The Chief Executive Officer The Hongkong and Shanghai Banking Corporation Limited India Branches

The Chief Executive Officer The Hongkong and Shanghai Banking Corporation Limited India Branches Auditors report on the financial statements of The Hongkong and Shanghai Banking Corporation Limited - India Branches 1. We have audited the attached balance sheet of The Hongkong and Shanghai Banking Corporation Limited India Branches ( the Bank ) as at 31 March 2006 and the related profit and loss account and the cash flow statement of the Bank for the year ended on that date, annexed thereto. 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 auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. 3. The balance sheet and profit and loss account have been drawn up in accordance with the provisions of section 29 of the Banking Regulation Act, 1949 read with the provisions of sub sections (1), (2) and (5) of Section 211 and sub section (5) of Section 227 of the Companies Act, 1956. 4. In our opinion, and to the best of our information and according to the explanations given to us, the financial statements give a true and fair view in conformity with the accounting principles generally accepted in India: - In the case of balance sheet, of the state of affairs of the Bank at 31 March 2006; - In the case of the profit and loss account, of the profit for the year ended on that date; and - In the case of the cash flow statement, of the cash flows for the year ended on that date. 5. Further in our opinion the accompanying balance sheet, profit and loss account and cash flow statement dealt with by this report comply with the Accounting Standards, referred to in sub section 3(C) of section 211 of the Companies Act, 1956, to the extent they are not inconsistent with the accounting policies prescribed by the Reserve Bank of India. 1

Auditors report (Continued) The Hongkong and Shanghai Banking Corporation Limited India Branches 6. We further report that: a) We have obtained all information and explanations which to the best of our knowledge and belief were necessary for the purpose of the audit and found them to be satisfactory; b) the financial accounting systems of the Bank are centralised and therefore, accounting returns for the purpose of preparing financial statements are not required to be submitted by the branches; c) the transactions which have come to our notice have been within the powers of the Bank; d) in our opinion, the Bank has maintained proper books of account as required by law insofar as appears from our examination of the books; e) the balance sheet, profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account; f) in our opinion, and to the best of our information and according to explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required for banking companies and guidelines issued by the Reserve Bank of India from time to time; and g) the requirements of section 274 (1) (g) of the Companies Act, 1956 are not applicable considering the Bank is a branch of The Hongkong and Shanghai Banking Corporation Limited which is incorporated with limited liability in Hong Kong SAR. For BSR & Co. Chartered Accountants Akeel Master Partner Membership No.: 046768 Mumbai 5 May 2006 2

The Hongkong and Shanghai Banking Corporation Limited Balance Sheet for the India Branches as at 31 March 2006 Schedules 31.03.2006 31.03.2005 (Rs 000) (Rs 000) CAPITAL AND LIABILITIES Amount of deposit kept with RBI under section 11(2) (b) of the Banking Regulation Act, 1949 1 4,372,000 3,522,000 Capital 1 13,677,500 13,677,500 Reserves and surplus 2 27,985,221 22,095,597 Deposits 3 249,551,124 170,127,893 Borrowings 4 31,159,523 32,363,211 Other liabilities and provisions 5 52,357,338 40,733,542 TOTAL 374,730,706 278,997,743 ASSETS Cash and balances with Reserve Bank of India 6 14,564,166 13,845,731 Balances with banks and money at call and short notice 7 14,184,609 8,280,852 Investments 8 121,419,272 91,688,648 Advances 9 168,122,960 126,206,114 Fixed assets 10 4,207,050 4,236,791 Other assets 11 52,232,649 34,739,607 TOTAL 374,730,706 278,997,743 (0) 0 Contingent liabilities 12 3,197,350,334 2,093,254,325 Bills for collection 45,326,334 35,197,345 Significant accounting policies and notes to accounts 18 Schedules referred to herein form an integral part of the balance sheet. As per our report attached For BSR & Co. Chartered Accountants For The Hongkong and Shanghai Banking Corporation Limited Akeel Master Anurag Adlakha Niall S. K. Booker Partner Chief Financial Officer Group General Manager and Chief Executive Officer, India Membership No : 046768 Mumbai 5 May 2006

The Hongkong and Shanghai Banking Corporation Limited Profit and Loss Account for the India Branches for the year ended 31 March 2006 Year ended Year ended Schedules 31.03.2006 31.03.2005 (Rs 000) (Rs 000) INCOME Interest earned 13 22,019,337 16,268,295 Other income 14 9,282,571 6,610,710 TOTAL 31,301,908 22,879,005 EXPENDITURE Interest expended 15 8,278,766 6,444,405 Operating expenses 16 10,252,413 6,984,789 Provisions and contingencies 17 7,621,486 6,080,753 TOTAL 26,152,665 19,509,947 Net profit for the year 5,149,243 3,369,058 Profit brought forward - 485,225 TOTAL 5,149,243 3,854,283 APPROPRIATIONS Add: Transfer from revaluation reserves 498,942 22,987 Less: Transfer to statutory reserve 1,287,311 842,265 Transfer to investment fluctuation reserve 3,124,000 1,350,000 Transfer to capital reserves 821,734 1,685,005 Balance carried over to balance sheet 415,140 - TOTAL 5,149,243 3,854,283 Significant accounting policies and notes to accounts 18 Schedules referred to herein form an integral part of the profit and loss account. As per our report attached For BSR & Co. Chartered Accountants For The Hongkong and Shanghai Banking Corporation Limited Akeel Master Anurag Adlakha Niall S. K. Booker Partner Chief Financial Officer Group General Manager and Chief Executive Officer, India Membership No : 046768 Mumbai 5 May 2006

