takes appropriate actions. (b) The Risk department of the Company functions independently of the Treasury and is responsible for oversight, measuring, reporting and monitoring derivative positions. The risk management methods generally applied are quantitative like counter party limits, deal sizes and stop loss limits. (c) Accounting policy: As per Significant Accounting Policies Note 1K (d) Quantitative Disclosures: CURRENT YEAR PREVIOUS YEAR RUPEES (in million) RUPEES (in million) Interest Rate Swaps Notional principal amount Hedge 23, Nil Trade Nil Nil Nature of swaps: Transactions were undertaken for hedging purpose / liability management in the nature of "fixed / floating" or "floating / fixed" based on market benchmarks such as GOI-Sec yields / LIBOR / MIBOR. Terms: The transactions are for maturities between 3-10 years. Quantification of the losses which would be incurred if the counter parties failed to fulfil their obligations under the agreements. Nil Nil Collateral: As per prevailing market practices, collateral is not insisted upon from the counter party. Nil Nil Credit Risk Concentration: Exposure to banks. 100% Nil Fair Value (419.64) Nil IDFC ANNUAL REPORT

104 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS CURRENT YEAR RUPEES (in million) PREVIOUS YEAR RUPEES (in million) I Credit Exposure Nil Likely impact of one percentage change in interest rate (100 * PV01) on hedge contracts (683.40) Nil Maximum and Minimum of 100 * PV01 observed during the year: On hedging Maximum (819.96) Nil Minimum Nil On trading Maximum (75.32) Nil Minimum Nil Nil In computing the likely impact of percentage change in interest rate (100 * PV01) certain estimates and assumptions have been made by the management which has been relied upon by the auditors. Interest Rate Derivatives Notional principal amount of exchange traded interest rate derivatives undertaken during the year. Nil Nil Notional principal amount of exchange traded interest rate derivatives outstanding as on 31st March, 2006 & Nil Nil Notional principal amount of exchange traded interest rate derivatives outstanding and not "highly effective". Nil Nil Mark-to-market value of exchange traded interest rate derivatives outstanding and not "highly effective". Nil Nil J Investment in Non Government Debt Securities A. Issuer categories in respect of investments made CURRENT YEAR RUPEES (in million) AMOUNT OF AMOUNT OF AMOUNT AMOUNT INVESTMENT "BELOW OF OF MADE THROUGH INVESTMENT UNRATED UNLISTED PRIVATE GRADE" SECURITIES SECURITIES SR. ISSUER AMOUNT PLACEMENT SECURITIES HELD HELD HELD 1 PSUs FIs 1, , Banks 1, , , Private Corporate 4, , , Subsidiaries / Joint Ventures Others 3, , , Provision held towards depreciation (63.20) Total 12, , ,

105 SCHEDULE 17 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS PREVIOUS YEAR RUPEES (in million) AMOUNT OF AMOUNT OF AMOUNT AMOUNT INVESTMENT "BELOW OF OF MADE THROUGH INVESTMENT UNRATED UNLISTED PRIVATE GRADE" SECURITIES SECURITIES SR. ISSUER AMOUNT PLACEMENT SECURITIES HELD HELD HELD 1 PSUs FIs Banks Private Corporate 1, , Subsidiaries / Joint Ventures Others 4, , Provision held towards depreciation (153.55) Total 7, , , B. Non-performing investments CURRENT YEAR PREVIOUS YEAR PARTICULARS RUPEES (in million) RUPEES (in million) Opening Balance Nil Additions during the year since 1st April Nil Reduction during the above period Nil Nil Closing Balance Total provisions held Deepak S. Parekh Chairman Rajiv B. Lall Managing Director & CEO L. K. Narayan Mahendra N. Shah Chief Financial Officer Company Secretary Mumbai April 29, 2006 IDFC ANNUAL REPORT

106 AND COMPANY'S GENERAL BUSINESS PROFILE BALANCE SHEET ABSTRACT (Submitted in terms of Part IV to the Companies Act, 1956) I. Registration Details Registration No State Code 1 8 Balance Sheet Date II. III. IV. Capital raised during the year (Amount in Rs. '000) Public Issue Rights Issue N I L Bonus Issue Private Placement N I L N I L Position of Mobilisation and Deployment of Funds (Amount in Rs. '000) Total Liabilities Total Assets SOURCES OF FUNDS Paid-up Capital Reserves and Surplus Unsecured Loans Subordinated Debt APPLICATION OF FUNDS Net Fixed Assets Investments Net Current Assets Infrastructure Loans Deferred Tax Asset Performance of the Company (Amount in Rs. '000) Total Income Total Expenditure Profit Before Tax Profit After Tax Earning per Share (in Rs.) Dividend % V. Generic Names of Principal Services of the Company (as per monetary terms) Item Code No. (ITC Code) N I L Product Description I N F R A S T R U C T U R E F I N A N C E Item Code No. (ITC Code) N I L Product Description F I N A N C I A L S E R V I C E S 104

107 PURSUANT TO SECTION 212 OF THE COMPANIES ACT, 1956 RELATING TO SUBSIDIARY COMPANIES STATEMENT IDFC PRIVATE EQUITY COMPANY FEEDBACK LIMITED FIRST URBAN (Formerly IDFC Asset IDFC TRUSTEE INFRASTRUCTURE Management COMPANY DEVELOPMENT NAME OF SUBSIDIARY COMPANIES Company Limited) LIMITED COMPANY LIMITED The financial year of the Subsidiary Companies ended on March 31, 2006 March 31, 2006 March 31, 2006 Number of shares in the Subsidiary Companies held by 49,400 49,400 21,000,200 Infrastructure Development Finance Company Limited shares of shares of shares of at the above date Rs. 10 each Rs. 10 each Rs. 10 each Holding Company's interest in percentage 98.80% 98.80% % The net aggregate of profits of the Subsidiary Companies so far as these concern the member of Infrastructure Development Finance Company Limited (i) dealt with in the accounts of Infrastructure Development Finance Company Limited amounted to: (a) (b) for subsidiaries' financial year ended on March 31, 2006 for previous financial years of the subsidiaries since these became subsidiaries of Infrastructure Development Finance Company Limited (ii) not dealt with in the accounts of Infrastructure Development Finance Company Limited amounted to: (a) (b) for subsidiaries' financial year ended on March 31, 2006 (Rupees in million) for previous financial years of the subsidiaries since these became subsidiaries of Infrastructure Development Finance Company Limited (Rupees in million) Deepak S. Parekh Chairman Rajiv B. Lall Managing Director & CEO L. K. Narayan Mahendra N. Shah Chief Financial Officer Company Secretary Mumbai April 29, 2006 IDFC ANNUAL REPORT

108 IDFC PRIVATE EQUITY COMPANY LIMITED (Formerly IDFC Asset Management Company Limited) IDFC PRIVATE EQUITY Board of Directors Dr. Vijay Kelkar Chairman Mr. Kishor Chaukar Mr. Jaithirth Rao Mr. N. S. Raghavan Mr. Dominic Price Dr. Rajiv B. Lall Mr. Vikram Limaye Auditors Price Waterhouse Chartered Accountants Bankers HDFC Bank Limited Registered Office 17, Vaswani Mansions, 3rd Floor, Dinshaw Vachha Road, Churchgate, Mumbai Tel.: Fax :

