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12 2 Kotak Mahindra Bank Limited BOARD OF DIRECTORS K. M. Gherda Chairman Uday Kotak Executive Vice Chairman & Managing Director Anand Mahindra Cyril Shroff Pradeep N. Kotak Dr. Shankar Acharya Shivaji Dam Ajay Sondhi (up to 7 th June 2005) C. Jayaram Executive Director Dipak Gupta Executive Director Bina Chandarana Company Secretary & Sr. Vice President REGISTERED OFFICE 36-38A, Nariman Bhavan, 227, Nariman Point, Mumbai Tel: Fax: WEBSITE AUDITORS M/s. S. B. Billimoria & Co. Chartered Accountants 12, Dr. Annie Besant Road Opp. Shiv Sagar Estate, Worli Mumbai REGISTRARS & TRANSFER AGENTS Karvy Computershare Private Limited 1) 46, Avenue 4, Street No. 1, Banjara Hills, Hyderabad ) 7, Andheri Industrial Estate, Off Veera Desai Road, Andheri (West), Mumbai

13 1 Kotak Mahindra Bank Limited Group Consolidated Financial Statements... 2 Kotak Mahindra Bank Limited SUBSIDIARIES Kotak Mahindra Capital Company Limited Kotak Securities Limited Kotak Mahindra Old Mutual Life Insurance Limited Kotak Mahindra Primus Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra Investments Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra Inc Global Investment Opportunities Fund Limited Kotak Mahindra Securities Limited Kotak Mahindra Private-Equity Trustee Limited Kotak Forex Brokerage Limited

14 2 Kotak Mahindra Bank Limited CONSOLIDATION AT A GLANCE Rupees in Lacs st March 31 st March Profit Profit Profit Profit before Tax after Tax before Tax after Tax Networth Networth Kotak Mahindra Bank Ltd. 11, , , , , , Subsidiaries Kotak Mahindra Capital Company Ltd. 1, , , , , , Kotak Securities Ltd. 16, , , , , , Kotak Mahindra Primus Ltd. 1, , , , , Kotak Mahindra Old Mutual Life Insurance Ltd. (4,579.40) (4,580.12) (4,912.17) (4,912.17) 10, , Kotak Mahindra Asset Management Co. Ltd , , Kotak Mahindra Trustee Company Ltd Kotak Mahindra Investments Ltd. 3, , , , , Kotak Mahindra (International) Ltd. (Consolidated) 1, , , Kotak Mahindra Inc (104.30) (104.30) (38.16) Kotak Mahindra Securities Ltd Kotak Mahindra Private-Equity Trustee Ltd Kotak Forex Brokerage Ltd. (36.95) (36.95) (70.61) (69.23) Total 32, , , , , , Add: Associates Less: Dividend, minority Interest, inter company & other adjustments 1, , (134.94) 2, , , Consolidated Profit before Tax 30, , Consolidated Kotak Mahindra Bank s Share 17, , , , Consolidated EPS Diluted (Rs.) Consolidated Book Value per Share (Rs.)

15 3 Kotak Mahindra Bank Limited (Consolidated) AUDITORS REPORT AUDITORS REPORT TO THE BOARD OF DIRECTORS OF KOTAK MAHINDRA BANK LIMITED ON THE CONSOLIDATED FINANCIAL STATEMENTS OF KOTAK MAHINDRA BANK LIMITED AND ITS SUBSIDIARIES 1 We have examined the attached Consolidated Balance Sheet of KOTAK MAHINDRA BANK LIMITED and its subsidiaries ( the Group ) as at 31 st March, 2005, the Consolidated Profit and Loss Account and the Consolidated Cash Flow Statement of the Group for the year ended on that date, both annexed thereto. The Consolidated Accounts include investments in affiliates, accounted for on the equity method in accordance with Accounting Standard 23 (Accounting for Investments in Associates in Consolidated Financial Statements). These financial statements are the responsibility of the Bank 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 all subsidiaries, whose financial statements reflect total assets of Rs. 5,72, lacs as at 31 st March, 2005, total revenues of Rs. 1,28, lacs and cash flows amounting to Rs. 30, lacs for the year ended on that date. The accounts of the affiliates have not been audited, except for Ford Credit Kotak Mahindra Limited. The financial statements of the subsidiaries 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 the subsidiaries, is based solely on the reports of the other auditors. 4 We report that the consolidated financial statements have been prepared by the Bank in accordance with the requirements of Accounting Standard 21 (Consolidated Financial Statements) and Accounting Standard 23 (Accounting for Investments in Associates in Consolidated Financial Statements), 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 unaudited financial statements of the affiliates 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, read together with Note 1 (b) of Schedule 18 regarding two affiliates which have not been consolidated, 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 31 st March, 2005; (b) (c) in the case of the Consolidated Profit and Loss Account, of the consolidated profit of the Group for the year ended on that date and in the case of the Consolidated Cash Flow Statement, of the consolidated cash flows of the Group for the year ended on that date. For S. B. Billimoria & Co. Chartered Accountants P. R. Ramesh Partner (Membership No ) Mumbai, 7 th June, 2005.