The Hongkong and Shanghai Banking Corporation Limited Cashflow Statements for the India Branches for the year ended 31 March 2006 Year ended Year ended 31.03.2006 31.03.2005 (Rs 000) (Rs 000) Cash flow from operating activities Net profit before taxes 9,681,437 5,962,742 Adjustments for : Depreciation on fixed assets 484,335 499,497 Provision for depreciation on investments 1,201,431 1,626,888 Provision for bad and doubtful debts and other assets 1,808,003 1,165,778 Provision for contingent liabilities and commitments 79,858 694,403 (Profit)/Loss on sale of fixed assets (303,263) 39,611 12,951,801 9,988,919 Adjustments for : (Increase)/Decrease in Investments (excluding Held to Maturity securities) (30,932,055) 9,469,318 (Increase)/Decrease in Advances (43,722,016) (31,067,951) Increase/(Decrease) in Borrowings (1,203,688) 6,970,987 Increase/(Decrease) in Deposits 79,423,231 7,429,133 (Increase)/Decrease in Other assets (16,664,383) 465,503 Increase/(Decrease) in Other liabilities and provisions 11,541,105 257,221 (1,557,806) (6,475,789) Direct taxes paid (5,360,853) (3,848,732) Net cash flow from operating activities (A) 6,033,142 (335,602) Cash flow from investing activities Reduction in Held to Maturity securities - 1,652,000 Purchase of fixed assets (267,222) (327,796) Proceeds from sale of fixed assets 856,272 134,327 Net cash flow from investing activities (B) 589,050 1,458,531 Cash flow from financing activities Capital remittance from Head Office - 6,527,250 Net cash flow from financing activities (C) - 6,527,250 Net increase/(decrease) in cash and cash equivalents (A) + (B) +(C) 6,622,192 7,650,179 Cash and cash equivalent at beginning of year 22,126,583 14,476,404 Cash and cash equivalent at end of year 28,748,775 22,126,583 Note: Cash and cash equivalent comprise cash in hand and in ATMs, balances with Reserve Bank of India and balances with banks and money at call and short notice.(refer schedule 6 and 7 of the balance sheet) For BSR & Co. Chartered Accountants For The Hongkong and Shanghai Banking Corporation Limited Akeel Master Anurag Adlakha Niall S. K. Booker Partner Chief Financial Officer Group General Manager and Chief Executive Officer, India Membership No: 046768 Mumbai 5 May 2006

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Balance Sheet of the India Branches as at 31 March 2006 31.03.2006 31.03.2005 (Rs 000) (Rs 000) 1 CAPITAL Amount of deposit kept with the Reserve Bank of India under Section 11(2)(b) of the Banking Regulation Act,1949. 4,372,000 3,522,000 Capital Opening Balance 13,677,500 7,150,250 Add : Remittance from Head Office - 6,527,250 13,677,500 13,677,500 2 RESERVES AND SURPLUS Statutory Reserve Opening balance 4,179,285 3,337,020 Additions during the year 1,287,311 842,265 5,466,596 4,179,285 Capital Reserves Opening balance 11,021,224 8,182,088 Add : Transfer from profit and loss account 821,734 1,685,005 Capitalisation of Head Office Charges - 1,154,131 Transfer from Investment Fluctuation Reserve 6,787,907-18,630,865 11,021,224 Revaluation Reserve Opening balance 2,167,136 1,995,964 Revaluation of premises 720,554 160,596 Transfer to profit and loss account (498,942) (22,987) Addition / Deduction during the year 19,827 33,563 2,408,575 2,167,136 Revenue and other Reserves Investment fluctuation reserve Opening balance 3,663,907 2,313,907 Additions during the year 3,124,000 1,350,000 6,787,907 3,663,907 Transferred to Capital Reserve (6,787,907) - - 3,663,907 Other reserves 1,064,045 1,064,045 1,064,045 1,064,045 1,064,045 4,727,952 Balance in Profit and Loss Account 415,140-415,140 - TOTAL 27,985,221 22,095,597

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Balance Sheet of the India Branches (Continued) as at 31 March 2006 31.03.2006 31.03.2005 (Rs 000) (Rs 000) 3 DEPOSITS A. Demand Deposits i) From banks 771,770 730,786 ii) From others 88,067,111 46,946,134 88,838,881 47,676,920 Savings Bank Deposits 45,418,360 38,579,550 Term Deposits i) From banks - - ii) From others 115,293,883 83,871,423 115,293,883 83,871,423 TOTAL 249,551,124 170,127,893 B. i) Deposits of branches in India 249,551,124 170,127,893 ii) Deposits of branches outside India - - TOTAL 249,551,124 170,127,893 4 BORROWINGS I Borrowings in India i) Reserve Bank of India 290,000 - ii) Other banks 145,179 15,938,992 iii) Other institutions and agencies 9,604,600-10,039,779 15,938,992 II Borrowings outside India 21,119,744 16,424,219 TOTAL 31,159,523 32,363,211 Secured borrowings included in I & II above - -

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Balance Sheet of the India Branches (Continued) as at 31 March 2006 5 OTHER LIABILITIES AND PROVISIONS 31.03.2006 31.03.2005 (Rs 000) (Rs 000) Bills payable 6,317,164 6,531,823 Interest accrued 3,574,889 4,272,289 Provision against standard assets 915,063 314,000 Others [including subordinated debt of Rs 2,000 million (previous year : Rs 2,000 million) and provisions] 41,550,222 29,615,430 TOTAL 52,357,338 40,733,542 6 CASH AND BALANCES WITH RESERVE BANK OF INDIA Cash in hand and in ATM's (including foreign currency notes) 870,054 802,831 Balances with the Reserve Bank of India i) In current account 13,694,112 13,042,900 ii) In Other accounts - - TOTAL 14,564,166 13,845,731 7 BALANCES WITH BANKS AND MONEY AT CALL & SHORT NOTICE In India i) Balances with banks a) in current accounts 2,016,474 2,294,638 b) in other deposit accounts - 1,500,000 ii) Money at call and short notice a) with banks - - b) with other institutions - - Total (i) and (ii) 2,016,474 3,794,638 Outside India i) In current accounts 568,235 111,714 ii) In other deposit accounts - - iii) Money at call and short notice 11,599,900 4,374,500 12,168,135 4,486,214 TOTAL 14,184,609 8,280,852

