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Contents

Message from the Non-Executive Chairman-Interim Message from the MD and CEO Message from the CFO Green Shoots Board of Directors Directors Report Management Discussion and Analysis Report on Corporate Governance Auditors Report 5 6 7 8 9 10 39 55 72

Message from the Non-Executive Chairman-Interim

Will there be a contagion effect? That was the question frequently asked of every microfinance industry professional following the promulgation of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010. Your Company has always maintained that there would be no contagion effect, given your Companys understanding of the ground realities in 17 non-Andhra Pradesh states where your Company has operations. None of these non-Andhra Pradesh states have been facing any demand-side issues, and even in Andhra Pradesh the credit gap of Rs. 4,000 crore created by the exit of microfinance institutions post October 2010 has not been met. Consistent with the public statements made by your Company regarding the robust non-Andhra Pradesh demand, your Company registered a 11 percent quarter-on-quarter non-Andhra Pradesh portfolio growth to Rs.1,320 crore in Q4-FY12, reversing the declining trend over the previous five quarters. Your Company continues to maintain its high collection efficiencies in 17 non-Andhra Pradesh states with the collection figure for the quarter ending March 2012 standing at 95 percent. As for Andhra Pradesh, the situation post promulgation of ordinance has deteriorated considerably. The sector owes a lot to the macro level political and financial sector leadership, which has resulted in greater clarity as to the emerging regulatory landscape for this sector. Some of the changes actual and on the anvil include: May 22, 2012 - Introduction of the Micro Finance Institutions (Development and Regulation) Bill, 2012 in Parliament, which will make Reserve Bank of India the regulator for the sector. The Law on approval by Parliament and its enactment will govern microfinance institutions. December 2, 2011 - RBIs NBFC-MFI Directions, 2011 creating a separate category of NBFCs i.e., NBFC-MFIs. May 3, 2011 - The Reserve Bank of India (RBI) clarification on eligibility requirements for priority sector loans to Microfinance Institutions as a separate category.

These changes at the macro level have seen a re-rating of the MFI sector, flow of private equity capital and credit to MFI institutions including to your Company. I believe that these regulatory changes promise a frame work which will provide an opportunity to usher greater value for all your Companys stakeholders. I am particularly thankful to all shareholders who have stood with the Management of the Company during this turbulent phase.

P .H. Ravikumar Non-Executive Chairman-Interim

Message from the Managing Director and CEO

Rationalization, Reinvention and Revitalization -- the three R approach has been driving change at your Company with the steadfast support of all key stakeholders like you. Your Company has heralded a new chapter in customer grievance redressal and customer protection in the Indian microfinance industry when it had integrated globally bench marked Customer Protection Practices (CPP) into the business plan. Among the other key initiatives on the CPP front are: Capping Return on Assets at 3 percent for the core microfinance business (announced on December 7, 2011). Appointment of Mr. Verghese Jacob, a seasoned corporate and social sector expert with three decades of experience, as your Companys Ombudsman on January 31, 2012. Investment of Rs. 15 crore in the next three years for its customer grievance redressal and CPP initiatives. Network-wide training for all employees in globally benchmarked CPP and realigning the employee incentive system by integrating customer grievance redressal and CPP into the KRAs.

On the business front, consolidation of customer base, cross sell initiatives and diversification have been the key focus areas. The customer base has seen a consolidation from 77.2 lakh in Q3-FY11 to 53.5 lakh in Q4-FY12. Your Company plans to service 15,000 Sangam Stores (present number: 10,742) and extend loans for purchase of 5.5 lakh mobile handsets this year (2.8 lakh loans advanced so far). In the core microfinance space, your Company had registered a 11 percent quarter-on-quarter portfolio growth to Rs.1,320 crore in Q4-FY12 in its non-Andhra Pradesh operations reversing the declining trend over the previous five quarters. Your Company continued to maintain its high collection efficiencies in 17 non-Andhra Pradesh states with the collection figure for the quarter ending March 2012 standing at 95 percent. The achievements are consistent with your Companys public statements that microfinance does not face any demand-side issues in any Indian state. However, in Andhra Pradesh, the plight of 92 lakh rural women borrowers needs immediate attention. These women have been labeled as defaulters on account of non-payment of microfinance loans for over a year, as indicated by data available with three credit information bureaus. Such women would be denied formal credit facilities or they would have to pay higher interest cost. In this regard, a research report of MicroSave, an independent international organization and a close affiliate of CGAP which is housed at the World Bank, is an eye-opener for all concerned. The report is based on 76 sessions using participatory methods like focus group discussions, relative preference ranking and financial sector trend analysis during July-August, 2011 in the Telangana, Rayalaseema and Coastal Andhra regions of Andhra Pradesh covering the districts of Anantapur, Krishna, Nizamabad and Adilabad. MicroSave also interviewed Government officials. The key findings are: MFI members have taken loans at exorbitant interest rates from moneylenders in the absence of loans from MFIs. Moneylenders have increased lending in the past eight to 10 months in areas with higher penetration of MFIs. Many members had reduced the scale of their business because of lack of access to alternate sources of credit. Members have sold their assets such as house, vehicle, cattle, jewellery, etc., to meet their productive as well as essential non-productive expenditure which have to be met. Most of the members stopped repaying as other members of the group and the community stopped repaying. Most of the members denied any harassment from the MFIs, and said that they are willing to repay their loans if MFIs start disbursing fresh loans and if other members in the community also start repaying. Members would like to carry forward their relationship with MFIs, given the fact that it is an economical and convenient credit option for them.

In order to end the miseries of lower middle class women and to meet part of the credit gap of Rs. 4,000 crore created in Andhra Pradesh post the exit of microfinance companies, your Company has been working with the State Government and others concerned to restore business normalcy in Andhra Pradesh. Your Company is confident of an early resolution to the Andhra Pradesh situation. Your Company is also confident of generating greater value for all stakeholders through consolidation, cross sell and CPP .

M.R. Rao Managing Director and CEO 6

Message from the CFO

FY12 was the most difficult year in your Companys corporate life because of the Andhra Pradesh MFI crisis. However, your Company was able to manage the crisis given its commitment to deliver all its promises. Your Company met all its financial obligations in a timely manner and repaid more than Rs. 3,800 crore to the credit grantors. Your Company decided against Corporate Debt Restructuring (CDR) and the same was highly appreciated by credit grantors. The long wait did come to an end in Q4-FY12. Your Company obtained sanction for incremental debt of Rs.1,360 crore and drew down Rs. 998 crore which is 2.4 times larger than the draw-downs in the first nine months of FY12. The difficult task of cleaning the AP exposure had been carried out with a write-off of Rs. 1,130 crore without igniting a crisis of confidence among various stakeholders. The write-off was accelerated when benchmarked with applicable provisioning norms and your Company did not avail deferred tax asset (DTA) of Rs. 460 crore. However, DTA of Rs. 460 crore is an economic value available for the shareholders in the near future. Your Company chose prudence over profitability. Branch network and headcount were rationalised in a non-disruptive manner to optimize the cost structure and deliver an ROA of 4 percent (3 percent from MFI operations and the rest from non-MFI operations) even under the regulated interest rate regime upon the portfolio outstanding reaching the optimal level. Your Company adopted the principle that, in a crisis period, cash flows are more important than Balance Sheet and Balance Sheet is more important than P&L. As you could see, your Companys cash flows were healthy and it ended the year with a cash and bank balance of Rs. 690 crore. The huge write-off on AP portfolio cleansed the B/S. Now the focus is on P&L and hence the headcount and branch network rationalization. Your Companys immediate priority is to return to the path of profitability and, with the planned capital raise, it should reach there sooner than later. The comprehensive regulatory framework laid down by RBI on December 2, 2011 has provided the much-awaited regulatory clarity and the final piece will be the passage of the Central MFI bill. In a sectoral crisis, even a leader cannot avoid the painful transition but your Company, having survived the crisis, should reap the fruits of consolidation.

S. Dilli Raj CFO

Green Shoots in Q4-FY12


Fund inflow (Rs. in Crore)* Disbursement (Rs. in Crore)

* Amount draw-down from Banks/ FIs

Loan portfolio outstanding (Rs. in Crore)

Cost of borrowing (%)

Headcount and No. of branches

Operating cost (Rs. in Crore)

Board of Directors

Sumir Chadha WestBridge Capital

V. Chandrashekaran* Independent Director

Tarun Khanna Independent Director

Paresh Patel Sandstone Capital

M.R. Rao Managing Director and CEO

P .H. Ravikumar Non-Executive ChairmanInterim

Geoffrey Tanner Woolley Independent Director

*SIDBI has withdrawn the appointment of V. Chandrasekaran with effect from June 8, 2012.