16 4 Kotak Mahindra Bank Limited (Consolidated) CONSOLIDATED BALANCE SHEET AS AT 31 ST MARCH, 2005 Capital and Liabilities Schedule As at 31 st As at 31 st March, 2005 March, 2004 Rupees in lacs Rupees in lacs Capital 1 12, , Reserves and Surplus 2 134, , Minority Interest 35, , Employees Stock Options (Grants) Outstanding Deposits 3 383, , Borrowings 4 380, , Policy Holders Funds 49, , Other Liabilities and Provisions 5 148, , Total 1,144, , Assets Cash and Balances with Reserve Bank of India 6 23, , Balances with Banks and Money at Call and Short Notice 7 49, , Investments 8 270, , Advances 9 714, , Fixed Assets 10 15, , Other Assets 11 70, , Goodwill on Consolidation Total 1,144, , Contingent Liabilities 12 1,245, , Bills for Collection 2, Significant Accounting Policies and Notes to the Financial Statements 18 As per our report of even date attached For and on behalf of the Board of Directors For S. B. Billimoria & Co. K. M. Gherda Uday Kotak Chartered Accountants Chairman Executive Vice-Chairman & Managing Director P. R. Ramesh Dipak Gupta Bina Chandarana Partner Executive Director Company Secretary Mumbai, 7 th June, 2005

17 5 Kotak Mahindra Bank Limited (Consolidated) CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 2005 Schedule Year ended Year ended 31 st March, st March, 2004 Rupees in lacs Rupees in lacs I. Income Interest earned 13 77, , Other Income 14 93, , II. III. IV. Total 171, , Expenditure Interest expended 15 32, , Operating expenses , , Provisions and Contingencies [includes Income tax provision of Rs. 11, lacs (Previous year Rs. 13, lacs)] 17 13, , Total 151, , Profit Net Profit for the year 19, , Less: Share of Minority Interest 2, , Add: Share in profit of Associates Consolidated Profit for the year attributable to the group 17, , Add: Surplus brought forward from previous year 27, , Total 44, , Appropriations Transfer to Statutory Reserve 2, , Transfer to Special Reserve u/s 45 IC of RBI Act, , Transfer to General Reserve 1, , Transfer to Capital Reserve Transfer to Debenture Redemption Reserve , Transfer from Debenture Redemption Reserve (5,920.47) Transfer to Investment Fluctuation Reserve 2, , Proposed Dividend 1, , Corporate Dividend Tax Balance carried over to Balance Sheet 40, , Total 44, , V. Earnings Per Share Basic Diluted Significant Accounting Policies and Notes to the Financial Statements 18 As per our report of even date attached For and on behalf of the Board of Directors For S. B. Billimoria & Co. K. M. Gherda Uday Kotak Chartered Accountants Chairman Executive Vice-Chairman & Managing Director P. R. Ramesh Dipak Gupta Bina Chandarana Partner Executive Director Company Secretary Mumbai, 7 th June, 2005

18 6 Kotak Mahindra Bank Limited (Consolidated) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 ST MARCH, 2005 Cash Flow from Operating Activities Year ended Year ended 31 st March, st March, 2004 Rupees in lacs Rupees in lacs Net Profit After Tax 17, , Add: Provision for tax 11, , Profit Before Tax 28, , Adjustments for: Employee Stock Options Grants Depreciation on bank property 4, , Diminution in the value of investments (68.60) (Profit)/Loss on revaluation of investments (477.97) Provision for Non Performing Assets 1, (Profit) on sale of assets (80.37) (87.13) Reserve for Doubtful Debt , , Adjustments for: (Increase)/Decrease in Investments other than Associates 91, (261,564.26) Increase in Advances Increase in Other Assets (251,262.60) (162,530.22) (18,646.90) (22,370.93) (Increase)/Decrease in Fixed Deposits with Banks (2,991.50) Increase/(Decrease) in Deposits (38,802.17) 401, Increase in Borrowings 70, , Debenture Issue Expense (21.43) Increase in Other Liabilities & Provisions 67, , (82,363.16) 34, Income Taxes Paid (12,560.00) (10,808.70) NET CASH FLOW FROM OPERATING ACTIVITIES (A) (59,859.67) 58, Cash Flow From Investing Activities Purchase of Fixed assets (6,685.07) (5,313.79) Sale of Fixed assets (Increase)/Decrease in Investments in Associates (430.84) 6, NET CASH FLOW FROM INVESTMENT ACTIVITIES (B) (6,783.09) 1,339.98

19 7 Kotak Mahindra Bank Limited (Consolidated) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 ST MARCH, 2005 (Contd.) Year ended Year ended 31 st March, st March, 2004 Rupees in lacs Rupees in lacs Cash Flow from Financing Activities Dividend paid including Corporate Dividend Tax (1,893.03) (1,402.79) Fresh issue of Share/Money received on exercise of stock options 7, , Bonus Share Issue Expense (78.06) Minority Interest Increase 3, , Policyholders Liability Increase 36, , NET CASH FLOW FROM FINANCING ACTIVITIES (C) 46, , NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS (A + B + C) (20,067.57) 74, CASH & CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR (Refer Note below) 90, , CASH & CASH EQUIVALENTS AT THE END OF THE YEAR (Refer Note below) 70, , Note: Balance with banks in India in Fixed Deposits 25, , Balance with banks in India in Current Accounts 17, , Money at call and short notice in India Cash in hand (including Foreign Currency notes) 2, , Balance with RBI in Current Accounts 21, , Balance with banks Outside India: (i) In Current Account 1, , (ii) Money at call and short notice CASH & CASH EQUIVALENTS AT THE END OF THE YEAR 70, , As per our report of even date attached For and on behalf of the Board of Directors For S. B. Billimoria & Co. K. M. Gherda Uday Kotak Chartered Accountants Chairman Executive Vice-Chairman & Managing Director P. R. Ramesh Dipak Gupta Bina Chandarana Partner Executive Director Company Secretary Mumbai, 7 th June, 2005