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Balance Sheet of the India Branches (Continued) as at 31 March 2006 8 INVESTMENTS 31.03.2006 31.03.2005 (Rs 000) (Rs 000) A. Investments in India in: Government securities 86,056,785 76,115,365 Other approved securities 553,259 615,454 Shares - fully paid 48,203 36,400 Debentures and bonds 20,037,996 12,986,059 Subsidiaries and/or joint ventures - fully paid 1 1 - partly paid 499 499 Others 14,722,529 1,934,870 TOTAL 121,419,272 91,688,648 B. Gross value of Investments in India 124,722,741 93,790,686 Aggregate provision for depreciation (3,303,469) (2,102,038) Net Value 121,419,272 91,688,648 9 ADVANCES A. Bills purchased and discounted # 17,794,907 16,188,103 Cash credits, overdrafts and loans repayable on demand 59,261,591 47,568,343 Term loans 91,066,462 62,449,668 TOTAL 168,122,960 126,206,114 B. Secured by tangible assets (including advances against book debt) 94,929,136 81,619,363 Covered by Bank/Government guarantees 9,294,979 5,458,077 Unsecured 63,898,845 39,128,674 TOTAL 168,122,960 126,206,114 C. Priority sectors (including export finance) 34,745,487 22,236,737 Public sector 988,970 1,981,032 Banks 5,203 29,092 Others 132,383,300 101,959,253 TOTAL 168,122,960 126,206,114 # net of bills rediscounted amounting to Rs 1,813 million (previous year Rs 46 million)

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Balance Sheet of the India Branches (Continued) as at 31 March 2006 10 FIXED ASSETS 31.03.2006 31.03.2005 (Rs 000) (Rs 000) Premises (including leasehold) (See Schedule 18 Note 5.1 ) Cost at the beginning of the year including revaluation 3,903,969 3,811,832 Additions during the year 47,269 84,922 Revaluation of premises 720,554 160,596 4,671,792 4,057,350 Deductions during the year (609,416) (153,381) 4,062,376 3,903,969 Accumulated depreciation to date (527,793) (436,656) 3,534,583 3,467,313 Other Fixed Assets (including furniture and fixtures) Cost at the beginning of the year 3,264,968 3,446,393 Additions during the year 219,953 242,873 3,484,921 3,689,266 Deductions during the year (36,351) (424,298) 3,448,570 3,264,968 Accumulated depreciation to date (2,776,103) (2,495,490) 672,467 769,478 TOTAL 4,207,050 4,236,791 11 OTHER ASSETS Inter-office adjustments Branches in India (net) - - Interest accrued 3,459,352 2,405,472 Tax paid in advance/tax deducted at source(net) 2,606,323 1,516,814 Deferred Tax 1,845,563 2,617,599 Stationery and stamps 4,877 3,929 Non-banking assets acquired in satisfaction of claims - - Items in course of collection 3,186,796 2,654,356 Others 41,129,738 25,541,437 TOTAL 52,232,649 34,739,607

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Balance Sheet of the India Branches (Continued) as at 31 March 2006 12 CONTINGENT LIABILITIES (See Schedule 18 Note 5.5) 31.03.2006 31.03.2005 (Rs 000) (Rs 000) Claims against the bank not acknowledged as debts (including tax matters) 2,138,416 2,219,584 Liability for partly paid investments 500 500 Liability on account of outstanding forward exchange and derivative contracts i) Forward contracts 777,274,573 551,816,482 ii) Currency options 291,217,966 71,934,095 iii) Derivative contracts 1,988,655,461 1,378,427,473 Guarantees given on behalf of constituents i) In India 37,061,825 23,218,746 ii) Outside India 15,816,970 17,095,644 Acceptances, endorsements and other obligations 83,093,134 48,354,331 Bills rediscounted 1,813,155 45,833 Other items for which the bank is contingently liable 278,334 141,637 TOTAL 3,197,350,334 2,093,254,325

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Profit and Loss of the India Branches (Continued) for the year ended 31 March 2006 13 INTEREST EARNED Year Ended Year Ended 31.03.2006 31.03.2005 (Rs 000) (Rs 000) Interest/discount on advances/bills 12,836,945 8,740,811 Income on investments 8,317,658 6,947,573 Interest on balances with Reserve Bank of India and other inter-bank funds 828,572 373,542 Others 36,162 206,369 TOTAL 22,019,337 16,268,295 14 OTHER INCOME Commission, exchange and brokerage 5,384,627 3,528,395 Profit / (Loss) on sale/maturity of investments (net) (2,488,518) (820,418) Profit / (Loss) on disposal of land, buildings and other assets (net) 303,263 (39,611) Profit on exchange transactions (net) 3,363,016 2,515,719 Miscellaneous income (including income on derivative products) 2,720,183 1,426,625 TOTAL 9,282,571 6,610,710 15 INTEREST EXPENDED Interest on deposits 6,054,642 4,307,455 Interest on Reserve Bank of India/ inter-bank borrowings 1,797,113 1,611,447 Others (including interest paid on subordinated debt) 427,011 525,503 TOTAL 8,278,766 6,444,405