Directors Report
Dear Members, Your Directors have pleasure in presenting the Ninth Annual Report of your Company together with the audited statement of accounts for the year ended March 31, 2012. The year was momentous for the microfinance industry in India in general and your Company in particular due to the significant regulatory changes. The following are the major developments on the regulatory front: On May 3, 2011 the Reserve Bank of India (RBI) accepted the recommendations of the Malegam Committee, set up to study issues and concerns in the microfinance sector. Also, the RBI re-affirmed priority sector status for microfinance. On December 2, 2011, the RBI created a new category of finance companies, the Non-Banking Finance Companies-Micro Finance Institutions (NBFC-MFIs), and released operational guidelines for these firms which will be regulated by the RBI. The guidelines lay considerable emphasis on the financial stability of MFIs and prescribe prudential norms for capital adequacy, asset classification and provisioning for bad assets. Further, ceilings have also been imposed on individual interest rates and realizable margins. Also, certain norms have been stipulated in relation to fair collection practices and transparency in pricing. On May 22, 2012, the Micro Finance Institutions (Development and Regulation) Bill, 2012 was introduced in Parliament.

Your Company has already adopted several aspects of the new regulatory framework and has applied to the RBI for the classification of your Company as an NBFC-MFI. Your Company continues to be one of the largest microfinance institutions (MFIs) in India in terms of the total value of loans outstanding and the number of borrowers, as of March 31, 2012, and the only MFI listed in India. Financial highlights The financial performance for fiscal ended March 31, 2012 is summarized in the following table: (Rs. in Crore) Year ended March 31 Total revenue Less: Total expenditure Profit (Loss) Before Tax Profit (Loss) After Tax Surplus brought forward Amount available for appropriation Appropriation has been made as under: Transfer to Statutory Reserve Surplus carried to Balance Sheet Earnings Per Share (EPS) (1,051.3) (188.06) 22.3 309.3 16.1 2012 472.3 1,796.1 (1,323.7) (1,360.6) 309.3 2011 1,269.5 1,098.6 170.9 111.6 220.0 331.6

Diluted EPS (188.06) 15.2 - Your Companys total revenue for the year ended March 31, 2012 has recorded a reduction of 62.8 percent from Rs. 1,269.5 crore to Rs. 472.3 crore. - Net Profit After Tax for the year declined from Rs. 111.6 crore to a loss of Rs. 1,360.6 crore in FY12.

Operational highlights The following table summarizes the operational performance of your Company for the year ended March 31, 2012: Year ended March 31 Number of branches Number of members (in Lakhs) Number of employees Amount disbursed (Rs. in Crore) Portfolio outstanding (Rs. in Crore) 10 2012 1,461 53.5 16,194 2,737 1,669 2011 2,379 73.1 22,733 7,831 4,111 Percentage change (38.6) (26.8) (28.8) (65.1) (59.4)

During the year under review, your Companys member base has decreased by 26.8 percent to 53.5 lakh (5.35 million) as compared to 73.1 lakh (7.31 million) for the previous year, which is primarily due to Andhra Pradesh Microfinance Institutions (Regulation of Money-Lending) Act, 2010 (AP MFI Act). Consequently, loan disbursement decreased by 65.1 percent from Rs. 7,831 crore to Rs. 2,737 crore. Your Company has closed or merged 918 branches as part of its business rationalization policy. Unique strengths Your Company continues to be recognized as one of the largest MFIs in India with unique achievements and strengths. Among these are: Your Company has repaid more than Rs. 3,800 crore to the banking system since the Andhra Pradesh microfinance situation without even a days delay and did not join CDR. Your Company has healthy cash and bank balances of Rs. 690 crore with a networth of Rs. 435 crore and strong capital adequacy of 35.4 percent (as against the 12 percent stipulated by the Reserve Bank of India) as of March 31, 2012. In addition, the unavailed deferred tax benefit stands at Rs. 460 crore. Your Company has also brought about a significant reduction in operating costs from Rs. 106 crore in Q4-FY11 to Rs. 81 crore in Q4-FY12 on account of branch consolidation from 2,379 in Q4-FY11 to 1,461 in Q4-FY12. Your Company has not lost a single Core Management Team member voluntarily since the Andhra Pradesh microfinance situation. In order to protect members from over-indebtedness, your Company has been playing a leading part in pioneering industry-wide efforts on creating and sharing credit-related information with Credit Bureaus. Between September 2011 and April 2012, your Company obtained Credit Bureau reports for 44 lakh members, while loans have been given to only 26percent of them. Your Companys policies and processes along with documentation have been modified to comply with: 1. 2. 3. RBI guidelines of December 2, 2011. RBI Fair Practice Code guidelines of July 2, 2012. Guidelines and codes of industry bodies like Sa-Dhan and MFIN.

Your Company disclosed on December 7, 2011 that it would invest Rs. 15 crore in the next three years in order to align its customer grievance redressal and Customer Protection Practices (CPP) with globally recognized benchmarks. Your Company announced on December 7, 2011 that it will cap Return on Assets at 3 percent for the core microfinance business. Your Companys present interest is 24.55 percent as against the Reserve Bank of India prescribed limit of 26 percent. Mr. Verghese Jacob, a seasoned corporate and social sector expert with three decades of experience, was appointed as your Companys Ombudsman on January 31, 2012. Your Company commissioned EDA Rural Systems, a reputed development sector consultancy, to develop a training programme encompassing the seven principles (avoidance of over-indebtedness, transparency, responsible pricing, appropriate collection practices, ethical staff behavior, privacy of client data and grievance redressal mechanism) of CPP and also certify several staff members after imparting Train-The-Trainer coaching to them.

On account of such distinctions, your Company has been appreciated by key stakeholders including banks and financial institutions. Your Company completed 23 transactions with leading banks and financial entities and obtained sanction for incremental debt of Rs. 1,360 crore in Q4-FY12. During the fiscal, your Company also accomplished the largest rated pool assignment transaction of Rs. 354 crore in the Indian microfinance history. Andhra Pradesh microfinance situation The achievements should be viewed in the backdrop of the sensitive Andhra Pradesh situation post the promulgation of the Andhra Pradesh Micro Finance Institutions (Regulation of Money-Lending) Ordinance, 2010. Subsequently, on January 1, 2011, the Government of Andhra Pradesh introduced the AP MFI Act to replace the AP MFI Ordinance. Prior to the promulgation of the new law, Andhra Pradesh was Indias largest microfinance market accounting 30 percent of borrower accounts and loan outstanding of microfinance institutions. Post the promulgation, the Indian microfinance industry faced its worst crisis ever with the lower middle class borrower bearing the brunt of the situation. The Andhra Pradesh Governments stated aim was to protect the poor and yet its actions have resulted in a 600-fold decrease in financing to the very poorest of Indias citizens, according to Legatum Ventures report, Microfinance in India: A Crisis at the Bottom of the Pyramid. This should make everyone pause. The rural poor depend on access to consistent and dependable finance to help 11

smooth patchy income streams and avert financial crisis. The Andhra Pradesh Governments actions have effectively shut off finance to these most vulnerable of Indias citizens. Indeed, as this paper discusses, the very premise of the AP MFI Act was fundamentally flawed. Quite apart from protecting the poor, the AP MFI Act does just the opposite and risks creating a near term financial and human crisis amongst the rural poor in Andhra Pradesh, while also potentially jeopardizing the Indian Governments broader financial inclusion agenda. The impact of the new law could be summed up on the following lines: In the first half of FY11, prior to the promulgation of the new law, MFIs in Andhra Pradesh disbursed Rs. 5,000 crore to borrowers. This dropped to Rs. 8.5 crore in the second half of FY11. The exit of microfinance companies had created a credit gap of Rs. 4,000 crore in Andhra Pradesh, The Hindu newspaper quoted a senior official of National Bank for Agriculture and Rural Development as saying. Close to 9.2 million customers or almost one in three microfinance borrowers (almost equal to Mumbais suburban population) have defaulted on loan repayment, according to Business Standard and The Economic Times. These members would appear as defaulters in Credit Bureau lists. Microfinance recovery rates in Andhra Pradesh had fallen to 10 percent from 95 percent. Your Company has also brought down the residual Andhra Pradesh exposure (Net) to Rs. 236 crore from a high of Rs. 1,491 crore in October 2010 by writing off/ provisioning Rs. 1,129 crore.

MicroSave report: No harassment The report of MicroSave, an independent international organization and a close affiliate of CGAP which is housed at the World Bank, is an eye-opener for all concerned. The report, What are Clients doing Post the Andhra Pradesh MFI Crisis?, is based on 76 sessions using participatory methods like focus group discussions, relative preference ranking and financial sector trend analysis during JulyAugust 2011 in the Telangana, Rayalaseema and Coastal Andhra regions of Andhra Pradesh covering the districts of Anantapur, Krishna, Nizamabad and Adilabad. MicroSave also interviewed several government officials, who are involved in SHG movement, bank officials, who have experience in SHG-bank linkage, field staff of SHG federations, field staff of MFIs and their borrowers and SHG members. Below are the extracts from the same: Key findings of MicroSave study are: MFI members have taken loans at exorbitant interest rates from moneylenders in the absence of loans from MFIs. Moneylenders have increased lending in the past eight to 10 months in areas with higher penetration of MFIs. Many members had reduced the scale of their business because of lack of access to alternate sources of credit. Members have sold their assets such as house, vehicle, cattle, jewellery, etc., to meet their productive as well as essential nonproductive expenditure which have to be met. Most of the members stopped repaying as other members of the group and the community stopped repaying. Most of the members denied any harassment from the MFIs, and said that they are willing to repay their loans if MFIs start disbursing fresh loans and if other members in the community also start repaying. Members would like to carry forward their relationship with MFIs, given the fact that it is an economical and convenient credit option for them.