20 8 Kotak Mahindra Bank Limited (Consolidated) SCHEDULES FORMING PART OF CONSOLIDATED BALANCE SHEET AS AT 31 ST MARCH, 2005 As at 31 st As at 31 st March, 2005 March, 2004 Rupees in lacs Rupees in lacs Schedule 1 : Capital Authorised Capital 20,00,00,000 (31 st March, 2004: 10,00,00,000) Equity Shares of Rs.10/- each 20, , Issued, Subscribed and Paid-up Capital 12,33,23,500 (31 st March, 2004: 5,95,32,750) Equity Shares of Rs.10/- each, fully paid-up during the year, 5,95,32,750 Equity Shares have been issued as bonus shares by capitalisation of Reserves 12, , Total 12, , Schedule 2 : Reserves and Surplus I. Statutory Reserve Opening Balance 7, , Add: Transfer from Profit and Loss Account 2, , Total 9, , II. Capital Reserve Opening Balance 5, , Add: Transfer from Profit and Loss Account Total 5, , III. General Reserve Opening Balance 17, , Add: Transfer from Profit and Loss Account 1, , Less: Amortisation of BSE membership card Total 18, , IV. Securities Premium Account Opening Balance 48, , Add: Received during the year 7, , Less: Utilised for Issue of Bonus Shares 5, Less: Utilised for Share Issue Expense Less: Utilised for Debenture Issue Expense Total 49, , V. Investment Fluctuation Reserve Opening Balance 1, Add: Transfer from Profit and Loss Account 2, , Total 3, , VI. Special Reserve under Section 45IC of the RBI Act, 1934 Opening Balance 4, , Add: Transfer from Profit and Loss Account , Less: Transfer to Statutory Reserve Total 5, , VII. Debenture Redemption Reserve Opening Balance 5, , Add: Transfer from Profit and Loss Account , Less: Transfer to Profit and Loss Account 5, Total , VIII. Capital Redemption Reserve IX. Share of Retained Earnings in Associates X. Reserve for Doubtful Debts [See Schedule 18, Note 2(G)(iii)] Opening Balance Add: Created during the year Total XI. Profit and Loss Account Balance in Profit and Loss Account 40, , Less: Translation Difference [see Schedule 18, Note 2(F)(ix)] , , Total 134, ,597.75

21 9 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of Consolidated Balance Sheet as at 31 st March, 2005 (Contd.) As at 31 st As at 31 st March, 2005 March, 2004 Rupees in lacs Rupees in lacs Schedule 3 : Deposits I. Demand Deposit i. From Banks ii. From Others 35, , Total 36, , II. Savings Bank Deposits 14, , III. Term Deposits i. From Banks 18, , ii. From Others 313, , Total 332, , Total Deposits of branches in India (I to III) 383, , Schedule 4 : Borrowings I. Borrowings in India (i) Banks 187, , (ii) Institutions and Agencies 172, , Total 359, , II. Borrowings outside India 12, , III. Subordinated debt 8, Total Borrowings (I, II and III) 380, , Secured Borrowings included in I, II and III above 3, , Schedule 5 : Other Liabilities and Provisions I. Bills Payable 13, , II. Interest Accrued 6, , III. Others (including provisions) 125, , IV. Proposed Dividend (includes tax on dividend for the current year) 1, , Total 148, , Schedule 6 : Cash and Balances with Reserve Bank of India I. Cash and cheques on hand (including foreign currency notes) 2, , II. Balances with RBI in current account 21, , Total 23, , Schedule 7 : Balances with Banks and Money at Call and Short Notice I. In India (i) Balances with Banks (a) In Current Accounts 17, , (b) In Other Deposit Accounts 29, , (ii) Total 46, , Money at call and Short Notice (a) With Banks (b) With Other Agencies Total II. Outside India (i) In current account 1, , (ii) Money at call and short notice Total 2, , Total (I and II) 49, ,697.55

22 10 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of Consolidated Balance Sheet as at 31 st March, 2005 (Contd.) As at 31 st As at 31 st March, 2005 March, 2004 Rupees in lacs Rupees in lacs Schedule 8 : Investments I. Investments in India in (i) Government Securities 178, , (ii) Other approved Securities (iii) Shares 27, , (iv) Debentures and Bonds 24, , (v) Associates** 5, , (vi) Others [Units, Certificate of Deposits, Commercial Paper (CP) and Pass Through Certificates (PTC)] 33, , Total 270, , ** Associates (At cost less provision for diminution in value) Cost of Investment [including Rs. 2, lacs (previous year Rs. 2, lacs) of goodwill arising on acquisition) 4, , Add: Share of post acquisition profit/loss (Net) 1, , Total 5, , Schedule 9 : Advances A. (i) Bills purchased and discounted 18, , (ii) Cash Credits, Overdrafts and loans repayable on demand 18, , (iii) Term Loans 677, , Total 714, , B. (i) Secured by tangible assets * 605, , (ii) Unsecured 108, , Total 714, , * including advances against book debts Schedule 10 : Fixed Assets A. Premises (Including Land) Gross Block At cost on 31 st March of the preceding year 7, , Additions during the year Less: Deductions during the year Total 7, , Depreciation As at 31 st March of the preceding year 2, , Add: Charge for the year Less: Deductions during the year Depreciation to date 2, , Net Block 5, , B. Other Fixed Assets (including furniture and fixtures) Gross Block At cost on 31 st March of the preceding year 15, , Additions during the year 5, , Deductions during the year Total 21, , Depreciation As at 31 st March of the preceding year 6, , Charge for the year 4, , Amortisation through General Reserve Less: Deductions during the year Depreciation to date 10, , Net Block 10, , Total (A) +(B) 15, ,738.79