109 Directors' Report TO THE MEMBERS Your Directors have pleasure in presenting the Fourth Annual Report with the audited accounts for the year ended March 31, PRINCIPAL ACTIVITIES Your Company is the private equity arm of IDFC and manages the India Development Fund and IDFC Private Equity Fund II. During the year we raised our second fund - IDFC Private Equity Fund II from domestic and international investors. International investors invest through IDFC Private Equity (Mauritius) Fund II. As at March 31, 2006 the total corpus of our two funds amounted to Rs. 25,511 million. This remains the largest corpus of dedicated private equity funds focussed on infrastructure in India. All our funds are registered with the Securities and Exchange Board of India. During the year we made two exits - a full exit from Hotel Leelaventure Limited and a partial exit from Gujarat State Petronet Limited. Our consortium also won the bid for the Delhi International Airport. FINANCIAL RESULTS RUPEES (in million) FOR THE YEAR ENDED FOR THE YEAR ENDED MARCH 31, 2006 MARCH 31, 2005 Total Income Less: Total Expenses Profit before Tax Less: Provision for Tax Profit after Tax Add: Balance Brought Forward Total Available for Appropriation carried to Balance Sheet DIVIDEND Your Directors do not recommend any dividend for the year ended March 31, PARTICULARS REGARDING CONSERVATION OF ENERGY AND TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND EXPENDITURE Since the Company does not carry out any manufacturing activity, the particulars regarding conservation of energy, technology absorption and other particulars as required by the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 are not applicable. The Company has no earnings in Foreign Exchange. The particulars regarding foreign exchange expenditure are furnished at Item No. 6 in the Notes to Accounts. PARTICULARS OF EMPLOYEES' REMUNERATION The Company has seven employees in receipt of remuneration of more than Rs. 24 lakhs per annum. In accordance with the provisions of Section 217(2A) of the Companies Act, 1956 and the rules framed thereunder, the names and other particulars of employees are set out in the Annexure to the Directors' Report. DIRECTORS Mr. N. S. Raghavan retires by rotation at the ensuing Annual General Meeting and being eligible offers himself for reappointment. Mr. Dominic Price retires by rotation at the ensuing Annual General Meeting and being eligible offers himself for reappointment. The Board recommends their re-appointment as Directors of the Company. AUDITORS Price Waterhouse, Chartered Accountants retire as Auditors of the Company at the ensuing Annual General Meeting. Your Directors propose the appointment of M/s. Price Waterhouse, Chartered Accountants, Mumbai as Auditors of the Company for the financial year ending March 31, As required under the provisions of Section 224 of the Companies Act, 1956 the Company has obtained a written certificate from the Auditors proposed to be appointed to the effect that their appointment, if made, would be in conformity with the limits specified in the said section. The shareholders are requested to appoint the auditors and fix their remuneration. DEPOSITS The Company has not accepted any fixed deposits during the year under review. DIRECTORS' RESPONSIBILITY STATEMENT Based on the information and explanation furnished by the Company, the Directors confirm: n That in preparation of annual accounts, the applicable accounting standards have been followed; n that they have selected such accounting policies and applied them consistently and made judgements and IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

110 Directors' Report (continued) n n estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company as at March 31, 2006 and of the profit of the Company for the year ended on that date; 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; and that they have prepared the annual accounts on a going concern basis. APPRECIATION The Board wishes to thank the investors of both, the India Development Fund and IDFC Private Equity Fund II, the Ministry of Finance, the Reserve Bank of India and the Securities and Exchange Board of India for their support. The Board also places on record its appreciation for the sincere efforts of the staff. Mumbai April 13, 2006 On behalf of the Board of Directors Dr. Vijay Kelkar Chairman 108

111 Auditors Report TO THE MEMBERS OF IDFC PRIVATE EQUITY COMPANY LIMITED (FORMERLY IDFC ASSET MANAGEMENT COMPANY LIMITED) 1. We have audited the attached Balance Sheet of IDFC PRIVATE EQUITY COMPANY LIMITED (Formerly IDFC Asset Management Company Limited) (the Company) as at March 31, 2006, the related Profit and Loss Account for the year ended on that date annexed thereto, and the Cash Flow Statement for the year ended on that date which we have signed under reference to this report. These financial statements are the responsibility of the Management of the Company. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We have conducted our audit in accordance with 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 misstatement. 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 presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. 3. We draw attention to Schedule 11 Note 5(a) regarding managerial remuneration aggregating Rs. 2,160,492 charged in these financial statements for which the approval of the Central Government of India is awaited. 4. In our opinion and to the best of our information and according to the explanations given to us, the said financial statements together with the notes thereon and attached thereto give in the prescribed manner the information required by the Companies Act, 1956 of India (the Act), and give, a true and fair view in conformity with the accounting principles generally accepted in India: (a) in the case of the Balance Sheet of the state of affairs of the Company as at March 31, 2006; (b) in the case of the Profit and Loss Account of the profit for the year ended on that date; and (c) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date. 5. 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. 6. In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books. 7. The Balance Sheet and the Profit and Loss Account dealt with by this report are in agreement with the books of account. 8. In our opinion, the financial statements dealt with by this report comply with the accounting standards referred to in sub-section (3C) of Section 211 of the Act. 9. On the basis of written representations received from the Directors of the Company as on March 31, 2006 and taken on record by the Board of Directors of the Company, none of the Directors of the Company is disqualified as on March 31, 2006 from being appointed as a director in terms of clause (g) of sub-section (1) of Section 274 of the Act. 10. As required by the Companies (Auditor s Report) Order, 2003, as amended by the Companies (Auditor s Report) (Amendment) Order, 2004 issued by the Central Government of India in terms of sub-section (4A) of Section 227 of the Act and on the basis of such checks of the books and records of the Company as we considered appropriate and according to the information and explanations given to us, we further report that : (i) (a) The Company has maintained proper records to show full particulars including quantitative details and situation of fixed assets. (b) The fixed assets of the Company have been physically verified during the year by the Management and no material discrepancies between the book records and the physical inventory have been noticed. (c) In our opinion a substantial part of the fixed assets has not been disposed off by the Company during the year. (ii) (a) The Company has not granted any loans, secured or unsecured, to companies, firms or other parties covered in the register maintained under Section 301 of the Act. (b) The Company has not taken any loans secured or unsecured from companies, firms or other IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

112 Auditors Report (continued) parties covered in the register maintained under Section 301 of the Act. (iii) In our opinion and according to the information and explanations given to us, there is an adequate internal control system commensurate with the size of the Company and the nature of its business in respect of purchase of fixed assets and sale of services. Further on the basis of our examination of the books of account and according to the information and explanations given to us, we have not come across nor have we been informed of any instance of major weaknesses in internal control procedures. (iv) In our opinion and according to the information and explanations given to us, there were no transactions during the year that need to be entered into the register in pursuance of Section 301 of the Act. (v) The Company has not accepted any deposits from the public under the provisions of Sections 58A and 58AA of the Act and the rules framed thereunder. (vi) In our opinion, the Company s present internal audit system is commensurate with its size and nature of business. (vii) (a) According to the books of account and the records as produced and examined by us in accordance with generally accepted auditing practices in India and also management representations in our opinion the Company is generally regular in depositing undisputed statutory dues in respect of provident fund, investor education and protection fund, employees state insurance, income-tax, sales-tax, wealth tax, service tax, customs duty, excise duty, cess and other statutory dues as applicable with the appropriate authorities in India. (b) According to the information and explanations given to us as at March 31, 2006 there are no disputed dues in respect of sales tax, income-tax, customs duty, wealth-tax, service tax, excise duty and cess. (viii) The Company is trading in units of mutual funds for which proper records have been maintained of the transactions and timely entries have been made therein. All securities have been held by the Company in its own name or the name of its nominees except to the extent of the exemption granted under Section 49 of the Act. (ix) During the course of examination of the books of account and records of the Company carried out in accordance with the generally accepted auditing practices in India, we have not come across any fraud on or by the Company, noticed or reported during the year, nor have we been informed of such case by the Management. (x) The other clauses of the Companies (Auditor s Report) Order, 2003, as amended by the Companies (Auditor s Report) (Amendment) Order, 2004 issued by the Central Government of India were not applicable to the Company during the financial year. Mumbai April 13, 2006 K. H. Vachha Partner (Membership No. F/30798) For and on behalf of Price Waterhouse Chartered Accountants 110

113 AS AT MARCH 31, 2006 BALANCE SHEET MARCH 31, 2006 MARCH 31, 2005 SCHEDULE RUPEES RUPEES SOURCES OF FUNDS Shareholders' Funds Capital 1 500, ,000 Reserves and Surplus 2 207,652,795 69,358,858 TOTAL 208,152,795 69,858,858 APPLICATION OF FUNDS Fixed Assets 3 Gross Block 15,417,986 10,329,141 Less: Depreciation 8,268,763 5,252,034 Net Block 7,149,223 5,077,107 Investments 4 100, ,000 Deferred Tax Asset (Net) 1,779, ,867 (Refer Schedule 11 Note 2) Current Assets, Loans and Advances Sundry Debtors 5 165,062,281 27,402 Interest Accrued on Term Deposits with Banks 209, ,822 Cash and Bank Balances 6 87,670, ,573,393 Loans and Advances 7 126,602,454 56,708, ,543, ,430,467 Less: Current Liabilities and Provisions 8 Liabilities 59,911,437 57,634,207 Provisions 120,508,541 42,884, ,419, ,518,583 Net Current Assets 199,123,906 63,911,884 TOTAL 208,152,795 69,858,858 Notes to the Financial Statements 11 The Schedules referred to above form an integral part of Balance Sheet This is the Balance Sheet referred to in our report of even date K. H. Vachha Partner For and on behalf of Dr. Vijay Kelkar Dr. Rajiv B. Lall Price Waterhouse Chairman Director Chartered Accountants Mumbai April 13, 2006 IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