One of the key recommendations (for the State Government/ MFIs): As the majority of the clientele of MFIs are members of SHGs promoted by the Government of Andhra Pradesh, there are chances of issues of conflict between MFIs and the local machinery of the Government. The Government and MFIs should take initiative to establish a forum at both district and state level to resolve any conflicts. Ex Andhra Pradesh Sarpanches back MFIs The grassroots Andhra Pradesh perspective too reflects the plight of the lower middle classes. In view of their plight, eminent ex Sarpanches and other grassroots opinion leaders from 15 districts of Andhra Pradesh have urged the State Government to restart microfinance loans for the poor. Media reports, featuring such requests, have been published regularly by leading regional newspapers including Andhra Bhoomi, Andhra Jyothi, Andhra Prabha, Eenadu, Namasthe Telangana, Sakshi, Surya and Vaartha during the latter half of the fiscal. The media reports focus on the following aspects: 12 Repeal Ordinance: Sakshi has reported that the State Ordinance against MFI loans had caused the people in Shadnagar area to again depend on usurious moneylenders to run their small businesses since they were unable to find easy credit after MFIs stopped offering loans due to the Ordinance.

Uncertainty due to lack of MFI loans leading to problems: Andhra Prabha has reported that there was an urgent need for the Government to reinstate MFI loans to farmers and the poor classes, who have been badly affected by the lack of credit. The report went on to note that non-availability of bank loans in villages could create a drop in farm output, which could have an adverse impact on the state economy. Poor in the vortex of debt: Namasthe Telangana has pointed out that farmers had been caught in the vortex of debt as the exit of MFIs has forced them back into the clutches of moneylenders. It reported that the previous year had seen farmers utilize loans from MFIs in a proper manner and benefiting from them. The MFI ordinance had once again increased their reliance on moneylenders, this year. Interest rates should be reduced: Eenadu has emphasized on the increased interest burden on the lower income classes as a result of the Governments MFI Ordinance and subsequent dependence on moneylenders. The article highlighted the hardships faced by the rural poor on account of the exit of MFIs and lack of alternative credit options at hand. Need for microfinance loans: Andhra Prabha has explained the indispensable role that microfinance loans had played not just in agricultural businesses but also in other important small businesses such as the purchase of buffaloes and selling of milk to villagers. Microfinance loans had benefitted a number of people and families improving their living standards. The article emphasized on the advantages of microfinance loans compared to loans from moneylenders in villages.

The validity of the AP MFI Act has been challenged by several MFIs, including your Company. The matter is currently pending in the Honorable High Court of Andhra Pradesh. The Sa-Dhan 2011 report had stated that concerted action from all the stakeholders, viz, the Central Government, the RBI, the Government of AP , banks, Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD), in addition to involvement from industry associations such as the Microfinance Institutions Network (MFIN) and Sa-Dhan (the Association of Community Development Finance Institution), is important for resolution of the AP microfinance crisis. In July 2011, the Central Government released the draft Micro Finance Institutions (Development and Regulation) Bill, 2011 (draft MFI Bill) for public comments. The Draft MFI Bill was subsequently replaced by the Micro Finance Institutions (Development and Regulation) Bill, 2012 (MFI Bill 2012). The MFI Bill 2012, which was presented before the Indian Parliament on May 22, 2012, attempts to regulate the entire microfinance sector, irrespective of the form of institutions involved. The MFI Bill 2012 states that its provisions shall be effective notwithstanding anything inconsistent contained in any other law. The MFI Bill 2012 will require the approval of the Indian Parliament as well as the assent of the President of India and publication in the Official Gazette before becoming law. The draft MFI Bill, among other things, states that its provisions shall be effective notwithstanding anything inconsistent contained in any other law and that microfinance services extended by any MFI registered with the RBI shall not be treated as money-lending for the purpose of any state enactments relating to money-lending and usurious loans. The introduction of the draft MFI Bill is being seen by the MFI industry as a key step towards resolving the uncertainty created by the AP MFI Act. No contagion effect The sensitive Andhra Pradesh situation has not shown any contagion effect with non-Andhra Pradesh operations of SKS Microfinance registering a 11 percent quarter-on-quarter portfolio growth to Rs. 1,320 crore in Q4-FY12 reversing the declining trend over the previous five quarters. Your Company continued to maintain its high collection efficiencies in 17 non-Andhra Pradesh states with the collection figure for the quarter ending March 2012 standing at 95.1 percent. New business initiatives Your Company has built a large distribution network in rural India. As of March 31, 2012, your Company has 13,596 branch managers, assistant branch managers and Sangam Managers who comprise 84 percent of its total workforce, across 1,461 branches in 18 states. Your Company can leverage this network to distribute financial and non-financial products of other institutions to the borrowermembers at a cost lower than the market price. Your Companys network also allows such distributors to access a segment of the market to which many do not otherwise have access to. Your Company intends to diversify into other businesses while retaining the core microfinance business focus. Your Company is scaling up certain pilot projects involving fee-based services and secured lending, gradually converting them into separate business verticals. Your Companys objective in these non-microfinance businesses is to focus on lending that will sustain high repayment rates, increase borrower-members loyalty and also provide economic benefits to the borrower-members and their families. Such nonmicrofinance products and services offer higher operating margins and thus may help your Company to increase the overall Return on Assets (ROA). Your Company currently offers certain loan products that borrower-members can use to purchase products that will increase the productivity of borrower-members and their businesses. Your Company is selective about the products for which loans are issued. To ensure the loans are used for the purchase of the specified product, your Company first enters into a strategic relationship with a selected supplier of the product and specifies the loan disbursement will be made directly to the supplier of the product rather than to the borrower-member. 13

Your Company has two programmes under this category, namely Mobile Phone Loans and Sangam Store Loans. Mobile Phone Loans After a successful pilot programme with Nokia during FY10 and FY11 for financing of mobile phones for the borrower-members, your Company extended this initiative to 11 states in India. The following are the features of MBL: The annual effective interest rate of the Mobile Phone Loans programme is 26.0 percent and the loan processing fee is 1.0 percent. A processing/ referral fee is paid to your Company by Nokia and its distributors. The term of this loan is typically 25 weeks. The price of the mobile phones financed by your Company ranges from Rs. 1,800 to Rs. 3,000. Principal and interest payments are due on a weekly basis during the term of the loan.

As of March 31, 2011 and March 31, 2012, Mobile Phone Loans constituted 0.4 percent and 1.3 percent respectively, of your Companys total outstanding loan portfolio. Sangam Store Loans Your Company has also undertaken a pilot project involving a business-to-business loan programme with Metro to fund the working capital requirements of the borrower-members and certain non-borrower-members, who own and operate kirana or Sangam Stores. Dividend Your Directors have not recommended any dividend as your Company reported losses during the year under review. Change in Registered Office The Registered Office of your Company was shifted from Ashoka Raghupathi Chambers, D. No. 1-10-60 to 62, Opp. Shoppers Stop, Begumpet, Hyderabad - 500 016, Andhra Pradesh, India to 3rd Floor, My Home Tycoon, Block - A, 6-3-1192, Kundanbagh, Begumpet, Hyderabad - 500 016, Andhra Pradesh, India with effect from May 7, 2012. Further, the Board in its meeting held on May 7, 2012 recommended shifting of the Registered Office from Andhra Pradesh to Maharashtra, by amendment to the Situation Clause of the Memorandum of Association of your Company, subject to approvals of the Members and Statutory Authorities. Your Company is in the process of obtaining necessary approvals. Management Discussion and Analysis The Management Discussion & Analysis Report for the year under review is presented in a separate section on Page 39 in this Annual report. Corporate Governance Your Company adopts the corporate best practices and is committed to conducting its business in accordance with applicable laws, rules and regulations. Your Company follows the highest standards of business ethics. A report on Corporate Governance is provided on Page 55 in this Annual Report. Resources and liquidity Your Company, being a Systemically Important Non-Deposit Accepting NBFC, is subject to the capital adequacy requirements prescribed by the Reserve Bank of India. Your Company has to maintain a minimum ratio of 15 percent as prescribed under the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time 14 This programme allows Sangam Stores to purchase their inventory of consumer goods and groceries from Metro at wholesale prices. Loan amounts range from Rs. 2,500 to Rs. 12,500 and are interest free. The term of the loan is seven days. Non-members are serviced on the basis of cash-on-delivery. Your Company also offers credit to non-borrower-members upon satisfactory credit appraisals and obtaining requisite approvals. Your Company receives a fixed commission from Metro for the total purchases a store makes from it, while utilizing the productivity loan.