23 11 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of Consolidated Balance Sheet as at 31 st March, 2005 (Contd.) As at 31 st As at 31 st March, 2005 March, 2004 Rupees in lacs Rupees in lacs Schedule 11 : Other Assets I. Interest accrued 6, , II. Advance tax (net of provision) 2, , III. Stationery and Stamps IV. Non Banking assets acquired in satisfaction of claims V. Cheques in course of collection VI. Other 60, , Total 70, , Schedule 12 : Contingent Liabilities I. Claims not acknowledged as debts 1, , II. Liability on account of outstanding forward exchange contracts 351, , III. Guarantees on behalf of constituents in India 22, , IV. Guarantees on behalf of constituents outside India 5, , V. Acceptances, Endorsements and Other Obligations 2, VI. Other items for which bank is contingently liable: Liability on account of interest rate swaps 782, , Liability in respect of options contracts 74, , Capital Commitments not provided 3, Maximum amount of recourse to the company as per the terms of the agreement to sell some of its receivables Total 1,245, , SCHEDULES FORMING PART OF CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 2005 Year ended Year ended 31 st March, st March, 2004 Rupees in lacs Rupees in lacs Schedule 13 : Interest Earned I. Interest/discount on advances/bills 61, , II. Income from investments 13, , III. Interest on balance with RBI and other inter-bank funds 1, , IV. Others 1, , Total 77, , Schedule 14 : Other Income I. Commission, exchange and brokerage 39, , II. Profit on sale of Investments (net) 4, , III. Profit/ (loss) on revaluation of investments (420.72) IV. Profit on sale of building and other assets (net) V. Profit on exchange transactions (net) VI. Premium on Insurance Business 46, , VII. Miscellaneous Income 2, , Total 93, ,853.89

24 12 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of Consolidated Profit and Loss Account for the year ended 31 st March, 2005 (Contd.) Year ended Year ended 31 st March, st March, 2004 Rupees in lacs Rupees in lacs Schedule 15 : Interest Expended I. Interest on Deposits 14, , II. Interest on RBI/Inter-Bank Borrowings 7, , III. Other Interest 11, , Total 32, , Schedule 16 : Operating Expenses I. Payments to and provision for employees 25, , II. Rent, taxes and lighting 4, , III. Printing and Stationery 1, IV. Advertisement, Publicity and Promotion 3, , V. Depreciation on Bank s property 4, , VI. Director s fees, allowances and expenses VII. Auditor s fees and expenses VIII. Law Charges IX. Postage, telegram, telephone etc. 2, , X. Repairs and maintenance 1, , XI. Insurance XII. Travel and Conveyance 2, , XIII. Professional Charges 4, , XIV. Brokerage 9, , XV. Stamping Expenses , XVI. Policyholder s reserves 36, , XVII. Other Expenditure 7, , Total 105, , Schedule 17 : Provisions and Contingencies I. Provision for taxation (including wealth-tax Rs lacs, previous year Rs lacs) 11, , II. Provision for Non-performing Assets (including write-offs and net of recoveries) 1, III. Provision for Diminution in value of Investments (68.60) Total 13, ,029.62