114 FOR THE YEAR ENDED MARCH 31, 2006 PROFIT AND LOSS ACCOUNT APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE RUPEES RUPEES INCOME Management Fees (Gross) 286,433,711 98,796,560 (Tax deducted at source Rs. 7,303,089, Previous year Rs. 5,681,680) [Refer Schedule 11 Note 1(b)] Gains from Redemption of Current Investments 3,807,190 2,969,839 Interest on Income Tax Refund 544,932 7,508 Interest on Term Deposits with Banks (Gross) 841, ,822 (Tax deducted at source Rs. 201,211, Previous year Rs. Nil) Reimbursement of Fund Raising Expenses 1,089,539 TOTAL 292,716, ,894,729 EXPENDITURE Employee Costs 9 42,720,790 27,885,436 Administrative and Other Expenses 10 31,781,039 16,929,167 Depreciation 3,330,706 3,110,549 TOTAL 77,832,535 47,925,152 Profit Before Taxation 214,884,138 53,969,577 Provision for Taxation Current Tax [including Rs. 200,000 (Previous year Rs. Nil) for earlier year] 76,200,000 20,900,000 Deferred Tax [Refer Schedule 11 Notes 1(g) and 2] (1,009,799) (717,144) Fringe Benefit Tax 1,400,000 Profit After Taxation 138,293,937 33,786,721 Profit and Loss Account Balance Brought Forward 69,358,858 35,572,137 Profit and Loss Account Balance Carried to Balance Sheet 207,652,795 69,358,858 EARNING PER SHARE 2, Basic and Diluted (Face Value Rs. 10) Notes to The Financial Statements 11 The Schedules referred to above form an integral part of the Profit and Loss Account This is the Profit and Loss Account referred to in our report of even date K. H. Vachha Partner For and on behalf of Dr. Vijay Kelkar Dr. Rajiv B. Lall Price Waterhouse Chairman Director Chartered Accountants Mumbai April 13,

115 FOR THE YEAR ENDED MARCH 31, 2006 CASH FLOW STATEMENT FOR THE YEAR ENDED FOR THE YEAR ENDED MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES CASH FLOW FROM OPERATING ACTIVITIES Net Profit Before Taxation 214,884,138 53,969,577 Adjustments for: Loss on Sale of Fixed Assets 106,730 Depreciation 3,330,706 3,110,549 Operating Profit Before Working Capital Changes 218,321,574 57,080,126 (Increase) / Decrease in Receivables (165,034,879) 547,940 (Increase) / Decrease in Other Assets (88,195) (120,822) (Increase) / Decrease in Loans and Advances (9,518,586) (372,099) (Increase) / Decrease in Current Investments 58,303,771 Increase / (Decrease) in Current Liabilities and Provisions 3,701,395 14,385,898 Direct Taxes Paid (net of refund of taxes) (61,775,018) (22,856,039) Net Cash From / (Used In) Operating Activities A (14,393,709) 106,968,775 Purchase of Fixed Assets (5,874,552) (312,146) Proceeds from Sale of Fixed Assets 365,000 Net Cash Used In Investing Activities B (5,509,552) (312,146) Net Increase / (Decrease) in Cash and Cash Equivalents A+B (19,903,261) 106,656,629 Cash and Cash Equivalents Beginning of the Year 107,573, ,764 Cash and Cash Equivalents End of the Year 87,670, ,573,393 (19,903,261) 106,656,629 Notes: 1. Cash and Cash Equivalents include the following: Balances with Scheduled Banks: In Current Account 3,664,400 12,567,373 In Deposit Account 84,000,000 95,000,000 Cash Equivalents 5,732 6, The above Cash Flow Statement has been prepared under the "Indirect Method" set out in Accounting Standard - 3 on Cash Flow Statements, issued by the Institute of Chartered Accountants of India. 87,670, ,573,393 This is the Cash Flow Statement referred to in our report of even date K. H. Vachha Partner For and on behalf of Dr. Vijay Kelkar Dr. Rajiv B. Lall Price Waterhouse Chairman Director Chartered Accountants Mumbai April 13, 2006 IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

116 BALANCE SHEET AS AT MARCH 31, 2006 AND THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2006 SCHEDULES ANNEXED TO AND FORMING A PART OF THE MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 1 RUPEES RUPEES SHARE CAPITAL Authorised: 5,000,000 Equity Shares of Rs.10 each 50,000,000 50,000,000 Issued, Subscribed and Paid-up: 50,000 Equity Shares of Rs.10 each 500, ,000 (Of the above 49,400 Equity Shares are held by Infrastructure Development Finance Company Limited) 500, ,000 MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 2 RUPEES RUPEES RESERVES AND SURPLUS Profit and Loss Account 207,652,795 69,358, ,652,795 69,358,858 SCHEDULE 3 FIXED ASSETS (Refer Schedule 11 - Note 1(c)) RUPEES COST DEPRECIATION NET BOOK VALUE AS AT ADDITIONS DEDUCTIONS AS AT UP TO CHARGE ON DEDUCT- AS AT AS AT AS AT APRIL 1, DURING THE DURING THE MARCH 31, APRIL 1, FOR THE IONS DURING MARCH 31, MARCH 31, MARCH 31, PARTICULARS 2005 YEAR YEAR YEAR THE YEAR Leasehold Improvements 4,682,632 2,328,197 7,010,829 3,132,266 2,208,185 5,340,451 1,670,378 1,550,366 Computers 2,497, ,842 3,470,124 1,283, ,679 1,953,800 1,516,324 1,214,161 Office Equipments 2,023,111 1,384,851 3,407, , , ,979 2,672,983 1,595,695 Vehicles 785,707 1,085, ,707 1,085, ,977 93, ,977 93, , ,730 Furniture and Fixtures 340, , ,411 95,254 50, , , ,155 Total 10,329,141 5,874, ,707 15,417,986 5,252,034 3,330, ,977 8,268,763 7,149,223 5,077,107 Previous year 10,016, ,146 10,329,141 2,141,485 3,110,549 5,252,034 MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 4 RUPEES RUPEES INVESTMENTS [Refer Schedule 11 - Notes 1(d) and 3] Non-Trade - Long Term 1,000 Class B Units of IDFC Infrastructure Fund - India Development Fund 100, ,000 of Rs. 100 each fully paid-up 100, ,

117 MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 5 RUPEES RUPEES SUNDRY DEBTORS (Unsecured and considered good) Outstanding For Over Six Months 165,062,281 Others 27, ,062,281 27,402 MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 6 RUPEES RUPEES CASH AND BANK BALANCES Cash in Hand 5,732 6,020 Balance with Scheduled Banks In Current Account 3,664,400 12,567,373 In Term Deposit 84,000,000 95,000,000 87,670, ,573,393 MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 7 RUPEES RUPEES LOANS AND ADVANCES (Unless Otherwise Stated Unsecured and Considered Good) Advances Recoverable in Cash or in Kind or for Value to be Received 4,490,336 92,250 Deposits 7,074,149 1,953,649 Advance Tax and Tax Deducted at Source 115,037,969 54,662, ,602,454 56,708,850 MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 8 RUPEES RUPEES CURRENT LIABILITIES AND PROVISIONS Current Liabilities Management Fees Received in Advance 45,920,663 48,362,237 Sundry Creditors * 13,990,774 9,271,970 * There are no dues to small scale industrial undertakings * There are no amounts due and outstanding to be credited to Investor Education and Protection Fund 59,911,437 57,634,207 Provisions Gratuity 1,378, ,000 Leave Encashment 968, ,376 Taxation 118,162,000 41,962, ,508,541 42,884, ,419, ,518,583 IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