to time) based on total capital to risk weighted assets. Your Company maintained Capital to Risk Asset Ratio (CRAR) of 35.4 percent and 45.4 percent respectively as on March 31, 2012 and as on March 31, 2011 respectively, which is higher than the statutory 15 percent requirement. During the year, your Company has received ratings for various instruments to raise funds and a summary of the ratings is presented in the following table: Agency CARE Rating CARE Rating CARE Rating CARE Rating Item Short Term Debt MFI Grading Assignment Securitization Rating CARE A1* MFI 2+ CARE A1+ (SO) CARE A1+ (SO)

*Rating withdrawn in May 2012 as no instrument is outstanding. Fixed deposits Your Company has not accepted any fixed deposits and, as such, no amount of principal or interest was outstanding as of the Balance Sheet date. Increase in share capital During the year under review, 32,985 equity shares were issued under the ESOP plans of your Company. Thus, the issued, subscribed and paid-up equity share capital increased from 72,323,910 to 72,356,895 as on March 31, 2012. Post the Balance Sheet date, your Company issued 906,734 Equity Shares under ESOP 2007 on May 4, 2012 and opened QIP issue on July 12, 2012 for issue of Equity Shares pursuant to and in accordance with the provisions of Chapter VIII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended. The said QIP issue is being carried out in accordance with the resolution passed by the shareholders of your Company through Postal Ballot on December 7, 2011. Further, in terms of Regulations 81(c) of Chapter VIII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, the Board has fixed July 12, 2012 as the Relevant Date for the purpose and accordingly the floor price is Rs. 75.40 per Equity Share as per the pricing formula under Regulation 85 of Chapter VIII of the SEBI ICDR Regulations, 2009. RBI guidelines The Reserve Bank of India, based on the recommendations of the Malegam Committee, notified the directions, inter alia, for the introduction of new category for MFIs, known as Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs). Following is the criteria for classifying an NBFC as an NBFC- MFI: Minimum net owned funds of Rs. 5 crore. Not less than 85 percent of its net assets are in the nature of qualifying assets. Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall be in accordance with the regulations specified in this regard. An NBFC, which does not qualify as an NBFC-MFI shall not extend loans to the microfinance sector, which in aggregate exceed 10 percent of its total assets.

Qualifying asset shall mean a loan, which satisfies the following criteria: Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000. Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles. Total indebtedness of the borrower does not exceed Rs. 50,000. Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty. Loan to be extended without collateral. Aggregate amount of loans, given for income generation, is not less than 75 percent of the total loans given by the MFIs. Loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

Capital requirement All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital, which shall not be less than 15 percent of their aggregate risk weighted assets. The total of Tier II Capital at any point in time shall not exceed 100 percent of Tier I Capital.

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Note: i. ii. Among the existing NBFCs to be classified as NBFC-MFIs, those with asset size less than Rs. 100 crore will be required to comply with this norm w.e.f April 01, 2012. Those with asset size of Rs. 100 crore and above are already required to maintain minimum CRAR of 15 percent. The CRAR for NBFC-MFIs, which have more than 25 percent loan portfolio in the state of Andhra Pradesh will be at 12 percent for the year 2011-2012 only. Thereafter, they have to maintain CRAR at 15 percent.

Asset classification norms: With effect from April 01, 2013: i. ii. Standard asset means the asset in respect of which no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business. Non-performing asset means an asset for which interest/ principal payment has remained overdue for a period of 90 days or more.

Provisioning norms: With effect from April 01, 2013 The aggregate loan provision to be maintained by NBFC-MFIs at any point in time shall not be less than the higher of: 1 percent of the outstanding loan portfolio, or 50 percent of the aggregate loan installments, which are overdue for more than 90 days and less than 180 days and 100 percent of the aggregate loan installments, which are overdue for 180 days or more.

The RBI has, through its circular dated March 20, 2012, deferred the implementation of the asset classification and provisioning norms prescribed for NBFC-MFIs until April 1, 2013. Pricing of credit: i. ii. iii. iv. All NBFC-MFIs shall maintain an aggregate margin cap of not more than 12 percent. The interest cost will be calculated on the basis of average fortnightly balances of outstanding borrowings, and interest income is to be calculated on the basis of average fortnightly balances of outstanding loan portfolio of qualifying assets. Interest on individual loans will not exceed 26 percent per annum and the same will be calculated on a reducing (diminishing) balance basis. Processing charges shall not be more than 1 percent of gross loan amount. Processing charges need not be included in the margin cap or the interest cap. NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges, where recovered, shall be as per Insurance Regulatory Development Authority (IRDA) guidelines.

Fair Practices Code The Reserve Bank of India on March 26, 2012 amended the Fair Practices Code for all NBFCs including MFIs and Gold Loan companies, requiring NBFC-MFIs and Gold Loan companies to comply with certain additional norms with respect to their lending practices and recovery methods. Your Company has revised the Code of Conduct for field staff, who have been involved in microfinance activities and Gold Loans along with relevant policies and documents in line with the RBI guidelines on Fair Practices Code for NBFCs. On December 21, 2011, your Company submitted an application to the RBI for classification as an NBFC-MFI and is awaiting necessary approval from the RBI. Credit bureau for MFIs In order to address the issue of multiple lending or over-indebtedness, various Micro Finance Institutions/ NBFCs have come together to invest in the Credit Information Bureau, namely High Mark Credit Information Services Private Limited via Alpha Micro Finance Consultants Private Limited. In order to facilitate the collective investment in High Mark as well as undertake other collective steps for building the technology infrastructure for credit information sharing among themselves, and to educate their staff in ensuring good Customer Protection Practices are followed, Alpha has been established as a collective entity by 25 NBFC-MFIs which together have about 70 percent of the total portfolio of the microfinance loans. Your Company invested Rs. 20 lakh in Alpha. Self-regulations for MFIs Your Company is a member of both Industry Associations viz., Microfinance Institutions Network (MFIN) and Sa-Dhan (the Association of Community Development Finance Institution) that aim to work with various stakeholders, including regulators to promote microfinance as a tool for achieving larger financial inclusion goals. These self-regulatory organisations have defined an Unified Code of Conduct for microfinance institutions in India, which seek to create social benefits and promote financial inclusion by providing affordable services 16

to un-served and underserved households. The Code, in addition to reiterating the regulatory guidelines, defines core values and fair practices for the sector so as to ensure that microfinance services through MFIs are provided in a manner that benefit borrowersmembers. Ethical approach and dignity for borrowers-members are the key elements of the Code. Globally benchmarked Customer Protection Practices In view of the concerns raised during the Andhra Pradesh situation, your Company has been rolling out several initiatives in order to make Client Protection Principle (CPP) a strategic priority as also to integrate the same into the business plan. Among the initiatives are: Credit bureaus and over-indebtedness: In order to protect members from over-indebtedness, your Company has been playing a leading part in pioneering industry-wide efforts on creating and sharing credit-related information with Credit Bureaus. Between September 2011 and April 2012, your Company obtained Credit Bureau reports for 44 lakh members, while loans have been given to only 26 percent of them. Regulatory compliance: Your Companys policies and processes along with documentation have been modified to comply with: 1. RBI guidelines of December 2, 2011; 2. RBI Fair Practice Code guidelines of July 2, 2012; 3. Guidelines and codes of industry bodies like Sa-Dhan and MFIN. Third-party verification and endorsement: Your Company has been seeking external validation for compliance. Accordingly, M-Cril, a well-known rating agency, conducted a study during October 2011-December 2011 across five states and issued a fully complaint report. A similar study for the period January 2012-June 2012 covering eight states is being commissioned. Rs. 15 crore investment for CPP: Your Company disclosed on December 7, 2011 that it would invest Rs. 15 crore in the next three years in order to align its customer grievance redressal and CPP with globally recognized benchmarks. Cap on Return on Asset: Your Company announced on December 7, 2011 that it will cap Return on Assets at 3 percent for the core microfinance business. Your Companys present interest is 24.55 percent as against the Reserve Bank of India prescribed limit of 26 percent. Ombudsman: Mr. Verghese Jacob, a seasoned corporate and social sector expert with three decades of experience, was appointed as its Ombudsman on January 31, 2012. CPP training and certification: Your Company commissioned EDA Rural Systems, a reputed development sector consultancy, to develop a training programme encompassing the seven principles (avoidance of over-indebtedness, transparency, responsible pricing, appropriate collection practices, ethical staff behavior, privacy of client data and grievance redressal mechanism) of CPP and also certify several staff members after imparting Train-The-Trainer coaching to them. CPP assessment: Your Company has volunteered for an independent assessment of its current practices by Smart Campaign Team of Accion International. Their initial comments capture the best practices being implemented by your Company. The final report is awaited. Upgradation of Customer Grievance Redressal systems and processes: Your Company was the first microfinance company in India to start a Toll-free Helpline (1800 300 10000), which is operational in eight Indian languages since July 6, 2009. A couple of new Customer Grievance Redressal initiatives are being implemented to ensure faster complaint resolution. Integrating CPP into employee KRAs: Zero-tolerance policies have been rolled out specifying severe penalties including termination for non-compliance of the regulatory guidelines. The above-mentioned measures will align your Companys CPP with globally benchmarked best practices, helping your Companys customer satisfaction levels while addressing policy-makers concerns, if any. Information technology Your Company is focused on technology solutions that drive growth. Initiatives are being taken in the following areas: Cost-effective total branch connectivity solution and strengthen existing communication channels. Centralization of data for real-time decision making. Building strong business intelligence reporting and analytics capability. Consolidation of network, storage and hardware infrastructure by using Cloud and virtualization services to drive economies of scale. Use of advanced communication channels like video conferencing to increase productivity and efficiencies. Build robust framework to strengthen technology assets, artifacts and data.