The Hongkong and Shanghai Banking Corporation Limited Schedules forming part of the Profit and Loss of the India Branches (Continued) for the year ended 31 March 2006 Year Ended Year Ended 31.03.2006 31.03.2005 ( Rs 000) (Rs 000) 16 OPERATING EXPENSES Payments to and provisions for employees (See Schedule 18 Note 5.2) 4,220,248 2,553,764 Rent, taxes and lighting 446,307 407,317 Printing and stationery 178,802 143,605 Advertisement and publicity 939,727 304,979 Depreciation on Bank's property 484,335 499,497 Auditors' fees and expenses 1,452 964 Law charges 55,684 35,549 Postage, telegrams, telephones, etc. 423,443 401,986 Repairs and maintenance 240,944 210,944 Insurance 250,235 179,753 Other expenditure (See Schedule 18 Note 5.6 - t) 3,011,236 2,246,431 TOTAL 10,252,413 6,984,789 17 PROVISIONS & CONTINGENCIES Provision for bad & doubtful debts and other assets 1,808,003 1,165,778 Provision for contingent liabilities & commitments (See Schedule 18 Note 5.3) 79,858 694,403 Taxation charge - Current tax expense 3,640,158 2,808,392 - Fringe benefit tax expense 120,000 - - Deferred tax expense / (benefit) 772,036 (214,708) 4,532,194 2,593,684 Provision for depreciation on investments 1,201,431 1,626,888 TOTAL 7,621,486 6,080,753

The Hongkong and Shanghai Banking Corporation Limited SCHEDULE 18 1 Background The financial statements for the year ended 31 March 2006 comprise the accounts of the India branches of The Hongkong and Shanghai Banking Corporation Limited ( the Bank ), which is incorporated and registered in the Hong Kong Special Administrative Region. The Bank s ultimate holding company is HSBC Holdings plc, which is incorporated in England. 2 Basis of preparation The financial statements are prepared and presented under the historical cost convention and accrual basis of accounting, except where otherwise stated, and in accordance with the generally accepted accounting principles and statutory provisions prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India ( RBI ), Accounting Standards ( AS ) issued by the Institute of Chartered Accountants of India ( ICAI ), to the extent applicable and current practices prevailing within the banking industry in India. 3 Use of estimates The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and disclosure of contingent liabilities as at the date of the financial statements. Actual results could differ from those estimates. Any revision to accounting estimates is recognized prospectively in current and future periods. 4 Significant accounting policies 4.1 Investments a) Classification In compliance with RBI guidelines, all investments, which cover both debt and equity securities, are categorised as Held for trading ( HFT ), Available for sale ( AFS ) or Held to maturity ( HTM ). However for the purpose of disclosure in the balance sheet investments are classified as disclosed in Schedule 8 ( Investments ). b) Valuation Investments categorised under AFS and HFT categories are marked to market on a monthly basis. Net depreciation, if any in any classification mentioned in Schedule 8 ( Investments ) is recognized in the profit and loss account. The net appreciation if any, under each classification is ignored, except to the extent of depreciation previously provided. The book value of individual securities is not changed consequent to periodic valuation of investments.

The Hongkong and Shanghai Banking Corporation Limited Investments classified under the HTM category are carried at their acquisition cost and any premium on acquisition is amortised on a straight line basis over the remaining period to maturity. Where in the opinion of management, a diminution, other than temporary in the value of investments classified under HTM has taken place, suitable provisions are made. Treasury Bills and Commercial Paper being discounted instruments, are valued at carrying cost. c) Transfer between categories Reclassification of investments from one category to the other, if done, is in accordance with RBI guidelines and any such transfer is accounted for at the acquisition cost / book value / market value, whichever is lower, as at the date of transfer. Depreciation, if any, on such transfer is fully provided for. d) Accounting for repos /reverse repos Repurchase (repos) and reverse repurchase (reverse repos) transactions are accounted for on outright sale and outright purchase basis respectively in line with RBI guidelines. The difference between the clean price of first leg and the clean price of the second leg is recognized as interest income/expense over the period of transaction. However, depreciation in the value, if any, compared to the original cost, is provided for. 4.2 Advances Advances are stated net of specific provision and interest in suspense for nonperforming advances. Specific provision represents the quantification of actual and expected losses from identified non performing advances. Non performing advances are identified by periodic appraisals of the portfolio by management or in accordance with RBI guidelines, whichever is earlier, and specific provision is made on a case by case basis based on management s assessment of impairment of the advance, subject to the minimum provisioning levels prescribed by the RBI. Where there is no longer any realistic prospect of recovery, the outstanding advance is written off. Subject to the minimum provisioning levels prescribed by the RBI, provision on homogenous loans relating to retail assets is assessed on a portfolio basis using the historical loss and net flow method. As per RBI guidelines, a general provision @ 0.40% (except for loans to Small & Medium Enterprises @ 0.25%) is required to be made on all standard assets. These provisions are included in Schedule 5 ( Other Liabilities ).