118 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 9 RUPEES RUPEES EMPLOYEE COSTS Salaries and Allowances 37,550,324 24,960,659 Contribution to Provident and Other Funds 2,190,467 1,314,456 Gratuity 815, ,000 Staff Welfare 2,164,999 1,252,321 42,720,790 27,885,436 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 10 RUPEES RUPEES ADMINISTRATIVE AND OTHER EXPENSES Business Centre 2,526,968 1,440,000 Rates and Taxes 88,105 84,327 Electricity 603, ,909 Office Maintenance 635, ,045 Travelling, Motor Car and Conveyance 7,915,446 4,136,681 Printing and Stationery 1,216, ,909 Communication 1,449, ,016 Conference 1,128,438 1,119,097 Professional Fees 5,559,648 1,477,410 Commission to Director [Refer Schedule 11 Note 5(a)] 2,160, ,226 Directors' Fees 180, ,000 Insurance 85,716 71,358 Brokerage 165,300 26,448 Membership and Subscription 869, ,806 Donation 4,204,000 2,000,000 Repairs and Maintenance - Others 308, ,442 Auditors Remuneration Audit Fees 450, ,000 Other Services 200, ,000 Out of Pocket Expenses 9,965 5,555 Fund Raising Expenses 1,089,539 Loss on Sale of Fixed Assets 106,730 Miscellaneous Expenses 1,918,166 1,259,399 31,781,039 16,929,

119 SCHEDULE 11 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (a) (b) (c) (d) (e) (f) (g) BASIS OF ACCOUNTING The financial statements have been prepared under the historical cost convention on an accrual basis and comply with the Accounting Standards referred to in Section 211(3C) of the Companies Act, REVENUE RECOGNITION The Management fees accrue from the date of initial closing upto the date of winding up of the Funds, as under: (a) In accordance with the Investment Management Agreement dated December 03, 2002 between IDFC Trustee Company Limited [being the first trustee of IDFC Infrastructure Fund - India Development Fund ("Fund")] and IDFC Private Equity Company Limited (Formerly, IDFC Asset Management Company Limited) ("Investment Manager") and Deed of Variation dated July 20, 2004 between IDBI Trusteeship Services Limited and the Investment Manager in respect of the Fund, an annual investment management fee as stipulated in the Private Placement Memorandum and Contribution Agreement of the Fund is payable to the Investment Manager for managing the Fund. (b) In accordance with the Investment Management Agreement dated May 09, 2005 and the amended and restated Investment Management Agreement dated March 31, 2006 between IDFC Trustee Company Limited and the Investment Manager in respect of IDFC Infrastructure Fund 2 - IDFC Private Equity Fund II ("Fund II"), an annual investment management fee as stipulated is payable to the Investment Manager for managing Fund II. In addition, the Investment Manager shall be entitled to recover from the Fund and Fund II, any other tax or duty (other than income tax) which is or may become leviable under applicable law on the fees payable to the Investment Manager. FIXED ASSETS AND DEPRECIATION i. Fixed assets are stated at their original cost of acquisition, less accumulated depreciation. ii. Depreciation on fixed assets is provided on the written down value method, at the rates prescribed by Schedule XIV of the Companies Act, Depreciation on additions and disposals of fixed assets during the year is being provided on a pro-rata basis. Leasehold improvements are depreciated over the primary period of the lease. iii. Assets individually costing less than Rs. 5,000 are charged off to the Profit and Loss Account in the year of purchase / acquisition. INVESTMENTS Long term investments are valued at cost except where there is a diminution in value other than temporary in which case the carrying value is reduced to recognise the decline. Current investments are valued at lower of cost or market value. Profit / loss on sale of current investments is calculated based on cost calculated on first in first out method. RETIREMENT BENEFITS Retirement benefits to employees comprise contributions to provident fund, superannuation fund and gratuity. The provident fund is a defined contribution scheme. The Company makes contributions to the Employees Superannuation Scheme, a defined benefit scheme of the Life Insurance Corporation of India. Gratuity is accrued based on an actuarial valuation at the financial year-end. Provision for leave encashment is being made on accrual basis. OPERATING LEASES Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the Profit and Loss Account, on a straight-line basis, over the lease term. DEFERRED TAX Deferred tax is recognised, subject to the consideration of prudence in respect of deferred tax asset, on timing differences, being the differences between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

120 SCHEDULE 11 (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS 2. DEFERRED TAXATION The deferred tax balances are set out below: MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES Deferred Tax Asset Miscellaneous Expenditure (to the extent not written off or adjusted) 1,683 3,659 Provision for Leave Encashment 326, ,505 Provision for Gratuity 463, ,016 Depreciation 988, ,931 Municipal Taxes 1,756 Total 1,779, , PURCHASE AND REDEMPTION OF INVESTMENTS The Company has purchased and redeemed the following investment during the year Purchase (units) Redemption (units) HDFC Mutual Fund - HDFC Liquid Fund - Growth Option 18,612, ,612, OPERATING LEASES Future minimum lease payments under non-cancellable operating leases are as follows: AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 PARTICULARS RUPEES RUPEES Not later than one year 3,749,333 2,277,000 Later than one year and not later than five years 4,314, ,000 Later than five years Nil Nil Lease payments recognised in the Profit and Loss Account for the year is Rs. 3,269,710 (Previous year: Rs. 1,564,000). The Company has interest free security deposits of Rs. 7,050,000 (Previous year: Rs. 1,900,000). 5. MANAGERIAL REMUNERATION (a) Directors' Remuneration: APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES Commission to Non Whole-time Director 2,160,492* 699,226* 2,160, ,226 *Includes payments made by the Company to third parties Rs. 1,560,492 (Previous year Rs. 404,065). The above remuneration is in accordance with the resolution passed by the shareholders at the extraordinary general meeting of the Company held on November 18, Approval of the Central Government for the current year remuneration is awaited. 118

121 SCHEDULE 11 (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (b) Computation of net profits in accordance with Section 198 read with Section 309(5) of the Companies Act, 1956 (the Act) for the year ended March 31, APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES Profit Before Taxation as per Profit and Loss Account 214,884,138 53,969,577 Add: Directors' Remuneration 2,160, ,226 Directors' Fees 180, ,000 Loss on sale of fixed assets 106,730 Depreciation as per Profit and Loss Account 3,330,706 3,110, ,662,066 57,889,352 Less : Depreciation as per Section 350 of the Act 3,330,706 3,110,549 Net Profit 217,331,360 54,778,803 Maximum Commission to Non Whole-time 3% 6,519,940 1,643,364 Maximum Commission prorated for the period October 04, 2004 to March 31, ,924 Commission payable restricted to 2,160, , EXPENDITURE IN FOREIGN CURRENCY (ON PAYMENT BASIS) APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES Travel 69, ,500 Training 468, ,928 Sponsorship 302,713 87,960 Professional Fees 16,135 Membership and Subscription 545,828 Books and Periodicals 24, SEGMENT INFORMATION The Company is an asset management company engaged in managing venture capital funds registered with the Securities and Exchange Board of India. During the year the Company was engaged in only one business segment and no geographical segments, therefore, these financial statements pertain to one business segment. 8. RELATED PARTY DISCLOSURES Relationships I II Holding Company Infrastructure Development Finance Company Limited Associates IDFC Trustee Company Limited Feedback First Urban Infrastructure Development Company Limited IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

122 SCHEDULE 11 (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS III Key Management Personnel Mr. Luis Miranda - President and CEO Mr. Prakash Karnik - Executive Vice President (from January 02, 2006) Ms. Rupa Vora - Chief Financial Officer Mr. Darius Pandole - Chief Operating Officer (upto November 30, 2005) The following transactions were carried out with the related parties in the ordinary course of business: APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 PARTICULARS RUPEES RUPEES KEY MANAGEMENT PERSONNEL (a) Sale of Fixed Asset to Mr. Luis Miranda 365,000 (b) Remuneration * Mr. Luis Miranda 6,227,845# 7,427,395 Mr. Darius Pandole 3,535,009# 7,406,740 Mr. Prakash Karnik 1,925,648# Ms. Rupa Vora 2,844,226# 3,583,254 * Excludes gratuity liability # Excludes provision for bonus 9. SCHEDULE VI - PART II Information with regard to other matters specified in paragraphs 4C and 4D of Part II of Schedule VI of the Companies Act, 1956 is either nil or not applicable to the Company for the year ended March 31, SCHEDULE VI - PART IV Refer Annexure for additional information pursuant to Part IV of Schedule VI of the Companies Act, CHANGE IN NAME During the year the name of the Company has changed from IDFC Asset Management Company Limited to IDFC Private Equity Company Limited with effect from October 25, Necessary approvals for change in name have been received by the Company. 12. PREVIOUS YEAR'S FIGURES Previous year's figures have been regrouped / rearranged wherever necessary. Signatures to Schedules 1 to 11 forming part of the financial statements. The Schedules referred to above form an integral part of the financial statements K. H. Vachha Partner For and on behalf of Dr. Vijay Kelkar Dr. Rajiv B. Lall Price Waterhouse Chairman Director Chartered Accountants Mumbai April 13,