17

The execution of the above-mentioned initiatives will help your Company in achieving its goals. Human Resource Management The Human Resources function has been implementing several initiatives to attract and retain talent. In this regard, the function has been implementing various programmes in the areas of manpower planning and optimization, devising development plans, employee engagement as also indiscipline. A key initiative in this regard is CARE built on the four pillars of: Creative communication, Appreciation for all, Reward and recognition and Energy and enthusiasm. The function has been playing a critical role in ensuring that the field employees follow a standardized set of processes and policies resulting in minimization of business risks and enhancing customer satisfaction. It plays a pivotal role in disseminating Client Protection Practices, Code of Conduct and Staff Ethical Behavior across the organization enabling the human capital of your Company to gear up for future with a special focus on rapid changes pertaining to internal and external environment. Your Company continues to implement various industry first initiatives in the areas of role-based training and certification, performance differentiation and value-based approaches. Building leaders from within will continue to be a priority and your Company continues to strengthen its efforts to build the pipeline. Employee Stock Option Plan (ESOP) and Employee Share Purchase Scheme (ESPS) Presently, stock options have been granted or shares have been issued under the following schemes: A. B. C. D. E. F. G. SKS Microfinance Employee Share Purchase Scheme 2007 (ESPS 2007) SKS Microfinance Employee Stock Option Plan 2007 (ESOP 2007) SKS Microfinance Employees Stock Option Plan 2008 (Independent Directors) (ESOP 2008 (ID)) SKS Microfinance Employee Stock Option Plan 2008 (ESOP 2008) SKS Microfinance Employee Stock Option Plan 2009 (ESOP 2009) SKS Microfinance Employee Stock Option Plan 2010 (ESOP 2010) SKS Microfinance Employee Stock Option Plan 2011 (ESOP 2011)

The disclosures with respect to each of the above-mentioned Employee Share Purchase Schemes (ESPS) and Employee Stock Option Plans (ESOP), as required by Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999, are appended as Annexure - 1 and form part of this report. Particulars of employees Pursuant to the provisions of Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of employees are set out in Annexure - 2 to the Directors Report. Directors During the year under review, following are the changes: 1. 2. 3. Mr. Suresh Gurumani and Mr. Pramod Bhasin resigned as Directors from the Board of Directors of your Company with effect from May 27, 2011 and August 12, 2011 respectively. Dr. Vikram Akula resigned as the Executive Chairman of your Company with effect from November 23, 2011. Mr. V. Chandrasekarans nomination on the Board was withdrawn by Small Industries Development Bank of India (SIDBI) with effect from June 8, 2012.

The Board places on record its appreciation for the contribution made by the above-mentioned Directors to your Company and industry during their tenure. Your Company is in the process of appointing a new incumbent in place of Mr. V. Chandrasekaran as SIDBI nominee on the board of your Company on completion of certain formalities. Mr. P .H. Ravikumar and Mr. Paresh Patel will retire by rotation and are eligible to offer themselves for re-appointment in the ensuing Annual General Meeting. A brief profile of the Directors is given in the Notice of the Ninth Annual General Meeting. Directors Responsibility Statement Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, your Directors confirm as under: 18 i) In the preparation of the annual accounts, the applicable accounting standards read with requirements set out under Schedule VI to the Companies Act, 1956 had been followed and there are no material departures from the same.

ii)

Your Company has selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of your Company at the end of the financial year and of the profit of your Company for that year.

iii) Your Company has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of your Company and for preventing and detecting fraud and other irregularities. iv) Your Company has prepared the annual accounts of your Company on a going concern basis.

Auditors The Statutory Auditors of your Company, M/s. S. R. Batliboi & Co, Chartered Accountants, Mumbai, retire at the ensuing Ninth Annual General Meeting and have confirmed their eligibility and willingness to accept office of the Auditors, if appointed. The Audit Committee and the Board of Directors have recommended reappointment of M/s. S. R. Batliboi & Co., as Statutory Auditors of the Company for the FY2012 - 2013 for your approval. Response of the Board to the Auditors Comments In terms of the provisions of Section 217(3) of the Companies Act, 1956, the Board would like to place on record an explanation to the Auditors comments in their Audit Report dated May 8, 2012: S. No. 1. Auditors Comments The Companys accumulated losses at the end of the financial year are more than fifty percent of its net worth and it has incurred cash losses in the current financial year. The Company had not incurred any cash losses in the immediately preceding financial year. Response Due to the impact of the Andhra Pradesh Microfinance (Money-lending) Regulation Act on the field operations in Andhra Pradesh, the Company has prudently written off substantial part of the loans outstanding in the state during the FY2011-12. Your Company has reduced its net exposure in AP to Rs. 236.0 crore as on March 31, 2012 from Rs. 1,303.2 crore as on March 31, 2011. The net exposure is post provisions and write-offs of Rs. 1,007.2 crore on the AP portfolio during the financial year, which have contributed primarily to the losses reported by your Company for the first time in its history. Notably, the total provisions and write-offs of Rs. 1,173.5 crore made during the financial year 2011-12 exceed the accumulated losses of Rs. 1,051.3 crore at the end of the financial year. The Company has a strong networth of Rs. 434.7 crore even after adjusting the accumulated losses and capital adequacy is 35.4 percent. The regulatory uncertainty created by the AP MFI Act led to reduced bank lending to the sector and for your Company resulting in a decline in the non-AP outstanding loan portfolio during the first three quarters of the financial year 2011-12. Subsequently, with clarity from the NBFCMFI directions issued by the RBI and the Central Micro Finance Institutions (Development and Regulation) Bill, 2012, your Company accessed higher funds in the fourth quarter of financial year 2011-12, resulting in quarter-on-quarter growth in the non-AP portfolio. The Company expects this trend to continue into the next financial year. However, lower revenues, due to the reduction in non-AP portfolio over the full year, coupled with less than proportionate decrease in expenses, resulted in cash losses in the financial year 2011-12. To control costs, your Company has initiated several measures and also steps to ensure AP operations are cash neutral.

19

2.

We have been informed that during the year there were instances of cash embezzlements by the employees of the Company aggregating Rs. 25,091,317; and loans given to nonexistent borrowers on the basis of fictitious documentation created by the employees of the Company aggregating Rs. 133,313,975. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. The outstanding balance (net of recovery) aggregating Rs. 142,440,656 has been written off.

Employee fraud is an inherent risk in the business the Company operates in, since all the transactions are cash-based. In case of cash embezzlements, your Company has recovered an amount of Rs. 10,859,714 including the insurance cover. Cash embezzlement is 0.09percent of disbursement during the year. To mitigate this risk to a large extent, the management has put in place several preventive control measures as under: - Procuring indemnity bond from every field staff, with personal guarantee of a third person. - Every bank transaction (deposit/ withdrawal) is to be executed by minimum of two staff comprising a bank signatory and a confirmed staff. - The strongbox at every branch is controlled by two keys and the keys are held by two different employees in the branch. - Surprise visits are conducted by managerial employees, at the time of carrying out cash/ bank transactions by field employees. - Minimizing the cash balances at various branches to the lowest level possible (50,000 + next day disbursement) There are also several detective controls, as follows: - Employee-wise daily reconciliation of cash balances by the managerial employees at each branch - Frequent surprise visits by accountants and internal auditors, which covers verification of physical cash and bank balances - The following is the action taken in such cases: Terminating services of all the employees involved in cash embezzlements and taking legal action against them Recovering money from such employees Also, your Company has taken fidelity insurance to minimize the losses from cash embezzlements. In case of loans given to non-existent/ fictitious borrowers, your Company has recovered an amount of Rs. 7,397,648 against these cases including insurance cover. These cases are 0.49percent of disbursement during the year. The following are the various preventive control measures included in the loan process to mitigate the risk of loans to non-existent borrowers/ fictitious borrowers: - All the loans disbursed have a maker/ checker control; wherein all the loans processed by sangam managers are approved by branch managers/ assistant branch managers. - Sangam managers are not deployed in their home towns, so as to prevent collusion with the local people there. - Employee rotation every six months, where in the sangam managers manage different centres at the end of every six months. - Transfer of sangam manager/ branch manager in a span of 9 to 12 months - Developed internal processes to restrict loan disbursements to inactive members Detective controls: - The branch managerial employees perform Loan Utilization Check for every loan disbursed. - The internal audit team, on a test basis, verifies the loan documents and performs Loan Utilization Check for the loans disbursed. Actions taken: - Terminating services of all the employees involved in fake loan transactions and taking legal action against them - Recovering money from such employees The net impact of frauds comes to around 0.51 percent of the total amount disbursed during the year. Your Company is working towards reducing this percentage to the least possible by making process improvements, covering the loss by having an adequate insurance policy and by increasing opportunities for direct contact with our members. During the year, your Company has recovered an amount of Rs. 1.30 crore against fraud amount written off in previous years.