The Hongkong and Shanghai Banking Corporation Limited Sale of non performing advances is accounted for in accordance with the RBI guidelines on Purchase/Sale of Non Performing Assets, wherein if the sale of non performing advances is for a value higher than the Net Book Value (NBV) of the loans, the excess, if any, is not recognized as profits but is held back to meet the shortfall/ loss on account of sale of other non performing advances and classified as additional standard asset provision. In case of sale at the value lower than NBV, the shortfall is recognised in the profit and loss account in the year of sale after setting off any earlier provision held back on sale of other non performing advances. 4.3 Transactions involving foreign exchange Transactions denominated in foreign currencies are recorded at the rates prevailing on the date of the transactions. Exchange differences arising on foreign currency transactions settled during the year are recognized in the profit and loss account of the year. Assets and liabilities denominated in foreign currencies as at the balance sheet date are restated at the closing rates notified by Foreign Exchange Dealers Association of India ( FEDAI ) and resultant exchange differences are recognized in the profit and loss account. Outstanding spot and forward exchange contracts are revalued at the exchange rates notified by FEDAI prevailing at the year end and the resultant gain or loss is recognized in the profit and loss account. Contingent liabilities denominated in foreign currencies are disclosed at closing rates of exchange notified by FEDAI. 4.4 Derivative financial instruments Derivatives in the form of forwards, swaps and option transactions are undertaken by the Bank in the foreign exchange and interest rate markets. Accounting for these instruments is dependent upon whether the transactions are undertaken for trading or hedging purposes. Trading transactions include transactions undertaken for market making, to service customer needs and for proprietary purposes. Hedging transactions are entered into as part of the Bank s risk management strategy relating to the Bank s assets, liabilities, positions or cash flows. Trading transactions are marked to market on a daily basis and the unrealized losses or gains are recognized into the profit and loss account as Other Income. Derivatives designated as a hedge is accounted for in line with the accounting of the underlying asset or liability. Where the underlying asset or liability is accounted for on an accrual basis the derivative is also accounted for on accrual basis. Where the designated asset or liability that is carried at lower of cost or market value in the financial statements the derivatives are marked to market with the resulting gain or loss recorded as an adjustment to the market value of designated asset or liability.

The Hongkong and Shanghai Banking Corporation Limited 4.5 Securitisation The Bank enters into securitisation transactions wherein corporate / retail loans are sold to a Special Purpose Vehicle (SPV). These securitisation transactions are accounted for in accordance with the RBI guidelines on Securitisation of Standard Assets and Guidance Note on Accounting for Securitisation issued by the ICAI. Securitised assets are derecognised upon sale if the Bank surrenders control over the contractual rights that comprise the financial asset. In respect of credit enhancements provided or recourse obligations accepted by the Bank, appropriate provision / disclosure is made at the time of sale in accordance with AS 29 Provisions, contingent liabilities and contingent assets. Gain on securitization, being the excess of the consideration received over book value of the assets and provisions towards expected costs including servicing costs and expected delinquencies is amortised over the life of the securities issued by the SPV. Sales and transfers that do not meet the criteria for surrender of control are accounted for as secured borrowings. 4.6 Income recognition Interest income is recognised in the profit and loss account as it accrues, except in the case of interest on non-performing advances. Interest on non-performing advances is credited to a suspense account, which is netted in the balance sheet against the relevant balances and not recognised in the profit and loss account until received. Commission and fee income is generally accounted for in the period when receivable, except where the fee is charged to cover the cost of a continuing service to, or risk borne for the customer, or is interest in nature. In such cases, the fee is recognised on an appropriate basis over the relevant period. Annual fees on credit cards however is recognized on a billing basis. 4.7 Staff retirement benefits (a) Provident fund The Bank contributes to recognized provident funds which are defined contribution schemes. The contributions are accounted for on an accrual basis and recognized in the profit and loss account. (b) Gratuity The Bank provides for gratuity liability which is a defined benefit based on actuarial valuation at the balance sheet date carried out by an independent actuary.

The Hongkong and Shanghai Banking Corporation Limited (c) Pension The Bank has a pension scheme, which is a defined benefit plan for employees who have joined prior to 31 March 2002. Employees joining after 31 March 2002 upto introduction of new salary terms in 2004 are covered under a pension scheme, which is a defined contribution plan. For staff opting for new salary terms, the pension benefits have been frozen based on the salary and service on the date of conversion. In respect of employees covered under the defined benefit plan, the Bank provides the pension liability based on actuarial valuation at the balance sheet date carried out by an independent actuary. In respect of other employees, the contributions are accounted for on an accrual basis and recognized in the profit and loss account. (d) Leave encashment The Bank provides for leave encashment liability which is a defined benefit scheme based on actuarial valuation at the balance sheet date conducted by an independent actuary. 4.8 Fixed assets Fixed assets are stated at acquisition cost less accumulated depreciation, with the exception of premises, which are revalued annually. The surplus / deficit arising on revaluation is transferred to the Revaluation Reserve account. Depreciation is provided on a straight line basis over the estimated useful life of the asset. The rates of depreciation are higher than those prescribed under Schedule XIV to the Companies Act, 1956. The rates applied by the Bank on different categories of fixed assets are as follows: Category of Asset Rate per annum Freehold land - Premises 2% Leasehold improvements Over 5 years or remaining period of lease whichever is lower Computers / softwares 33.33% Other fixed assets 20% Depreciation attributable to revaluation is recouped from Revaluation Reserve. The Bank assesses at each balance sheet date whether there is any indication that an asset may be impaired and provides for impairment loss, if any, in the profit and loss account. 4.9 Accounting for leases Lease payments for assets taken on operating leases are recognized as an expense in the statement of profit and loss account over the lease term.