123 AND COMPANY'S GENERAL BUSINESS PROFILE BALANCE SHEET ABSTRACT (Submitted in terms of Part IV to the Companies Act, 1956) I. Registration Details Registration No. U M H P L C State Code 1 1 Balance Sheet Date II. Capital raised during the year (Amount in Rs. '000) Public Issue Rights Issue N I L N I L Bonus Issue Private Placement N I L N I L III. Position of Mobilisation and Deployment of Funds (Amount in Rs. '000) Total Liabilities Total Assets SOURCES OF FUNDS Paid - up Capital Reserves and Surplus Secured Loans Unsecured Loans N I L N I L APPLICATION OF FUNDS Net Fixed Assets Investments Net Current Assets Miscellaneous Expenditure N I L Deferred Tax Asset (Net) IV. Performance of the Company (Amount in Rs. '000) Turnover / Income Total Expenditure Profit Before Tax Profit After Tax Earning per Share (in Rs.) Dividend % N I L V. Generic Names of Principal Services of the Company (as per monetary terms) Item Code No. (ITC Code) N I L Product Description A S S E T M A N A G E M E N T Item Code No. (ITC Code) N I L Product Description I N V E S T M E N T A D V I S O R Y S E R V I C E S IDFC PRIVATE EQUITY COMPANY LIMITED IDFC ANNUAL REPORT

124 IDFC TRUSTEE COMPANY LIMITED Board of Directors Mr. A. K. T. Chari Mr. Urjit R. Patel Mr. Mahendra N. Shah Auditors B. S. Mehta & Co. Chartered Accountants Bankers HDFC Bank Ltd. Registered Office Ramon House, H.T. Parekh Marg, 169, Backbay Reclamation, Mumbai Tel.: Fax :

125 Directors' Report TO THE MEMBERS Your Directors have pleasure in presenting the Fourth Annual Report with the audited accounts for the period ended March 31, FINANCIAL RESULTS The Company has made a Profit Before Tax of Rs. 510,443 and Rs. 170,132 has been provided for taxes. DIVIDEND The Directors do not recommend any dividend for the year ended March 31, PARTICULARS OF EMPLOYEES' REMUNERATION The Company had no employees on its payroll as on March 31, The provisions of Section 217(2A) of the Companies Act, 1956 are consequently not applicable. PARTICULARS REGARDING CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND EXPENDITURE Since the Company does not carry out any manufacturing activity and has no dealings in foreign exchange, the particulars in the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 are not applicable. AUDITORS B.S. Mehta & Co., Chartered Accountants, will retire as auditors at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment. DEPOSITS The Company has not accepted any fixed deposits during the year under review. DIRECTORS' RESPONSIBILITY STATEMENT The Directors confirm : that in preparation of annual accounts, the applicable accounting standards have been followed; that they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company as at March 31, 2006 and of the profit for the year ended on that date; 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; and that they have prepared the annual accounts on a going concern basis. APPRECIATION The Directors wish to place on record their appreciation to employees of IDFC for the services provided to the Company. On behalf of the Board of Directors A. K. T. Chari Urjit R. Patel Mumbai April 13, 2006 Director Director IDFC TRUSTEE COMPANY LIMITED IDFC ANNUAL REPORT

126 Auditors Report TO THE MEMBERS OF IDFC TRUSTEE COMPANY LIMITED 1. We have audited the attached Balance Sheet of IDFC TRUSTEE COMPANY LIMITED ("the Company") as at March 31, 2006, the annexed Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on that date, which we have signed under reference to this report. 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 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 misstatement. 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 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 ("the Order") issued by the Company Law Board in terms of Section 227(4A) of the Companies Act, 1956 ("the Act") and on the basis of such checks as we considered appropriate, we annex hereto a statement on the matters specified in paragraph 4 of the said Order, to the extent applicable. 4. Further to our comments in the Annexure referred to above, we report that: (a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit; (b) In our opinion, proper books of account as required by law, have been kept by the Company, so far as appears from our examination of such books; (c) The Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report are in agreement with the books of account; (d) In our opinion, the said Balance Sheet, Profit and Loss Account and Cash Flow Statement comply with the Accounting Standards referred to in Section 211(3C) of the Act, to the extent applicable. (e) On the basis of written representations / information received from Directors as on March 31, 2006 and taken on record by the Board of Directors, none of the Directors are prima facie, disqualified from being appointed as a Director in terms of clause (g) of sub-section (1) of Section 274 of the Act. (f) In our opinion and to the best of our information and according to the explanations given to us, the accounts read together with the notes thereon, give the information required by the Act in the manner so required and give a true and fair view: (i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2006; (ii) in the case of the Profit and Loss Account, of the profit for the year ended on March 31, 2006; and (iii) in the case of the Cash Flow Statement, of the cash flow for the year ended on March 31, For B. S. Mehta & Co. Chartered Accountants H. G. Buch Partner Mumbai April 13, 2006 (Mem. No ) 124

127 Annexure to the Auditors' Report STATEMENT REFERRED TO IN PARAGRAPH 3 OF OUR REPORT TO THE MEMBERS OF IDFC TRUSTEE COMPANY LIMITED i. The Company does not have any fixed assets and hence items (i) (a), (b), & (c) of paragraph 4 of the Order are not applicable. ii. The nature of the Company's activities is such that requirements of items (ii), (vii) and (viii) of paragraph 4 of the Order are not applicable. iii. a. The Company has not granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under Section 301 of the Act. b. Accordingly, the information required at items (iii) (b), (c) & (d) of paragraph 4 of the Order is not provided. c. The Company has not taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained under Section 301 of the Act. d. Accordingly, the information required at items (iii) (f) & (g) of paragraph 4 of the Order is not provided. iv. The Company has not purchased any inventory or fixed assets nor sold any goods during the year. In respect of services rendered during the year it has adequate internal control system commensurate with its size and the nature of its business. v. There are no transactions exceeding Rs. 5 lakhs in respect of any party entered into during the year that need to be entered into a register in pursuance of Section 301 of the Act. Accordingly, the information required at items (v) (a) & (b) of paragraph 4 of the Order is not provided. vi. The Company has not accepted any deposits from public during the year. vii. The Company does not have any employee and hence the provisions of item (ix) (a) of paragraph 4 of the Order in respect of statutory dues of Provident Fund, Employees State Insurance do not apply. No undisputed amounts in respect of Investor Education and Protection Fund, Income tax, Sales tax, Wealth tax, Service tax, Custom duty, Excise duty, Cess and any other statutory dues are outstanding at the year end. viii. The Company is not registered for a period of not less than five years and accordingly the question of examining its accumulated losses at the end of the financial year to be less than 50 per cent of its net worth does not arise. The Company has not incurred cash loss in the current financial year and in the immediately preceding financial year. ix. The Company has not borrowed any sums during the year and hence does not have any dues payable to a financial institution, a bank or debenture holders. x. The Company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other securities. xi. a. The provisions of any special statute applicable to chit fund / nidhi / mutual fund / societies do not apply to the Company. b. Accordingly, the information required at items (xiii) (a), (b), (c) & (d) of paragraph 4 of the Order is not provided. xii. The Company has not dealt or traded in shares, securities, debentures and other investments. The Company does not hold any shares, securities, debentures and other investments. xiii. As informed to us, the Company has not given any guarantee for loans taken by others from banks or financial institutions. xiv. The Company has not taken any term loans. xv. The Company has not raised any funds on short term basis. xvi. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under Section 301 of the Act. xvii. The Company has not issued any debentures. xviii.the Company has not raised any money by public issue. xix As informed to us and on the basis of information available with us, no fraud on or by the Company has been noticed or reported during the year. For B. S. Mehta & Co. Chartered Accountants H. G. Buch Partner Mumbai April 13, 2006 (Mem. No ) IDFC TRUSTEE COMPANY LIMITED IDFC ANNUAL REPORT