25 13 Kotak Mahindra Bank Limited (Consolidated) SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements 1 BASIS OF CONSOLIDATION a. The Consolidated Financial Statements of Kotak Mahindra Bank Limited ( the Bank ) are prepared in accordance with Accounting Standard 21 (AS 21), Consolidated Financial Statements and Accounting Standard 23 (AS 23), Accounting for Investments in Associates in Consolidated Financial Statements issued by the Institute of Chartered Accountants of India ( ICAI ). The Bank consolidates all subsidiaries as defined in AS 21 on a line by line basis by adding together like items of assets, liabilities, income and expenses. Further, the Bank accounts for investments in Associates as defined by AS 23 by the equity method of accounting. Kotak Mahindra Bank Limited (KMBL), its subsidiaries and associates which have been consolidated, constitute the Group. The list of Subsidiaries are as under: Name of the Subsidiary Country of % Shareholding of Origin Kotak Mahindra Bank Kotak Mahindra Capital Company Limited India Kotak Mahindra Securities Limited India Kotak Mahindra Inc * USA Kotak Mahindra (International) Limited * Mauritius Global Investments Opportunities Fund Limited * Mauritius Kotak Mahindra (UK) Limited * U.K Kotak Securities Limited India Kotak Mahindra Old Mutual Life Insurance Company Limited ** India Kotak Mahindra Primus Limited India Kotak Mahindra Asset Management Company Limited India Kotak Mahindra Trustee Company Limited India Kotak Mahindra Investments Limited India Kotak Forex Brokerage Limited India Kotak Mahindra Private-Equity Trustee Limited India * For the purposes of consolidating these subsidiary accounts into KMBL (Consolidated), balances as per audited accounts for the 15 months ended March 31, 2005 have been considered. ** Formerly known as OM Kotak Mahindra Life Insurance Company Limited b. The Consolidated Financial Statements incorporate the financial statements of the following associates as per Accounting Standard 23 (AS 23) Accounting for Investments in Associates in Consolidated Financial Statements. Name of the Associate Country of % Shareholding of Origin Kotak Mahindra Bank Ford Credit Kotak Mahindra Limited (Audited) India Business Standard Limited (Unaudited) India Business Standard Digital Limited (wholly owned subsidiary of Business Standard Limited) (Unaudited) India India Car Private Limited (#) (Unaudited) India Multifaced Finstock Pvt. Ltd. ($) (Unaudited) India (#). The financial statements of India Car Private Limited have not been consolidated under AS 23, as the same are not material. ($). The percentage stake indicated therein is held by Kotak Mahindra Capital Company Limited and Kotak Mahindra Securities Limited. The financial statements of Multifaced Finstock Pvt. Ltd. have not been consolidated under AS 23, as the same are not material. 2 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING METHODOLOGY The Financial Statements have been prepared on historical cost basis of accounting. The Group adopts the accrual system of accounting and the financial statements conform with the Accounting Standards issued by the ICAI, guidelines issued by the Reserve Bank of India ( RBI ), Insurance Regulatory and Development Authority ( IRDA ) from time to time as applicable to relevant companies and the generally accepted accounting principles prevailing in India.

26 14 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.) Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements (Contd.) 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 a. Banking/investing Activity: i. Interest income is recognised on accrual basis except in case of non-performing assets and overdue interest, which is recognised as income on realisation. ii. Interest income in respect of retail advances {except for the subsidiary, Kotak Mahindra Primus Limited (KMPL)} is accounted for by using the internal rate of return method to provide a constant periodic rate of return on the net investment outstanding on the contract. iii. KMPL accrues for auto finance income (including service charges, incentives) by using the internal rate of return method to provide a constant periodic rate of return after adjustment of brokerage expenses on the net investment outstanding on the contract. iv. Service charges received on advances are accrued when due, except for one subsidiary (KMPL). v. Income on discounted instruments is recognised over the tenure of the instruments so as to provide a constant periodic rate of return. vi. Fees and commission income are recognised when due except for guarantee commission which is recognised over the period of the guarantee. vii. Gain on account of securitisation of assets is recognised, based on the difference between the book value of the securitised asset and consideration received. viii. Dividend income is accounted on an accrual basis when the Bank s right to receive the dividend is established. ix. Income on non performing assets acquired from other banks/ NBFCs/ Financial Institutions is the excess of amounts collected against such assets over the consideration paid for such acquisition. No income is recognised on non performing assets acquired from other banks/ NBFCs/ Financial Institutions unless the entire purchase consideration paid for the entire portfolio acquired is recovered. b. Investment Banking Activity: Issue management fees, underwriting fees, financial advisory fees and placement fees are accounted for based on stage of completion of assignments. c. Insurance Activity: Premium is recognised as income when it is due from policyholders. Further, uncollected premium on lapsed policies is not recognised as income. Premium payable on re-insurance ceded is accounted at the time of recognition of the premium income in accordance with the treaty arrangements with the re-insurers. Reinsurance premium and commission is recognized over the period of the risk. d. Broking Activity: i. Brokerage on Fixed Income Securities Placements is accounted net of sub-brokerage on completion of the transactions. ii. Brokerage Income:! on fixed deposit management, is accounted on completion of the transaction.! on primary market subscription/mobilization is accounted on allotment.! on secondary market transaction is recognized net of service tax on the date of the transaction. iii. Underwriting commission is accounted on allotment. iv. Incentive on primary market subscription/mobilisation is accounted on the basis of intimation received. v. Depository Fees: Transaction fees are recognised on completion of transaction. Account maintenance charges are recognised on time basis over the period of contract. vi. Stock Lending Fees and Borrowing Expenses: Stock lending fees and borrowing expenses are recognised on time basis over the period of contract. vii. Portfolio management fees: Portfolio management fees are accounted on accrual basis as follows: a. In case of percentage based fees, as a percentage of the initial corpus for the first year and on additional placement of funds during the year, on a quarterly basis. For each subsequent year, the fees will be recognized as a percentage of the unaudited net asset value on the renewed corpus at the commencement of each year and on any additional placement of funds during the year. b. In case of return based fee, as a percentage of the annual realised profit. e. Asset Management Management fee is recognised at specific rates agreed with the relevant schemes of Mutual Funds applied on the average daily net asset of each scheme.