The Hongkong and Shanghai Banking Corporation Limited 4.10 Taxes on income Taxation charge comprises the current tax provision and the net change in the deferred tax asset and liability during the year. Current tax provision represents the estimated income-tax liability and fringe benefit tax liability determined in accordance with the provision of the Income Tax Act, 1961 and rules framed there under. The Bank accounts for deferred taxes in accordance with the provisions of AS 22 Accounting for Taxes on Income. Deferred taxation is provided on timing differences, using the liability method, between the accounting and tax treatment of income and expenditure. Deferred tax assets are recognized only if there is a reasonable certainty that they will be realized in future. However, where there are unabsorbed depreciation or carry forward losses, deferred tax assets are recognized only if it is virtually certain that these assets will be realized. Deferred tax assets are reviewed for appropriateness of their carrying value at each balance sheet date. Deferred tax assets and liabilities are measured using the tax rates that have been enacted or substantively enacted by the balance sheet date. 4.11 Provision for reward points on credit cards The Bank has a policy of awarding reward points for credit card spends by customers. Provision for such reward points is made on the basis of behavioural analysis of utilization trends. 4.12 Provisions and contingent liabilities The Bank creates a provision when there is a present obligation as a result of a past event that probably requires an outflow of resources and a reliable estimate can be made of the amount of the obligation. A disclosure for contingent liability is made when there is a possible obligation or a present obligation that may but probably will not require an outflow of resources. When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable than an outflow of resources would be required to settle the obligation, the provision is reversed. Contingent assets are not recognized in the financial statements. However, contingent assets are assessed continually and if it is virtually certain that an inflow of economic benefits will arise, the asset and related income are recognized in the period in which the change occur. 4.13 Employee separation costs The Bank expenses out Employee separation costs in the year in which they are incurred.

The Hongkong and Shanghai Banking Corporation Limited 5 Notes to accounts 5.1 Fixed assets The most recent revaluation of the freehold premises was conducted in September 2005 and the Bank revalued its owned freehold premises upwards by Rs 721 million (Previous year Rs 161 million upward revaluation) based on an independent professional valuation. Certain premises valued at Rs 2,642 million (Previous year Rs 2,339 million) acquired under a Scheme of Arrangement are held in the name of HSBC Agency (India) Private Limited, a wholly owned subsidiary, for the benefit of the Bank. Accordingly, these premises have been treated as assets of the Bank. During the year the Bank sold some of the premises mentioned above. Profit on sale of such premises amounting to Rs 288 million have been recognised in the profit and loss account of the Bank and the same has been transferred to capital reserve. The profit on sale of properties and the balance in the revaluation reserve with respect to these properties are transferred to the Capital Reserve. At year end certain premises valued at Rs 183 million (Previous year Nil) are held for sale and are valued at lower of cost or market value. 5.2 Staff retirement benefits In the previous year, due to change in salary terms, the contributions to the gratuity and pension funds were in excess of the amount required to meet the accrued liability as certified by the independent actuary. The excess was treated as a prepayment, which resulted in a credit of Rs 570 million and the same was included within Operating Expenses which was recognized in the profit and loss account of the previous year. 5.3 Securities Certain securities transactions undertaken by the Bank in 1991 involving an initial aggregate claim of Rs 331 million (Previous year Rs 331 million) were in dispute, which were not acknowledged as debts, as the Bank had filed a counter claim against the disputing party. On 30 June 2004, the Special Court decreed against the Bank in the original suit. The Bank however appealed against this decree to the Honourable Supreme Court (SC). The SC admitted the appeal of the Bank and stayed the decree of the Special Court, subject however to the Bank depositing the decreed amount with the SC. Accordingly, the Bank deposited Rs 555 million (inclusive of interest) with the SC in September 2004, which was recognized in the profit and loss account of the previous year.

The Hongkong and Shanghai Banking Corporation Limited 5.4 Other assets The Bank holds a valid Banker s Receipt for 110,760 Canstock Units (Previous year 110,760 units) of face value Rs 100/- each which were not physically delivered by the counterparty pending settlement of a dispute detailed under 5.3 above. In February 1996, the Bank filed a suit against the counterparty to recover the amount covered by the said Banker s receipt with interest. In terms of the Interim Order of the Honourable High Court of Mumbai, the counter party deposited on 7 August 1998 an amount of Rs 20 million (Previous year Rs 20 million) with the Honourable High Court, who in turn deposited the amount in a fixed deposit with a nationalized bank, pending final decision of the Court. 5.5 Taxation Tax liabilities in respect of Mercantile Bank Limited taken over by the Bank relating to the assessment years 1974-75 to 1983-84 and those in respect of the Bank for the assessment year 1984-85 to 1991-92 and 1996-97 are pending final outcome of the tax assessments/appeals filed by the Bank/Tax Authorities. In respect of assessment years 1992-93 to 2003-2004 and assessment year 2005-2006 there is a contingent liability of approximately Rs 1,878 million (Previous year Rs 1,750 million) which is presently in appeal. Similarly, in respect of the Indian operations of the HSBC Bank Middle East, which were taken over by the Bank, there is a contingent liability for assessment years 1991-92 to 2000-2001 of approximately Rs 157 million (Previous year Rs 152 million), which is presently in appeal. Management considers that adequate provision has been made for tax liabilities relating to the above assessment years. 5.6 Statutory disclosures a) Capital adequacy ratio The capital adequacy ratio of the Bank calculated in accordance with the RBI guidelines, is as follows: 31 March 2006 31 March 2005 Tier 1 capital 36,967,130 27,318,200 Tier 2 capital 3,046,709 6,374,900 Total capital 40,013,839 33,693,100 Total risk weighted assets & contingents 377,293,862 240,082,200 Capital ratios Tier 1 capital 9.80% 11.38% Tier 2 capital 0.81% 2.65% Total capital 10.61% 14.03% Amount of subordinated debt raised as Tier II capital 2,000,000 2,000,000