128 AS AT MARCH 31, 2006 BALANCE SHEET SCHEDULE AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 RUPEES RUPEES RUPEES SOURCES OF FUNDS Shareholders' Funds Share Capital 1 500, ,000 Reserves and Surplus Profit and Loss Account 413,461 75, , ,126 APPLICATION OF FUNDS Deferred tax Asset (See Schedule 5 Note 4) 1,683 3,659 Current Assets, Loans & Advances Cash & Bank Balances 2 572, ,906 Loans and Advances 3 591,410 15,790 1,164, ,696 Less: Current Liabilities & Provisions Current Liabilities 4 62,923 15,979 Provision for tax 189,382 19, ,305 35,229 Net Current Assets 911, , , ,126 Notes to the Financial Statements 5 The Schedules referred to herein form an integral part of the Balance Sheet This is the Balance Sheet referred to in our report of even date For and on behalf of B. S. Mehta & Co. Chartered Accountants H. G. Buch A. K. T. Chari Urjit R. Patel Partner Director Director Mumbai April 13,

129 FOR THE YEAR ENDED MARCH 31, 2006 PROFIT AND LOSS ACCOUNT SCHEDULE APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES INCOME Trusteeship Fees 506,849 45,416 (TDS Rs. 188,007; Previous Year Rs. 2,328) Interest on Fixed Deposit 27,436 26,439 (TDS Rs. 5,899; Previous Year Rs. 5,296) 534,285 71,855 EXPENDITURE Payment to Auditors Audit Fees 11,224 11,020 For Other Services 9,918 4,959 Filing Fees 2, ,842 16,279 Profit Before Tax 510,443 55,576 Provision for Taxation Current Tax 170,132 19,194 Deferred Tax (See Schedule 5 Note 4) 1,976 1,722 For Earlier Year 4,335 Profit After Tax 338,335 30,325 Balance Brought Forward 75,126 44,801 Balance Carried to Balance Sheet 413,461 75,126 Basic & Diluted Earning Per Share (See Schedule 5 Note 5) Notes to the Financial Statements 5 The Schedule referred to above forms an integral part of the Profit and Loss Account This is the Profit and Loss Account referred to in our report of even date For and on behalf of B. S. Mehta & Co. Chartered Accountants H. G. Buch A. K. T. Chari Urjit R. Patel Partner Director Director Mumbai April 13, 2006 IDFC TRUSTEE COMPANY LIMITED IDFC ANNUAL REPORT

130 FOR THE YEAR ENDED MARCH 31, 2006 CASH FLOW STATEMENT FOR THE YEAR ENDED FOR THE YEAR ENDED MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES RUPEES A. CASH FLOW FROM OPERATING ACTIVITIES Profit before tax 510,443 55,576 Operating profit before Working Capital Changes 510,443 55,576 Changes in : Loans and Advances (370,114) (1,135) Current Liabilities 46,944 9,499 (323,170) 8,364 Direct Taxes paid (205,506) (61,090) Net Cash From Operating Activities (18,233) 2,850 B. CASH FLOW FROM INVESTING ACTIVITIES Net Cash Used In Investing Activities C. CASH FLOW FROM FINANCING ACTIVITIES Net Cash From Financing Activities Net change in cash and cash equivalent (A+B+C) (18,233) 2,850 Cash and cash equivalent as at the beginning of the year as per Schedule 2 590, ,056 Cash and cash equivalent as at the end of the year as per Schedule 2 572, ,906 This is the Cash Flow Statement referred to in our report of even date For and on behalf of B. S. Mehta & Co. Chartered Accountants H. G. Buch A. K. T. Chari Urjit R. Patel Partner Director Director Mumbai April 13,

131 FORMING PART OF THE BALANCE SHEET AS AT MARCH 31, 2006 SCHEDULES AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 1 RUPEES RUPEES SHARE CAPITAL Authorised: 100,000 Equity Shares of Rs. 10 each 1,000,000 1,000,000 Issued, Subscribed & Paid-up 50,000 Equity Shares of Rs. 10 each, fully paid 500, ,000 (Of the above 49,400 shares are held by Infrastructure Development Finance Company Limited) 500, ,000 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 2 RUPEES RUPEES CASH & BANK BALANCES Balance with Scheduled Bank in Current Account 72, Balance with Scheduled Bank in Fixed Deposit 500, , , ,906 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 3 RUPEES RUPEES LOANS AND ADVANCES Interest Accrued on Fixed Deposit 7,739 8,166 Advance Payment of Tax 213,130 7,624 Receivables Trusteeship Fees 370, ,410 15,790 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 4 RUPEES RUPEES CURRENT LIABILITIES For Expenses 11,224 15,979 Other Liabilities 51,699 62,923 15,979 IDFC TRUSTEE COMPANY LIMITED IDFC ANNUAL REPORT

132 FORMING PART OF FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, SCHEDULES SCHEDULE 5 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (a) (b) BASIS OF ACCOUNTING The financial statements have been prepared under historical cost convention on accrual basis and comply with the Accounting Standards referred to in Section 211(3C) of the Companies Act, REVENUE RECOGNITION Trusteeship fees are accounted for on accrual basis. (c) TAXATION i) The provision for Current Income Tax is made at the applicable rates under the Income-tax Act, ii) Deferred tax is recognised, subject to the consideration of prudence in respect of deferred tax asset, on timing differences, being the differences between taxable income and accounting income that originate in current period and are capable of reversal in one or more subsequent periods. 2. The financial statements include remuneration for Directors amounting to Rs. Nil. 3. Information with regard to other matters specified in paragraphs 3, 4A, 4C and 4D of Part II of Schedule VI of the Companies Act, 1956 are either Nil or not applicable to the Company for the year ended March 31, Deferred Tax Asset is in respect of Preliminary Expenditure already charged to the Profit & Loss Account in an earlier year but allowed under Section 35D of the Income-tax Act, EARNING PER SHARE AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 PARTICULARS RUPEES RUPEES Profit After Tax 338,335 30,325 Weighted average number of equity shares 50,000 50,000 Basic & Diluted Earning Per Share Face Value Per Share RELATED PARTY TRANSACTION PARTICULARS Name of the Related Party & Relation with the Related Party Infrastructure Development Finance Company Limited - Holding Company IDFC Private Equity Company Limited - Fellow Subsidiaries (formerly IDFC Asset Management Company Limited) & Feedback First Urban Infrastructure Development Company Limited - Fellow Subsidiaries 7. Refer Annexure for additional information pursuant to Part IV of the Schedule VI of the Companies Act, Signatures to Schedules 1 to 5 forming part of the financial statements For and on behalf of B. S. Mehta & Co. Chartered Accountants H. G. Buch A. K. T. Chari Urjit R. Patel Partner Director Director Mumbai April 13,

133 AND COMPANY'S GENERAL BUSINESS PROFILE BALANCE SHEET ABSTRACT (Submitted in terms of Part IV to the Companies Act, 1956) I. Registration Details Registration No. U M H P L C State Code 1 1 Balance Sheet Date II. Capital raised during the year (Amount in Rs. '000) Public Issue Rights Issue N I L N I L Bonus Issue Private Placement N I L N I L III. Position of Mobilisation and Deployment of Funds (Amount in Rs. '000) Total Liabilities Total Assets SOURCES OF FUNDS Paid - up Capital Reserves and Surplus Secured Loans Unsecured Loans N I L N I L APPLICATION OF FUNDS Net Fixed Assets Investments N I L N I L Net Current Assets Deferred Tax Asset IV. Performance of the Company (Amount in Rs. '000) Turnover / Income Total Expenditure Profit Before Tax Profit After Tax Earning per Share (in Rs.) Dividend % N I L V. Generic Names of Principal Services of the Company (as per monetary terms) Item Code No. (ITC Code) N I L Product Description T R U S T E E S IDFC TRUSTEE COMPANY LIMITED IDFC ANNUAL REPORT

134 FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED Board of Directors Mr. A. K. T. Chari Mr. Sadashiv Rao Mr. Mahendra N. Shah Auditors S. B. Billimoria & Co. Chartered Accountants Bankers HDFC Bank Ltd. Registered Office The Capital Court, 6th Floor, Olof Palme Marg, Munirka, New Delhi Tel.: Fax :