27 15 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.) Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements (Contd.) C. FIXED ASSETS AND INTANGIBLE ASSETS Fixed assets/intangible assets have been stated at cost inclusive of incidental expenses less accumulated depreciation/amortisation. DEPRECIATION The Group has adopted the Straight Line Method of depreciation so as to write off 100% of the cost of the assets at rates higher than those prescribed under Schedule XIV to the Companies Act, 1956 based on the Management s estimates of useful lives of these assets. Estimated useful lives over which assets are depreciated are as follows: Asset Type Useful life in years Premises 30 Improvement to leasehold premises Over the period of lease subject to a maximum of 6 years. Office equipments 5 Computers 3 Furniture and Fixtures 6 Vehicles 4 ATMs 5 Software (including development) expenditure 3 Forex Broking Business rights 10 Goodwill 5 Membership cards of the Stock Exchange, Mumbai 10 D. RETIREMENT BENEFITS i. Contribution as required by statute is debited to the Profit & Loss Account. ii The Bank makes annual contribution to a Gratuity Fund administered by trustees and managed by a Life Insurance Company. The Bank accounts for the liability for future gratuity benefits based on actuarial valuation. In respect of other entities, Provision for Gratuity is made on the basis of actuarial valuation. iii. The Bank contributes a sum equivalent to 15% of employees eligible salary to a Superannuation Fund administered by trustees and managed by a Life Insurance Company. The Bank recognises such contributions as an expense in the year they are incurred. iv. Provision for Leave encashment liability to employees, wherever payable, is made on the basis of actuarial valuation. E. INVESTMENTS FOR BANK 1. CLASSIFICATION a. In accordance with RBI guidelines, investments are categorised into Held for Trading, Available for Sale and Held to Maturity. i. Investments that are held for resale within 90 days from the date of purchase are classified as Held for Trading. ii. iii. Investments that the Bank intends to hold to maturity are classified as Held to Maturity. Investments which are not classified in the above categories are classified as Available for Sale. b. The cost of investments is determined on the weighted average basis. c. Broken period interest on debt instruments is treated as revenue item. d. Brokerage, commission etc. paid at the time of acquisition of investments is charged to revenue. 2. VALUATION The valuation of investments is made in accordance with the RBI guidelines. a. Held for Trading/Available for Sale Each security in this category is revalued at the market price or fair value and the net depreciation of each group is recognized in the Profit and Loss Account. Net appreciation, if any, is ignored. b. Held to Maturity These are carried at their acquisition cost. Any premium on acquisition of debt instruments is amortised over the balance maturity of the security. Any diminution, other than temporary, in the value of securities, is provided for. The market value of investments where current quotations are not available is determined as per the norms laid down by the RBI.

28 16 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.) Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements (Contd.) 3. TRANSFER BETWEEN CATEGORIES Transfer between categories is done at the acquisition cost/book value/market value on the date of the transfer, whichever is the least and depreciation, if any, on such transfer is fully provided for. 4. PROFIT OR LOSS ON SALE/REDEMPTION OF INVESTMENTS a. Held For Trading and Available for Sale Profit or loss on sale/redemption is included in the Profit and Loss Account. b. Held to Maturity Profit on sale/redemption of investments is included in the Profit and Loss Account. Loss on sale is charged off to the Profit and Loss Account. In case of profits, the same is appropriated to Capital Reserve after adjustments for tax and Statutory Reserve transfer. FOR INSURANCE COMPANY All debt securities are considered as held to maturity and accordingly recorded at cost (excluding interest paid, if any). Debt securities including government securities are stated at net amortised cost. The premium/discount, if any, on purchase of debt securities is amortised/accrued over the period to maturity. Listed equity shares as at balance sheet date are stated at fair value being the last quoted closing price on The Stock Exchange, Mumbai ( BSE ). Unrealised gains/losses arising due to changes in the fair value of listed equity shares are carried forward to Balance sheet. The profit and loss on actual sale of listed equity includes the accumulated changes in the fair value recognised previously. FOR OTHER ENTITIES As required by Accounting Standard 13, Accounting for Investments, investments are classified into long term investments and current investments. Investments, which are intended to be held for more than one year are classified as long term investments and investments, which are intended to be held for less than one year, are classified as current investments. Long term investments are accounted at cost and any decline in value, other than temporary is provided for. Current investments are valued at cost or market/fair value whichever is lower. Securities acquired with the intention to trade are considered as Stock-in-Trade. Investments classified as Stock-in-Trade by some of the entities are valued at cost or market price, whichever is lower. Brokerage, stamping and additional charges paid are included in the cost of investments. F. FOREIGN CURRENCY AND DERIVATIVE TRANSACTIONS FOR BANK i. Foreign currency assets and liabilities are translated as at the balance sheet date at rates notified by the Foreign Exchange Dealers Association of India (FEDAI). ii. Income and Expenditure items are translated at the rates of exchange prevailing on the date of the transaction. iii. Foreign Exchange contracts (other than deposit and placement swaps) outstanding at the balance sheet date are revalued at rates notified by FEDAI and resulting profits or losses are included in the Profit and Loss Account. Foreign exchange swaps linked to foreign currency deposits and placements are translated at the ruling spot rate at the time of swap. The premium/discount on the swap arising out of the difference in the exchange rate of the swap date and the maturity date of the underlying forward contract is amortised over the period of the swap and the same is recognised as other income. iv. Derivative transactions comprising of swaps and options are disclosed as off balance sheet exposures. The swaps are segregated into trading or hedge transactions. Trading swaps outstanding as at the Balance Sheet dates are marked to market and the resulting profits or losses, are recorded in the Profit and Loss Account. Outstanding derivative transactions designated as Hedges are accounted on an accrual basis over the life of the transaction. Option premium paid is accounted for in the profit & loss account on expiry of the option. v. Contingent liabilities at the balance sheet date on account of outstanding foreign exchange contracts are restated at year end rates reported by FEDAI. FOR OTHER ENTITIES vi. Transactions in foreign currencies are translated to Indian Rupees at the rate of exchange ruling on the date of the transaction. vii. Assets and liabilities contracted in foreign currencies are translated into Indian Rupees at the rate of exchange ruling at the Balance Sheet date. viii. Exchange differences arising on settlement of the transaction and on account of restatement of assets and liabilities are dealt with in the Profit and Loss Account, except in cases where they relate to the acquisition of fixed assets, in which case, they are adjusted to the carrying cost of such assets.