20

Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo The particulars required to be furnished under sub section (1) (e) of Section 217 of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are set out in the Annexure 3 to this report. Green initiatives During the previous fiscal, your Company started a sustainability initiative with the aim of going green and minimizing the environmental impact. Like last year, this year too your Company has published the Annual Report prepared in compliance with provisions of the Companies Act, 1956 and the Listing Agreement. Intellectual property Your Company has 11 trademarks registered in its name, including the trademark registrations for SKS Microfinance, the composite trademark for SKS in English and eight other Indian languages, and the Swarna Pushpam logo in English. Our trademark registration application for the Swarna Pushpam logo in Telugu language as well as our application for registration of a composite trademark for SKS Microfinance in Bengali language are currently pending. Your Company also has copyright certification of our anthem song titled Udhte Jaayen Badte Jaayen. Acknowledgements Your Directors express their sincere appreciation of the cooperation and assistance received from Sangam Members, shareholders, bankers, and other stakeholders during the year under review. Your Directors also wish to place on record their deep sense of appreciation for the commitment displayed from all executives, officers and field employees resulting in the successful performance of your Company during the year. Place: Hyderabad Date: July 14, 2012 For and on behalf of the Board of Directors SD/- P .H. Ravikumar Non-Executive Chairman-Interim SD/M.R. Rao Managing Director and CEO

21

Employee Share Purchase Scheme (ESPS) and Employee Stock Option Plan (ESOP) The disclosures with respect to your Companys Employee Share Purchase Scheme (ESPS) and Employee Stock Option Plan (ESOP) are set out hereunder: A. SKS Microfinance Employee Share Purchase Scheme 2007 (ESPS 2007) Your Company instituted ESPS 2007 pursuant to a special resolution dated February 9, 2007, passed at an EGM of your Company. The ESPS 2007 was implemented by the Compensation Committee and the SKS Microfinance Employee Welfare Trust (EWT). The EWT was constituted on March 28, 2007, pursuant to a resolution passed by the Board of Directors dated March 5, 2007. The effective date of the ESPS 2007 was March 31, 2007 and it shall be in effect till March 31, 2020. Under ESPS 2007, 1,849,750 Equity Shares were issued for the benefit of the eligible employees and, in the event an employee is terminated or has resigned from the service of your Company, then the unreleased Equity Shares to the said employee stand transferred to the EWT. The same is used for the other eligible employees of your Company. The following table sets forth the particulars of the Equity Shares granted under the ESPS 2007 as of date: Particulars Shares issued Date of issue Allotment price of share (Rs.) Person-wise details of shares granted to i) Directors and key managerial employees ii) Any other employee who was allotted Equity Shares amounting to 5 percent or more of the Equity Shares allotted during the year iii) Identified employees who were allotted Equity Shares, during any one year equal to exceeding 1 percent of the issued capital (excluding outstanding warrants and conversions) of your Company at the time of allotment Fully diluted EPS Difference between employee compensation cost using the intrinsic value method and the employee compensation cost that shall have been recognized if your Company has used fair value and impact of this difference on profits and EPS of your Company Not Applicable Refer below Not Applicable Not Applicable Details of Tranche I 818,000 March 31, 2007 10.00 Details of Tranche II 514,250 November 20, 2007 49.77 Details of Tranche III 517,500 August 25, 2008 70.67

Not Applicable

Not Applicable

Not Applicable

Rs. (188.06) as on March 31, 2012 Not Applicable Not Applicable Not Applicable

Details of Equity Shares allotted/ transferred to Directors and key managerial employees are set forth below: Name of Director/ key managerial personnel Mr. M.R. Rao* Number of Equity Shares 4,56,666 Date of Allotment/Transfer 200,000 Equity Shares allotted on March 31, 2007. 163,750 Equity Shares allotted on August 25, 2008. 86,250 Equity Shares have been transferred from EWT on August 25, 2008. 6,666 Equity Shares transferred from EWT on July 29, 2009. 100,000 Equity Shares have been transferred from EWT on February 1, 2008. 2,666 Equity Shares transferred from EWT on July 29, 2009.

Mr. S. Dilli Raj**

1,02,666

* Mr. M.R. Rao holds 2,94,166 equity shares as on March 31, 2012. ** Mr. S. Dilli Raj holds 77,666 equity shares as on March 31, 2012. B. SKS Microfinance Employees Stock Option Plan 2007 (ESOP 2007) Your Company instituted ESOP 2007 pursuant to a special resolution dated September 8, 2007 passed at an AGM of your Company and was further amended pursuant to the resolutions passed through Postal Ballot on December 7, 2011. The total number of shares (which mean Equity Shares of your Company and securities convertible into Equity Shares) that may be issued under ESOP 2007 are 18,52,158 Equity Shares. The ESOP 2007 came into effect on September 8, 2007 and is valid up to September 7, 2011, or such other date as may be decided by the Board of Directors. The ESOP 2007 was implemented by the Board 22

of Directors and the Compensation Committee. Unless otherwise specified, the vested options were to be exercised prior to the expiry of 48 months from the date of vesting. Your Company has granted 18,52,158 options convertible into 18,52,158 Equity Shares of face value of Rs. 10 each on various dates as tabulated below and the following table sets forth the particulars of the options granted under ESOP 2007 as on March 31, 2012: Particulars Options granted Date of grant Exercise price of options (in Rs.) Total options vested Options exercised* Total number of Equity Shares that would arise as a result of full exercise of options already granted Options forfeited/ lapsed/ cancelled Variation in terms of options Money realized by exercise of options (in Rs.) Options outstanding (in force) Person-wise details of options granted to i) Directors and key managerial employees ii) Any other employee who received a grant in any one year of options amounting to 5 percent or more of the options granted during the year iii) Identified employees who are granted options, during any one year equal to exceeding 1 percent of the issued capital (excluding outstanding warrants and conversions) of your Company at the time of grant Diluted EPS on issue of shares on exercise calculated as per AS 20 Method of calculation of employee compensation cost Weighted average exercise price of options Weighted average fair value of options The details of ESOP 2007 as on March 31, 2012 have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 9,06,734 9,06,734 Weighted average exercise price (Rs.) 49.77 49.77 7.28 As at March 31, 2011 Number of options 9,06,734 9,06,734 9,06,734 0.6 Weighted average exercise price (Rs.) 49.77 49.77 49.77 7.28 18,52,158 Details 18,52,158 October 15, 2007 49.77 18,52,158 18,52,158 18,52,158 9,21,81,904 -

Rs. (188.06) as on March 31, 2012 Fair Value Method 49.77 7.28

* Notice of exercise received for 9,06,734 options. However, allotment is pending as on March 31, 2012. These shares have been subsequently allotted on May 4, 2012. The weighted average share price on the date of receipt of such notice for exercise was Rs. 214.66 (Previous year: Rs. Nil).