135 Directors' Report TO THE MEMBERS Your Directors have pleasure in presenting the Sixth Annual Report with the audited accounts for the year ended March 31, Total Income of the Company during the year was Rs. 603,656. The income included interest on bank deposit with scheduled banks of Rs. 599,761 and Profit on Sale of current investments of Rs. 3,895. The administrative expenses of Rs. 513,919 and included payment of Rs. 166,400 towards Rent and Rs. 101,364 towards Service charges at DBS House. The Company's operations during the year have resulted in net gain of Rs. 89,737 as against Rs. 5,719,276 during the previous year, the reduction mainly on account of unbooked profits on investments in mutual fund units of Rs. 200,106,459. DIVIDEND Your Directors do not recommend any dividend for the year ended March 31, PARTICULARS REGARDING CONSERVATION OF ENERGY AND TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND EXPENDITURE Since the Company does not carry out any manufacturing activity and has no dealings in foreign exchange, the particulars regarding conservation of energy and technology absorption as required by the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 are not applicable. PARTICULARS OF EMPLOYEES' REMUNERATION The Company has no employees on its payroll and all the affairs of the Company are presently being carried out by certain employees of IDFC. The provisions of Section 217(2A) of the Companies Act, 1956 are consequently not applicable. DIRECTORS Mr. S. H. Khan and Mr. Hasmukh Shah have resigned from the Board of the Company during the year. The Board places on record its appreciation of the valuable services rendered by Mr. S. H. Khan and Mr. Hasmukh Shah during their tenure as members of the Board and other Committees of the Board. AUDITORS S. B. Billimoria & Co., Chartered Accountants retire as Auditors of the Company at the ensuing Annual General Meeting. Your Directors propose the appointment of S. B. Billimoria & Co., Chartered Accountants as Auditors of the Company for the financial year ending March 31, As required under the provisions of Section 224 of the Companies Act, 1956 the Company has obtained a written certificate from the Auditors proposed to be appointed to the effect that their appointment, if made, would be in conformity with the limits specified in the said section. The shareholders are requested to appoint the auditors and fix their remuneration. DEPOSITS The Company has not accepted any fixed deposits during the year under review. DIRECTORS' RESPONSIBILITY STATEMENT In accordance with the requirements of Section 217(2AA) of the Companies Act, 1956 your Board of Directors wish to confirm the following: i) that in preparation of annual accounts, the applicable accounting standards have been followed; ii) that they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company as at March 31, 2006, and of the profit of the Company for the year ended on that date; iii) 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; and iv) that they have prepared the annual accounts on a going concern basis. APPRECIATION The Directors wish to place on record their appreciation to the employees of IDFC for the services provided to the Company. Mumbai April 19, 2006 On behalf of the Board of Directors A. K. T. Chari Director FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED IDFC ANNUAL REPORT

136 Auditors' Report TO THE MEMBERS OF FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED 1. We have audited the attached Balance Sheet of FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED as at 31st March, 2006, 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. These 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 give 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 : (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 31st March, 2006; (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 from the directors as on 31st March, 2006, taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 2006 from being appointed as a director under Section 274(1)(g) of the Companies Act, For S. B. Billimoria & Co. Chartered Accountants Nalin M. Shah Partner Mumbai 19th April, 2006 (Membership No ) 134

137 Annexure to the Auditors' Report (REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE) i) The nature of the Company's business / activities during the year is such that clauses (i), (ii), (iii), (iv), (vi), (viii), (x), (xi), (xii), (xiii), (xv), (xvi), (xvii), (xviii), (xix) and (xx) of CARO are not applicable. ii) To the best of our knowledge and belief and according to the information and explanations given to us, no contracts or arrangements were required to be entered in the Register maintained in pursuance of Section 301 of the Companies Act, iii) No internal audit has been undertaken during the year. iv) (a) According to the information and explanations given to us, the Company has generally been regular in depositing undisputed statutory dues, including Income-tax and any other material statutory dues with the appropriate authorities during the year. (b) There were no disputed income-tax demands which remain to be deposited with the appropriate authorities. v) Based on our examination of the records and evaluation of the related internal controls, the Company has maintained proper records of transactions and contracts in respect of its dealings in mutual funds and timely entries have been made therein. The aforesaid securities have been held by the Company in its own name. vi) To the best of our knowledge and belief and according to the information and explanations given to us, no fraud on or by the Company was noticed or reported during the year. For S. B. Billimoria & Co. Chartered Accountants Nalin M. Shah Partner Mumbai 19th April, 2006 (Membership No ) FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED IDFC ANNUAL REPORT

138 AS AT MARCH 31, 2006 BALANCE SHEET SCHEDULE AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 RUPEES RUPEES SOURCES OF FUNDS Shareholders Funds Share Capital 1 210,002, ,002,000 Profit and Loss Account 912, , ,914, ,833,033 APPLICATION OF FUNDS Investments 2 200,106,459 7,802,565 Current Assets, Loans and Advances : 3 Current Assets 9,313, ,115,270 Loans and Advances 1,719,049 4,156,568 11,032, ,271,838 Less: Current Liabilities and Provisions 4 Current Liabilities 66,120 91,350 Provisions 158, , , ,370 Net Current Assets 10,808, ,030, ,914, ,833,033 Significant Accounting Policies 8 Notes forming part of the Accounts 9 The Schedules 1 to 9 annexed hereto, form an integral part of the Accounts As per our report of even date attached For S. B. Billimoria & Co. A. K. T. Chari Sadashiv S. Rao Chartered Accountants Director Director Nalin M. Shah Partner Bipin N. Gemani Manager Mumbai April 19,

139 FOR THE YEAR ENDED MARCH 31, 2006 PROFIT & LOSS ACCOUNT SCHEDULE APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES INCOME Income from Investments 5 3,895 5,618,349 Other Income 6 599,761 3,978, ,656 9,596,963 EXPENSES Administrative Overheads 7 513,919 3,300,464 Preliminary expenses written off 553,130 Depreciation 24, ,919 3,877,687 Profit Before Taxation 89,737 5,719,276 Less: Provision for Taxation Current Tax 8,000 Less: Deferred Tax Asset 120,900 Profit After Taxation 81,737 5,840,176 Add: Balance as per last Balance Sheet 831,033 (5,009,143) Balance carried forward 912, ,033 Basic and Diluted Earning Per Share 0.28 (Face Value Rs. 10) (See Schedule 9 Note 6) Significant Accounting Policies 8 Notes forming part of the Accounts 9 The Schedules 1 to 9 annexed hereto, form an integral part of the Accounts As per our report of even date attached For S. B. Billimoria & Co. A. K. T. Chari Sadashiv S. Rao Chartered Accountants Director Director Nalin M. Shah Partner Bipin N. Gemani Manager Mumbai April 19, 2006 FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED IDFC ANNUAL REPORT

140 FOR THE YEAR ENDED MARCH 31, 2006 CASH FLOW STATEMENT FOR THE YEAR ENDED FOR THE YEAR ENDED MARCH 31, 2006 MARCH 31, 2005 RUPEES RUPEES RUPEES RUPEES A. CASH FLOW FROM OPERATING ACTIVITIES Profit before tax 89,737 5,719,276 Adjustments for : Preliminary expenses written off 553,130 Depreciation 24,093 Profit on Sale of Fixed Asset (1,302) Investment Income (603,656) (9,585,511) Operating loss before Working Capital Changes (513,919) (3,290,314) Changes in : Loans and Advances 82,000 1,560 Current Liabilities (17,230) (6,402,839) 64,770 (6,401,279) Direct Taxes paid (124,585) (757,161) NET CASH USED IN OPERATING ACTIVITIES (573,734) (10,448,754) B. CASH FLOW FROM INVESTING ACTIVITIES Sale of Fixed Assets 100,000 Investment Income 3,075,760 7,153,957 Proceeds from / (Purchase) of Investments, (2,303,894) 1,781,506 Loans and Deposits (net) NET CASH FROM INVESTING ACTIVITIES 771,866 9,035,463 C. CASH FLOW FROM FINANCING ACTIVITIES NET CASH FROM FINANCING ACTIVITIES Net change in cash and cash equivalent (A+B+C) 198,132 (1,413,291) Cash and cash equivalent as at the beginning of the year (See Note 1) 115,270 1,528,561 Cash and cash equivalent as at the end of the year (See Note 2) 313, ,270 (198,132) 1,413,291 Notes to Cash Flow Statement: 1 Cash and cash equivalents as at the beginning of the year Cash and cash equivalent as per Schedule 3 199,115,270 21,086,067 Less: Bank deposits placed for more than 90 days 199,000,000 19,557, ,270 1,528,561 2 Cash and cash equivalents as at the end of the year Cash and cash equivalent as per Schedule 3 9,313, ,115,270 Less: Bank deposits placed for more than 90 days 9,000, ,000, , ,270 As per our report of even date attached For S. B. Billimoria & Co. A. K. T. Chari Sadashiv S. Rao Chartered Accountants Director Director Nalin M. Shah Partner Bipin N. Gemani Manager Mumbai April 19,