The Hongkong and Shanghai Banking Corporation Limited b) Business ratios/ information The details relating to business ratios are given below: 31 March 2006 31 March 2005 Interest income as percentage of working funds 6.65% 6.39% Non - interest income as percentage to working funds 2.80% 2.60% Operating profits as percentage to working funds 3.79% 3.73% Return on assets (%) 1.58% 1.27% Business (deposits plus advances) per employee (Rs 000) 97,565 85,254 Net profit per employee (Rs 000) 1,207 974 Working funds are defined by RBI as the monthly average of total assets reported to them, except for calculation of the return on assets ratio, for which average working funds as at the balance sheet date are considered. c) Issuer composition of non SLR investments The details relating to issuer composition of non SLR investments as at 31 March 2006 is as follows: Issuer Amount Extent of private placement Extent of below investment grade securities Extent of unrated securities Extent of unlisted securities Public Sector Undertakings 1,915,359 1,000-1,000 1,000 Financial Institutions 15,844,789 14,265,920 - - - Banks 15,717,340 11,552,856 - - - Private Corporates 1,730,600 1,730,600-98,576 98,576 Subsidiaries /Joint ventures 500 500-500 500 Others - - - - - Provision held towards depreciation (399,360) (253,928) - (26,373) (26,373) Total 34,809,228 27,296,948-73,703 73,703 d) Non-performing non-slr investments For the year ended 31 March 2006 For the year ended 31 March 2005 Opening balance 13,373 13,373 Additions during the year since 1st April - - Reductions during the above period - - Closing balance 13,373 13,373 Total provisions held 13,373 13,373

The Hongkong and Shanghai Banking Corporation Limited e) Provision for depreciation on investments For the year ended 31 March 2006 For the year ended 31 March 2005 Opening Balance 2,102,038 510,944 Add : Provision made during the year 1,201,431 1,629,788 Less : Write off, write back of excess provision during the year - (38,694) Closing balance 3,303,469 2,102,038 f) Repos Minimum Outstanding During the Year* Maximum Outstanding During the Year Daily Average Outstanding During the Year Outstanding as at 31 March 2006 Securities sold under Repos # 165,700 26,950,768 3,469,653 12,002,183 Securities purchased under Reverse Repos 92,891 42,500,000 5,805,876 - *Minimum outstanding during the year excludes days with nil outstandings. #At market prices g) Non-Performing Advances (NPA) The percentage of net NPA to net advances was 0.58% as at 31 March 2006 (Previous year 0.50%). h) Movements in NPAs Rs. 000 For the year ended 31 March 2006 For the year ended 31 March 2005 Provision and Provision and Gross NPA Interest in Suspense Net NPA Gross NPA Interest in Suspense Net NPA (a) Opening Balance 4,092,778 3,459,795 632,983 4,188,758 3,512,315 676,443 (b) Additions during the year 3,228,755 2,572,969 655,786 2,076,656 2,904,153 (827,497) (c) Reductions during the year (4,146,519) (3,832,391) (314,128) (2,172,636) (2,956,673) 7,84,037 (d) Closing Balance 3,175,014 2,200,373 974,641 4,092,778 3,459,795 632,983

The Hongkong and Shanghai Banking Corporation Limited i) Lending to sensitive sectors Exposure to real estate Category 31 March 2006 31 March 2005 a) Direct exposure 63,896,161 40,338,079 (i) Residential Mortgages Lendings fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented *56,023,174 37,587,425 - Of which individual housing loans up to Rs.15 lakh 8,510,554 4,965,626 (ii) Commercial Real Estate 7,872,987 2,750,654 (iii) Investments in Mortgage Backed Securities (MBS) and other securitised exposures a. Residential - - b. Commercial Real Estate - - b) Indirect exposure Fund based and non-fund based exposures on National Housing Bank (NHB) and Housing Finance Companies (HFCs). 14,436,500 3,897,400 Total exposure to real estate sector 78,332,661 44,235,479 *Figures as at 31 March 2006 include undrawn limits of Rs 2,016.53 million pertaining to mortgages on residential property. Exposure to capital market 31 March 2006 31 March 2005 (i) investments made in equity shares, 74,576 49,773 (ii) investments in bonds/ convertible debentures - - (iii) investments in units of equity oriented mutual funds - - (iv) advances against shares to individuals for investment in equity shares (including IPOs/ESOPS), bonds and debentures, units of equity oriented mutual funds - - (v) secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers 1,800,000 4,050,000 Total Exposure to Capital Market (i+ii+iii+iv+v) 1,874,576 4,099,773 (vi) Of (v) above, the total finance extended to stockbrokers for margin trading. - -

The Hongkong and Shanghai Banking Corporation Limited j) Restructured accounts (a) Details for debt restructuring for standard and sub standard assets are as follows: For the year ended 31 March 2006 For the year ended 31 March 2005 (i) Total amount of loan assets subjected to restructuring, rescheduling, renegotiation; 42,000 - - of which under Corporate Debt Restructuring ( CDR ) - - (ii) The amount of Standard assets subjected to restructuring, rescheduling, renegotiation; 42,000 - - of which under CDR - - (iii) The amount of Sub-Standard assets subjected to restructuring, rescheduling, renegotiation; - - - of which under CDR - - (iv) The amount of Doubtful assets subjected to restructuring, rescheduling, renegotiation; - - - of which under CDR - - Note: [ (i) = (ii)+(iii)+(iv) ] (b) There are no debt restructuring for SME accounts during the year (Previous year Rs nil). k) Country risk Provision for country risk exposure in line with RBI guidelines is as follows:. Classification Exposure (net) as at 31 March 2006 Provision held as at 31 March 2006 Exposure (net) as at 31 March 2005 Provision held as at 31 March 2005 Insignificant 9,919,643-4,093,331 - Low 8,134,949 2,833 3,205,837 - Moderate 223,073-87,380 - High 171,682-54,004 - Very high 10,361-11,931 - Restricted 117,264-11,745 - Off-credit - - - - Total 18,576,972 2,833 7,464,228 - The above provision of Rs 2.83 million has been classified as standard asset provision in schedule 5.