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Details of options granted to Directors and key managerial employees are set forth below: Name of Director/ key managerial personnel Dr. Vikram Akula Total No. of options granted 18,52,158 No. of options exercised 18,52,158* Total No. of options outstanding No. of Equity Shares held 18,52,158

* Dr. Vikram Akula has exercised 906,734 stock options vide Notice of Exercise dated October 13, 2011 and 906,743 equity shares were allotted to Dr. Vikram Akula on May 4, 2012. C. SKS Microfinance Employees Stock Option Plan 2008 (Independent Directors) (ESOP 2008 (ID)) Your Company instituted ESOP 2008 (ID) pursuant to a special resolution dated January 16, 2008 passed at an EGM of your Company. The ESOP 2008 (ID) was amended pursuant to the resolutions passed at EGM held on January 8, 2010 and was further amended pursuant to the resolutions passed through Postal Ballot on December 7, 2011. The total number of Equity Shares that may be issued under ESOP-2008 (ID) are 1,95,000 Equity Shares (as amended, pursuant to a resolution of the shareholders dated January 8, 2010. The ESOP-2008 (ID) came into effect on January 16, 2008 and is valid up to January 15, 2015, or such other date as may be decided by the Board of Directors. The ESOP 2008 (ID) was implemented by the Board of Directors. Unless otherwise specified, the vested options were to be exercised prior to the expiry of 60 months from the date of vesting. The following table sets forth the particulars of the options granted under the ESOP 2008 (ID) as on March 31, 2012: Particulars Options granted Date of Grant Exercise price of options (in Rs.) Total options vested Options exercised Total number of Equity Shares that would arise as a result of full exercise of options already granted Options forfeited/ lapsed/ cancelled Variation in terms of options Money realized by exercise of options (in Rs.) Options outstanding (in force) Person-wise details of options granted to i) Directors and key managerial employees 30,000 15,000 6,000 18,000 90,000 Tranche I 30,000 February 1, 2008 70.67 30,000 30,000 30,000 Tranche II 15,000 February 1, 2008 70.67 15,000 15,000 Tranche III 6,000 November 10, 2008 70.67 6,000 2,000 6,000 Tranche IV 18,000 July 29, 2009 300.00 18,000 18,000 Tranche V 90,000 February 1, 2010 300.00 4,500 90,000

2,120,100

1,41,340

36,000 13,50,000

15,000

4,000

18,000

49,500

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ii) Any other employee who received a grant in any one year of options amounting to 5 percent or more of the options granted during the year iii) Identified employees who are granted options, during any one year equal to exceeding 1 percent of the issued capital (excluding outstanding warrants and conversions) of your Company at the time of grant Diluted EPS on issue of shares on exercise calculated as per AS 20 Method of calculation of employee compensation cost Weighted average exercise price of options Weighted average fair value of options

Rs. (188.06) as on March 31, 2012

Fair Value Method

Rs. 70.67

Rs. 70.67

Rs. 70.67

Rs. 300.00

Rs. 300.00

Rs. 17.72

Rs. 52.14

Rs. 21.57

Rs. 72.53

The details of Tranche I have been summarized below: As at March 31, 2012 Particulars Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted Number of options Weighted average exercise price (Rs.) As at March 31, 2011 Number of options 30,000 30,000 Weighted average exercise price (Rs.) 70.67 70.67 15.28

25

* Includes notice received for exercise of 5,000 options. However, allotment was pending as on March 31, 2011. The weighted average share price on the date of receipt of such notice for exercise was Rs. 664.94. The weighted average share price on the date of exercise of other 25,000 stock options was Rs.1,180.65. The details of Tranche II have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (years)** Weighted average fair value of options granted 15,000 15,000 15,000 0.8 Weighted average exercise price (Rs.) 70.67 70.67 70.67 17.72 As at March 31, 2011 Number of options 15,000 15,000 Weighted average exercise price (Rs.) 70.67 70.67 17.72

* Notice of exercise received for 15,000 options. However, allotment of shares was pending as on March 31, 2011. Subsequently, in the current year, your Company refunded the share application money received towards such options, within 180 days of its receipt and the options are outstanding and exercisable as on March 31, 2012. The weighted average share price on the date of receipt of such notice for exercise was Rs. 664.94. ** Original exercise period ending on February 1, 2011, extended up to February 1, 2013. The details of Tranche III have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (years)** Weighted average fair value of options granted 4,000 4,000 4,000 0.8 Weighted average exercise price (Rs.) 70.67 70.67 70.67 52.14 As at March 31, 2011 Number of options 6,000 2,000 4,000 4,000 0.6 Weighted average exercise price (Rs.) 70.67 70.67 70.67 70.67 52.14

* Includes notice received for exercise of 1,000 options. However, allotment was pending as on March 31, 2011. The weighted average share price on the date of receipt of such notice for exercise was Rs. 664.94. ** Original exercise period ending on November 10, 2011, extended up to February 1, 2013. The weighted average share price on the date of exercise of other 1,000 stock options was Rs. 1,166.54.

26

The details of Tranche IV have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 18,000 18,000 18,000 0.3 Weighted average exercise price (Rs.) 300.00 300.00 300.00 21.57 As at March 31, 2011 Number of options 18,000 18,000 12,000 1.3 Weighted average exercise price (Rs.) 300.00 300.00 300.00 21.57

The details of Tranche V have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 85,500 36,000 49,500 22,500 2.8 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 72.53 As at March 31, 2011 Number of options 90,000 4,500 85,500 18,000 3.8 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 72.53

* Notice received for exercise of 4,500 options. However, allotment was pending as on March 31, 2011. The weighted average share price on the date of receipt of such notice for exercise was Rs. 664.94. Details of options granted to Independent Directors are set forth below: Name of Director Mr. Geoffrey Tanner Woolley Mr. Gurcharan Das* Mr. P .H. Ravikumar Plan Tranche IV Tranche V Tranche I Tranche I Tranche III Tranche V Mr. Pramod Bhasin** Dr. Tarun Khanna Tranche V Tranche II Tranche III Tranche V Total No. of options granted 18,000 18,000 15,000 15,000 3,000 18,000 36,000 15,000 3,000 18,000 No. of options exercised 15,000 15,000 2,000 4,500 Total No. of options outstanding 18,000 18,000 1,000 13,500 15,000 3,000 18,000 27 No. of Equity Shares held 5,500 15,400

* Resigned with effect from January 5, 2010. ** Resigned with effect from August 12, 2011 and options granted to him have lapsed. D. SKS Microfinance Employee Stock Option Plan 2008 (ESOP 2008) Your Company instituted ESOP 2008 pursuant to a special resolution dated November 8, 2008 passed at an EGM of your Company. The ESOP 2008 was amended pursuant to the resolutions passed through Postal Ballot on December 7, 2011. The total number of shares (which mean Equity Shares of your Company and securities convertible into Equity Shares) that may be issued under ESOP 2008 are 26,69,537 Equity Shares. The ESOP 2008 came into effect on November 10, 2008 and is valid up to November 9, 2014, or such other date as may be decided by the Board of Directors. The ESOP 2008 was implemented by the Board of Directors and the Compensation Committee. Unless otherwise specified, the vested options were to be exercised prior to the expiry of 60 months from the date of vesting. The following table sets forth the particulars of the options granted under ESOP 2008 as on March 31, 2012: Particulars Options granted Date of grant Exercise price of options (in Rs.) Total options vested Options exercised Total number of Equity Shares that would arise As a result of full exercise of options already granted Options forfeited/ lapsed/ cancelled Variation in terms of options Money realized by exercise of options (in Rs.) Options outstanding (in force) Person-wise details of options granted to i) Directors and key managerial employees ii) Any other employee who received a grant in any one year of options amounting to 5 percent or more of the options granted during the year iii) Identified employees who are granted options, during any one year equal to exceeding 1 percent of the issued capital (excluding outstanding warrants and conversions) of your Company at the time of grant Diluted EPS on issue of shares on exercise calculated as per AS 20 Method of calculation of employee compensation cost Weighted average exercise price of options Weighted average fair value of options # Options lapsed on May 25, 2012. 17,69,537 9,00,000 Details of Tranche I 17,69,537 November 10 , 2008 300.00 17,69,537 17,69,537 Details of Tranche II 9,00,000 December 8, 2008 300.00 2,25,000 2,25,000 9,00,000 Details of Tranche III* 4,49,897 September 7, 2011 229.40 4,49,897

17,69,537

4,50,000 6,75,00,000 2,25,000#

71,228 3,78,669

Rs. (188.06) as on March 31, 2012 Fair Value Method 300.00 2.92 300.00 1.81 229.40 146.37

28

*The weighted average fair value of stock options granted during the year was Rs. 146.37. The Black-Scholes Model has been used for computing the weighted average fair value considering the following: Particulars Share price on the date of grant (Rs.) Exercise price (Rs.) Expected volatility (%) Life of the options granted (years) Risk-free interest rate (%) Expected dividend rate (%) Fair value of the option The details of Tranche I have been summarized below: As at March 31, 2012 Particulars Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted The details of Tranche II have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 6,75,000 4,50,000 2,25,000 2,25,000 0.2 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 1.81 As at March 31, 2011 Number of options 6,75,000 6,75,000 1.6 Weighted average exercise price (Rs.) 300.00 300.00 1.81 17,69,537 17,69,537 1.6 300.00 300.00 2.92 17,69,537 17,69,537 2.6 300.00 300.00 2.92 Number of options 17,69,537 Weighted average exercise price (Rs.) 300.00 As at March 31, 2011 Number of options 17,69,537 Weighted average exercise price (Rs.) 300.00 Tranche vesting in FY 2012-13 229.55 229.40 72.96 4 8.30 0 140.08 Tranche vesting in FY 2013-14 229.55 229.40 72.96 5 8.29 0 153.38