141 ANNEXED TO AND FORMING PART OF THE ACCOUNTS SCHEDULES AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 1 RUPEES RUPEES SHARE CAPITAL Authorised : 40,000,000 Equity Shares of Rs. 10 each 400,000, ,000,000 Issued : 27,000,400 Equity Shares of Rs. 10 each 270,004, ,004,000 Subscribed and Paid-up : 21,000,200 Equity Shares of Rs. 10 each 210,002, ,002,000 (All the above shares are held by Infrastructure Development Finance Company Limited, the holding company and its nominees) AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 2 RUPEES RUPEES INVESTMENTS Trade Investments - Current Mutual Funds - Unquoted No. of Units Face Value LIQUID FUND - Prudential ICICI Liquid Plan - Institutional 470, ,606,459 7,802,565 Prudential ICICI Liquid Plan- Institutional Plus 11,718, ,500, ,106,459 7,802,565 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 3 RUPEES RUPEES CURRENT ASSETS, LOANS AND ADVANCES A. CURRENT ASSETS Cash 860 Bank Balances - with Scheduled Bank in : Deposit Account 9,000, ,000,000 Current Account 313, ,410 B. LOANS AND ADVANCES 9,313, ,115,270 Unsecured considered good Advances recoverable in cash 176,070 2,730,174 or in kind or for value to be received Advance Tax and Tax Deducted at Source 1,542,979 1,426,394 1,719,049 4,156,568 11,032, ,271,838 FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED IDFC ANNUAL REPORT

142 AS AT MARCH 31, 2006 AS AT MARCH 31, 2005 SCHEDULE 4 RUPEES RUPEES CURRENT LIABILITIES AND PROVISIONS A. CURRENT LIABILITIES Sundry Creditors (other than SSI undertakings) 66,120 78,330 Other Liabilities 13,020 B. PROVISIONS 66,120 91,350 Taxation 158, , , ,370 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 5 RUPEES RUPEES INCOME FROM INVESTMENTS Trade Investments : Profit from sale of current investments (Net) 3, ,511 Dividend Income from current investments 5,026,838 3,895 5,618,349 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 6 RUPEES RUPEES OTHER INCOME Interest on Bank Deposits 599,761 3,967,162 (Tax deducted at source Rs.116,586; Previous Year Rs. 828,649) Interest on refund of Income Tax 10,150 Profit on sale of fixed assets 1, ,761 3,978,

143 APRIL 1, 2005 TO APRIL 1, 2004 TO MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 7 RUPEES RUPEES ADMINISTRATIVE OVERHEADS Salaries 1,458,596 Staff Welfare Expenses 39,312 Rent 166, ,800 Telephone Expenses 7,294 52,633 Travelling & Conveyance 29, ,357 Legal and Professional Fees (See Schedule 9 Note 3) 57, ,260 Filing Fee & Other Legal Expenses 4,500 Board Meeting Expenses 17,969 Directors' Sitting Fees 10, ,000 Auditors' Remuneration (See Schedule 9 Note 1) 116,537 66,120 Office Repairs and Maintenance Expenses 17,313 Printing and Stationery 1,837 6,339 Service Charges 101, ,715 Books and Periodicals 5,500 83,500 Miscellaneous Expenses 17,507 20, ,919 3,300,464 FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED IDFC ANNUAL REPORT

144 SCHEDULE 8 SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF ACCOUNTING The Company adopts the accrual concept in the preparation of accounts. The preparation of 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. Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Future results could differ from these estimates. B. REVENUE RECOGNITION Income and Expenditure are accounted for on accrual basis. Dividend income on investments is recognised when unconditional right to receive is established. C. INVESTMENTS Investments are classified as Current or Long Term. Provision for diminution in the value of investments is made in accordance with the Non- Banking Financial Companies Prudential Norms (Reserve Bank) Directions & Guidelines issued by Reserve Bank of India and Accounting Standard 13 issued by the Institute of Chartered Accountants of India. Long Term investments are carried at cost (net of provision on an individual basis for diminution in value, which is not considered temporary). Current investments are valued at the lower of cost and market value determined on an individual basis. D. PRELIMINARY EXPENDITURE Preliminary Expenditure include eligible expenses under Section 35D of the Income-tax Act, These expenses are amortised over a period of 5 (five) years. E. INCOME TAX The accounting treatment for Income Tax in respect of the Company s income is based on the Accounting Standard 22 on Accounting for taxes on Income issued by the Institute of Chartered Accountants of India. The provision for Income Tax comprises both current tax and the deferred tax. Deferred tax is recognised, subject to the consideration of prudence in respect of deferred tax asset, 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. MARCH 31, 2006 MARCH 31, 2005 SCHEDULE 9 RUPEES RUPEES NOTES FORMING PART OF THE ACCOUNTS 1. Auditors Remuneration includes : Audit Fees 60,000 60,000 Other Matters 45,750 Service Tax 10,787 6, ,537 66, Managerial Remuneration to the Manager : (in accordance with Schedule XIII of the Companies Act, 1956) Salary 1,071,699 Allowance 386,897 Perquisite 17,500 *paid to the former Manager including Rs. 725,199 towards terminal benefits. 1,476,096* 142

145 SCHEDULE 9 (CONTINUED) NOTES FORMING PART OF THE ACCOUNTS 3. Legal and Professional Fees amounting to Rs. 57,954 (Previous Year Rs. 416,260) paid by the Company during the year include a sum of Rs. 30,000 (Previous Year Rs. 360,000) paid to one of the Directors for services rendered in his professional capacity, for which the Company has obtained necessary approval from the Central Government under Section 309(4) of the Companies Act, CONTINGENT LIABILITIES Claims not acknowledged as debts in respect of income tax demand of Rs. 94,785 (Previous Year Rs. 94,785) against which the Company has gone in appeal. 5. RELATED PARTY DISCLOSURES UNDER ACCOUNTING STANDARD 18 Relationships: I. Holding Company Infrastructure Development Finance Company Limited II. III. Fellow Subsidiaries: IDFC Private Equity Company Limited (Formerly IDFC Asset Management Company Limited) IDFC Trustee Company Limited Key Management Personnel Mr. Bipin N. Gemani, Manager (since November 1, 2004) 6. EARNING PER SHARE MARCH 31, 2006 MARCH 31, 2005 PARTICULARS RUPEES RUPEES Profit After Tax 81,737 5,840,176 Weighted average number of equity shares 21,000,200 21,000,200 Basic & Diluted Earning Per Share 0.28 Face Value Per Share The figures for the previous year have been regrouped / rearranged wherever necessary. Signatures to Schedules 1 to 9 A. K. T. Chari Sadashiv S. Rao Director Director Bipin N. Gemani Manager Mumbai April 19, 2006 FEEDBACK FIRST URBAN INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED IDFC ANNUAL REPORT

146 AND COMPANY S GENERAL BUSINESS PROFILE BALANCE SHEET ABSTRACT (Submitted in terms of Part IV to the Companies Act, 1956) I. Registration Details Registration No State Code 5 5 Balance Sheet Date II. Capital raised during the year (Amount in Rs. 000) Public Issue Rights Issue N I L N I L Bonus Issue Private Placement N I L N I L III. Position of Mobilisation and Deployment of Funds (Amount in Rs. 000) Total Liabilities Total Assets SOURCES OF FUNDS Paid - up Capital Reserves and Surplus Secured Loans Unsecured Loans N I L N I L APPLICATION OF FUNDS Net Fixed Assets Investments N I L Net Current Assets Deferred Tax Asset N I L IV. Performance of the Company (Amount in Rs. 000) Turnover / Income Total Expenditure Profit Before Tax Profit After Tax Earning per Share (in Rs.) Dividend % N I L V. Generic Names of Principal Services of the Company (as per monetary terms) Item Code No. (ITC Code) N I L Product Description U R B A N I N F R A S T R U C T U R E F I N A N C I N G A. K. T. Chari Sadashiv S. Rao Director Director Bipin N. Gemani Manager Mumbai April 19,

147 DESIGN ITU CHAUDHURI DESIGN/ PRINTED AT UMA OFFSET

148 INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED REGISTERED OFFICE: ITC CENTRE, 3 RD FLOOR, 760 ANNA SALAI, CHENNAI T /48/56 F E info@idfc.com W