29 17 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.) Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements (Contd.) ix. The financial statements of all subsidiaries incorporated outside India are converted on the following basis: (a) Income and expenses are converted at the average rate of exchange applicable for the year and (b) All assets and liabilities are translated at the closing rate as on the balance sheet date. The exchange difference arising out of year end translation is debited or credited to Translation Reserve forming part of Reserves and Surplus. EQUITY INDEX/STOCK FUTURES/OPTIONS x. Gains are recognised only on settlement/expiry of the derivative instruments. xi. All open positions are marked to market and the unrealised gains/(loss) are netted on a scripwise basis. Mark to market gains, if any, are not recognised. xii. Debit/credit balances on open positions are shown as other assets/other liabilities, as the case may be. G. ADVANCES i. Advances are classified into standard, sub-standard, doubtful and loss assets in accordance with RBI guidelines and are stated net of provisions made towards non-performing assets. ii. Provision for non-performing assets comprising sub-standard, doubtful and loss assets is made in accordance with RBI guidelines. In addition, the Group adopts an approach to provisioning that is based on past experience, evaluation of security and other related factors. iii. A general provision of 0.25% is made on all standard assets of the Bank as per RBI guidelines on all loans other than personal loans. In respect of personal loans, a general provision of 0.50% is made. In respect of Kotak Mahindra Primus Limited, a subsidiary, the additional provision on the asset portfolio is shown as Reserve for Doubtful Debts. iv. Amounts paid for acquiring non-performing assets from other banks/nbfcs/financial Institutions are considered as advances. Actual collections received on such non-performing assets are compared with cash flows estimated while purchasing the asset to ascertain default. If the default is in excess of 90 days, then the assets are classified into sub-standard, doubtful and loss as required by the draft RBI guidelines on purchase of non-performing assets. H. BORROWING COSTS Borrowing costs other than those directly attributable to qualifying Fixed Assets are recognised as an expense in the period in which they are incurred. I. ACQUISITION COSTS Acquisition costs such as commission and other costs are expensed in the year in which they are incurred except as stated in para 2 B (a) (iii). J. TAXES ON INCOME Current tax is determined as the amount of tax payable in respect of taxable income for the year. Deferred tax is recognised in respect of deferred tax assets on timing differences being the difference between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax asset is recognised subject to prudence and judgement that realisation is more likely than not. Changes in deferred tax assets/liabilities on account of changes in effective tax rates are given effect to in the Profit and Loss Account. K. SEGMENTAL ACCOUNTING In accordance with Accounting Standard 17 (AS17) on Segment Reporting, the Group s business has been segregated into the following segments whose principal activities are as under: Segment Principal activity Bank Treasury (*) Money market, forex market, derivatives and investments other than strategic investments. Corporate Banking (*) Wholesale borrowings and lendings and services to corporate sector. Retail Liabilities and branch banking (*) Retail borrowings covering savings and current accounts and banking branch network and services. Retail Lending Activities (*) Commercial vehicle finance, personal loans, home loans, agriculture finance and other loans/services. Corporate Centre (*) Strategic investments and group activities. Car Finance Car Financing. Broking Brokerage related to secondary market transactions, services rendered in connection with primary market subscription mobilization, fees related to portfolio management services, depository participation etc. Investment Banking Financial advisory services such as mergers and acquisition advice and equity-debt issue management services. Trading/Principal Investments Primary dealer in Debt and money markets and equity portfolio. Insurance Life insurance.