The Hongkong and Shanghai Banking Corporation Limited l) Disclosure on Single/Group Borrower Limits The RBI has prescribed credit exposure limits for banks in respect of their lending to single/group borrowers. The exposure limits prescribed are 15% of the capital funds of banks in case of single borrowers and 40% of the capital funds of banks in case of group borrowers. In case of infrastructure projects an additional exposure of upto 5% of capital funds is allowed. The Bank s credit exposures to single/ group borrowers are within the aforesaid limits except in certain cases where the limits were exceeded during the year for which the Bank had relevant approval from the Board (Asset Liability Committee B). The following customers were sanctioned an additional 5% limit. Single Borrowers: Group Borrowers: Hindalco Industries Ltd. Reliance Group Reliance Industries Ltd. Aditya Birla Group Bharat Heavy Eletricals Ltd. Indian Oil Corporation Ltd. Siemens Ltd. Larsen & Tourbo Ltd. SIDBI. NABARD. Wipro Ltd. Tata Chemicals. Reliance Petroleum Ltd. m) Securitisation of standard assets For year ended 31 March 2006 For year ended 31 March 2005 Total number of loan assets securitised 756 - Total book value of loan assets securitised () 1,250,320 - Sale consideration received for the securitised assets () 1,259,968 - Gain/(loss) on sale on account of securitisation () 30,143 - The unamortized gain as at 31 March () 19,772 - Form and quantum (outstanding value) of services provided by way of Credit Enhancement () 40,025 - Note: The gain on securitisation represents the present value of the excess interest strip retained by the Bank and the difference between the sale consideration and the book value. n) Sale of NPA's For year ended 31 March 2006 For year ended 31 March 2005 1. No. of accounts sold 29-2. Aggregate outstanding () Net Book Value 52,079-3. Aggregate consideration received () 250,000 -

The Hongkong and Shanghai Banking Corporation Limited o) Disclosure on interest rate swaps and forward rate agreements (FRA) No. Items 31 March 2006 31 March 2005 (i) The notional principal of swap agreements (including FRAs) 1,760,401,240 1,282,575,549 (ii) Losses which would be incurred if counterparties failed to fulfill their obligations under the agreements 17,907,034 10,768,425 (iii) Collateral required by the bank upon entering into swaps - - (iv) Concentration of credit risk arising from the swaps 86% 87% - maximum single industry exposure with banks (Previous year with banks) (v) The fair value of the swap book (including FRAs) 2,922,262 1,382,848 The nature and terms of interest rate swaps outstanding as at 31 March 2006 are set out below: Nature No. Notional principal () Terms Trading swaps 32 21,572,337 Receive floating pay floating Trading swaps 2,668 887,881,540 Receive floating pay fixed Trading swaps 2,631 833,972,763 Receive fixed pay floating Hedging swaps 30 12,690,000 Receive floating pay fixed Hedging swaps 2 2,250,000 Receive fixed pay floating The nature and terms of forward rate agreements outstanding as at 31 March 2006 are set out below: Nature No. Notional principal () Terms Trading swaps 2 1,142,300 Receive floating pay fixed Trading swaps 1 892,300 Receive fixed pay floating p) Risk exposure in derivatives Qualitative disclosure Limit utilizations are monitored against approved limits provided by the Chief Executive Officer (CEO) to the dealers. The above is monitored daily by the Bank s Treasury Mid Office through system reports and advised to Senior Management as appropriate. Market Risk Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits (Present Value of Basis Points), as well as Value at Risk ( VAR ) limits at a portfolio level. Similarly, option risks are controlled through full revaluation limits in conjunction with limits on the underlying variables that determine each option s value.

The Hongkong and Shanghai Banking Corporation Limited Derivative instruments are subject to both market risk and credit risk. Market risk is the risk that movement in foreign exchange rates, interest rates and credit spreads result in profits or losses to the Bank. Credit risk for a derivative is the replacement cost of any contract with a positive mark-to-market gain and an estimate of the potential future change in value, reflecting the volatilities affecting the contract. Credit risk on contracts having a negative mark-to-market value is restricted to the potential future change in value. The Bank enters into derivative deals within limits set up for each counterparty. These limits are set based on the Bank s credit risk assessment for the counterparty which interalia considers the ability of the counterparty to honour its obligations in the event of crystallization of the exposure. Appropriate facility covenants are stipulated where required, defining trigger events that gives the Bank the right to call for collaterals or terminate a transaction to contain the risk. The accounting policy for derivative financial instruments is set out in schedule 18 note 4.4. Further, the Bank conforms to the RBI guidelines on provisioning. Outstanding trading derivative contracts are valued at market rates. Market values for derivatives are determined by reference to independently sourced rates, using valuation models, which typically utilize discounted cashflow techniques to derive the market value. Quantitative disclosure Sl. No. Particular Currency Derivatives as at 31 March 2006 Rs crores Interest Rate Derivatives as at 31 March 2006 1 Derivatives (Notional Principal Amount) a) for hedging - 1,494 b) For trading 126,691 177,530 2 Marked to Market Position a) Asset (+) 1,454 1,852 b) Liability (-) 1,250 1,560 3 Credit Exposure 3,696 2,488 4 Likely impact of one percentage change in interest rate (100*PV01) a) on hedging derivatives - 23 b) on trading derivatives 50 143 5 Maximum and Minimum of 100*PV01 observed during the year a) on hedging Maximum - 23 Minimum - 3 b) on trading Maximum 86 184 Minimum 20 34 Currency derivative includes Forwards, Currency Options and Currency Swaps. Interest rate derivative includes Forward Rate Agreement, Interest Rate Options and Interest Rate Swaps.