30 18 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.) Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements (Contd.) The above segments have been identified based on the organisation structure, the customer segment, products and services offered and its relation to risk and reward, and the internal reporting process. (*) A transfer pricing mechanism between segments has been established to arrive at interest cost on the borrowings of the segments and which is disclosed as part of Segment Revenue. Segment revenue consists of earnings from external customers and inter-segment revenue as stated above. Segment expenses consist of interest expenses including those allocated, operating expenses, provisions and allocated costs. Segment results are a result of segment revenue and segment expenses. Segment assets include assets related to segments and excludes tax related assets. Segment liabilities include liabilities related to the segment excluding net worth. L. EMPLOYEE STOCK OPTION SCHEME The Bank has formulated an Employee Stock Option Scheme (ESOS) in accordance with SEBI (Employee Stock Option Scheme) Guidelines, The Scheme provides for grant of options to employees of the Group to acquire the equity shares of the Bank 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 market price of the share at the date of grant of the option under ESOS over the exercise price of the option is amortised on a straight-line basis over the vesting period. M. PRELIMINARY EXPENSES Preliminary expenses are written off as per section 35D of the Income Tax Act, N. CLAIMS Claims for death, including the reinsurance benefits, are accounted for when intimated. Maturity claims are accounted on the date of the maturity. 3 The Bank charges off to the Profit and Loss account all expenses related to acquisition costs of advances in the year in which they are incurred. Kotak Mahindra Primus Limited, a subsidiary of the bank charges off such costs based on the Internal Rate of Return of a contract. On account of this difference in accounting policy, unamortised brokerage amounting to Rs. 3, lacs (previous year Rs. 2, lacs) is carried forward in the Balance Sheet under Other Assets. 4 Investments include Rs. 11, lacs as securities earmarked, partially or wholly towards initial margin for equity index/stock futures account, stocks pledged with National Securities Clearing Corporation Limited towards exposure in derivatives and stocks pledged with The Stock Exchange Mumbai towards additional base capital in cash segment. 5 Investments include Rs lacs (previous year Rs lacs) in GDR s and Rs lacs (previous year Nil) in ADR s. 6 During the year, some of the entities have discontinued its policy of encashment of leave unavailed by their employees. No provision for leave encashment has therefore been made for the current year in respect of these entities. Further, the accumulated provision for leave encashment as at March 31, 2004 amounting to Rs lacs has been written back to the Profit and loss account under other income. 7 Balances in Banks in other deposit accounts includes Rs. 2,900 lacs (previous year Rs. Nil) which are under the lien to National Securities Clearing Corporation Limited, Rs lacs (previous year Rs. Nil) with the Stock Exchange, Mumbai and Rs lacs (previous year Rs lacs) maintained as collateral in respect of receivables securitised. 8 Other Liabilities and Provisions (Schedule 5) includes the following items included under Provision for Contingencies provided by Kotak Securities Limited, a subsidary, which have been recognised in the accounts in respect of obligations arising from past event, the settlement of which is expected to result in an outflow embodying economic benefits. (Rs. in lacs) Description Balance as on Addition Reversed/ Balance as on April 1, 2004 During the year paid during the year March 31, 2005 Interest on Stamp Duty on contracts Provision has been recognised for likely payment of interest on delayed payment of stamp duty Stamp duty on Proprietary Trades Provision has been recognised for likely payment of stamp duty on proprietary trades Total

31 19 Kotak Mahindra Bank Limited (Consolidated) Schedules forming part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.) Schedule 18 : Significant Accounting Policies and Notes to the Financial Statements (Contd.) 9 DESCRIPTION OF CONTINGENT LIABILITIES Sr. Contingent Liability* Brief Description No. 1. Claims not acknowledged as debts. This also includes liability on account of income tax, interest tax, sales tax, lease tax and service tax demands. The Group is a party to various legal proceedings in the normal course of business. The Group does not expect the outcome of these proceedings to have a material adverse effect on the financial conditions, result of operations or cash flows. 2. Liability on account of forward exchange and The bank enters into foreign exchange contracts, currency options, forward rate derivative contracts agreements, currency swaps and interest rate swaps with inter bank participants on its own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Currency Swaps are commitments to exchange cash flows by way of interest/principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. The notional amounts that are recorded as contingent liabilities are amounts used as a benchmark for the calculation of interest component of the contracts. 3. Guarantees given on behalf of constituents, The Group issues documentary credit and guarantees on behalf of its customers. Acceptances, Endorsements and others Documentary credits such as letters of obligations, enhance the credit standing of the customers of the bank. Guarantees generally represent irrevocable assurances that the Group will make payments in the event of customer failing to fulfill its financial or performance obligations. 4. Other items for which the Bank is contingently liable These include: (a) Credit enhancements in respect of securitised loans to which the Special Purpose vehicle has recourse, (b) Bills rediscounted by the Bank, (c) Capital Commitments. * Also refer Schedule 12 Contingent Liabilities 10 EARNINGS PER EQUITY SHARE As at 31 st As at 31 st Particulars March, 2005 March, 2004 Rupees in lacs Rupees in lacs Reconciliation between weighted shares used in the computation of basic and diluted earnings per share: Weighted average number of equity shares used in computation of basic earnings per share 11,98,97,779 11,86,69,106 Effect of potential equity shares for stock options outstanding 8,86,267 14,49,100 Weighted average number of equity shares used in computation of diluted earnings per share 12,07,84,046 12,01,18,206 Annualised earnings per equity share have been calculated based on profit available to equity shareholders of Rs. 17, lacs (previous year Rs. 17, lacs) and the weighted average number of equity shares outstanding as at end of the year of 11,98,97,779 (previous year 11,86,69,106) Following is the reconciliation between basic and diluted earnings per share: Nominal value per share Basic earnings per share (*) Effect of potential equity shares for stock options (*) Diluted earnings per share (*) (*) Following the approval of the shareholders at the Annual General Meeting on 26 th July, 2004, a committee of the Board of Directors at its meeting held on 28 th August, 2004 allotted bonus shares in the ratio of one equity share for every share held. In accordance with Accounting Standard 20 (AS 20), Earnings Per Share issued by the Institute of Chartered Accountants of India (ICAI), the earnings per share for the previous year ended 31 st March, 2004 have been reworked as if the bonus shares were in existence during the said period.