29

The details of Tranche III have been summarized below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 4,49,897 71,228 3,78,669 4.4 Weighted average exercise price (Rs.) 229.40 229.40 229.40 146.37 As at March 31, 2011 Number of options Weighted average exercise price (Rs.) -

Details of options granted to Directors and key managerial personnel are set forth below: Tranche Name of Director/ key managerial personnel Dr. Vikram Akula Mr. Suresh Gurumani Total No. of options granted 17,69,537 9,00,000 No. of options exercised 2,25,000 Total No. of options outstanding 17,69,537 4,50,000* No. of Equity Shares held -

I II III

* Mr. Suresh Gurumani resigned as Director with effect from May 27, 2011, consequent to which 4,50,000 unvested options were forfeited during the financial year ended March 31, 2012 and 2,25,000 vested options lapsed as on May 25, 2012. E. SKS Microfinance Employees Stock Option Plan 2009 (ESOP 2009) Your Company instituted ESOP 2009 pursuant to a special resolution dated September 30, 2009 and, as amended, pursuant to a special resolution dated December 10, 2009 passed at an EGM of your Company. This was further amended pursuant to the resolutions passed through Postal Ballot on December 7, 2011. The total number of Equity Shares that may be issued under ESOP 2009 (as amended, pursuant to a resolution of shareholders dated December 10, 2009) are 24,99,490 Equity Shares. The ESOP 2009 came into effect on September 30, 2009 and is valid up to November 30, 2014, or such other date as may be decided by the Board of Directors. The ESOP 2009 was implemented by the Board of Directors and the Compensation Committee. The vested options were to be exercised prior to the expiry of six years from the date of grant of the options as may be determined by the Board/ Compensation Committee.

30

The following table sets forth the particulars of the options granted under ESOP 2009 as on March 31, 2012:
Particulars Options granted Date of grant Exercise price of options Details of Tranche I 5,14,750 November 3, 2009 Rs. 300.00 Details of Tranche II 18,81,160 December 16, 2009 (a) 13,13,160 at Rs. 150.00 per option; and (b) 5,68,000 at Rs. 300.00 per option (a) 368,543 at Rs. 150.00 per option; and (b) 140,760 at Rs. 300.00 per option (a) 1,32,995 at Rs. 150.00 per option; (b) 67,360 at Rs. 300.00 per option; 18,81,160 Details of Tranche III 10,340 May 4, 2010 (a) 4,340 at Rs. 150 per option; and (b) 6,000 at Rs. 300 per option a) 618 at Rs. 150 per option; and b) 600 at Rs. 300 per option a) 388 at Rs. 150 per option; and b) Nil at Rs. 300 per option 10,340 Details of Tranche IV* 4,70,332 September 7, 2011 Rs. 229.40

Total options vested

265,038

Nil

Options exercised

1,47,110

Nil

Total number of Equity Shares that would arise as a result of full exercise of options already granted Options forfeited/ lapsed/ cancelled

5,14,750

4,70,332

1,07,000

(a) 319,802 at Rs. 150.00 per option; and (b) 216,100 at Rs. 300.00 per option Nil 4,01,57,250 (a) 7,88,363 at Rs. 150.00 per option; and (b) 2,84,540 at Rs. 300.00 per option Nil Nil

(a) 1,248 at Rs. 150.00 per option; and (b) 3,000 at Rs. 300.00 per option Nil 58,200 (a) 2,704 at Rs. 150.00 per option; and (b) 3,000 at Rs. 300.00 per option Nil Nil

95,810

Variation in terms of options Money realised by exercise of options Options outstanding (in force)

Nil 4,41,33,000 2,60,640

Nil Nil 3,74,522

Person-wise details of options granted to i) Directors and key managerial employees ii) Any other employee who received a grant in any one year of options amounting to 5 percent or more of the options granted during the year iii) Identified employees who are granted options during any one year equal to exceeding 1 percent of the issued capital (excluding outstanding warrants and conversions) of your Company at the time of grant Diluted EPS on issue of shares on exercise calculated as per AS 20 Method of calculation of employee compensation cost Nil Nil Nil Nil

Nil

Nil

Nil

Nil

Rs. (188.06) as on March 31, 2012

Fair Value Method

31

Weighted average exercise price of options Weighted average fair value of options

Rs. 300.00 Rs. 41.18

a. Rs. 300.00 b. Rs. 150.00 a. Rs. 115.30 b. Rs. 69.29

a. Rs. 300.00 b. Rs. 150.00 a. Rs. 233.75 b. Rs. 152.53

Rs. 229.40 Rs. 146.37

*The weighted average fair value of stock options granted during the year was Rs. 146.37. The Black-Scholes Model has been used for computing the weighted average fair value considering the following:
Particulars Share price on the date of grant (Rs.) Exercise price (Rs.) Expected volatility (%) Life of the options granted (years) Risk-free interest rate (%) Expected dividend rate (%) Fair value of the option Tranche vesting in FY 2012-13 229.55 229.40 72.96 4 8.30 0 140.08 Tranche vesting in FY 2013-14 229.55 229.40 72.96 5 8.29 0 153.38

The details of Tranche I have been summarized below:


Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 57,000 2,200 2,60,640 1,17,928 2.6 300.00 300.00 300.00 300.00 41.18 3,19,840 Weighted average exercise price (Rs.) 300.00 As at March 31, 2011 Number of options 5,02,250 37,500 1,44,910 3,19,840 40,990 3.6 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 300.00 41.18

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs. 394.87 (Previous year: Rs. 690.46). The details of Tranche II Options granted at Rs. 150.00 have been summarized below:
As at March 31, 2012 Particulars Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted Number of options 9,75,792 1,67,892 19,537 7,88,363 2,35,548 3.6 Weighted average exercise price (Rs.) 150.00 150.00 150.00 150.00 150.00 115.30 As at March 31, 2011 Number of options 12,37,040 1,47,790 1,13,458 9,75,792 1,04,392 4.6 Weighted average exercise price (Rs.) 150.00 150.00 150.00 150.00 150.00 115.30

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs. 325.79 (Previous year: Rs. 642.96).

32

The details of Tranche II Options granted at Rs. 300.00 have been summarized below:
Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 4,01,000 1,16,100 360 2,84,540 73,400 3.6 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 300.00 69.29 As at March 31, 2011 Number of options 5,62,000 94,000 67,000 4,01,000 26,600 4.6 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 300.00 69.29

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs. 374.27 (Previous year: Rs. 634.98). The details of Tranche III Options granted at Rs. 150.00 have been summarized below:
Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 3,990 898 388 2,704 230 4.1 Weighted average exercise price (Rs.) 150 150 150 150 150 233.75 As at March 31, 2011 Number of options 4,340 350 3,990 5.1 Weighted average exercise price (Rs.) 150 150 150 233.75

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs. 399.32 (Previous year: Rs. Nil). The details of Tranche III Options granted at Rs. 300.00 have been summarized below:
Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 3,000 3,000 600 4.1 Weighted average exercise price (Rs.) 300 300 300 152.53 As at March 31, 2011 Number of options 6,000 3,000 3,000 5.1 Weighted average exercise price (Rs.) 300 300 300 152.53

33

The details of Tranche IV have been summarized below:


Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 4,70,332 95,810 3,74,522 4.4 Weighted average exercise price (Rs.) 229.40 229.40 229.40 146.37 As at March 31, 2011 Number of options Weighted average exercise price (Rs.) -

F.

SKS Microfinance Employees Stock Option Plan 2010 (ESOP 2010)

Your Company instituted ESOP 2010 pursuant to a special resolution dated July 16, 2010 passed at an AGM of your Company. The ESOP 2010 was amended pursuant to the resolutions passed through Postal Ballot on December 7, 2011. The total number of shares (which mean Equity Shares of your Company and securities convertible into Equity Shares) that may be issued under ESOP 2010 are 12,00,000 Equity Shares. The ESOP 2010 came into effect on July 16, 2010 and is valid up to July 15, 2016, or such other date as may be decided by the Board of Directors. The ESOP 2010 was implemented by the Board of Directors and the Compensation Committee. Unless otherwise specified, all grants made to any employee would vest not earlier than one year but not later than five years from the date of grant of options. Your Company has granted 8,66,100 options convertible into 8,66,100 Equity Shares of face value of Rs. 10 each on various dates as tabulated below and the following table sets forth the particulars of the options granted under ESOP 2010 as on March 31, 2012:
Particulars Options granted Date of grant Exercise price of options (in Rs.) Total options vested Options exercised Total number of Equity Shares that would arise as a result of full exercise of options already granted Options forfeited/ lapsed/ cancelled Variation in terms of options Money realized by exercise of options (in Rs.) Options outstanding (in force) Person-wise details of options granted to i) Directors and key managerial employees ii) Any other employee who received a grant in any one year of options amounting to 5 percent or more of the options granted during the year iii) Identified employees who are granted options during any one year equal to exceeding 1 percent of the issued capital (excluding outstanding warrants and conversions) of your Company at the time of grant Nil Nil Nil Nil Details of Tranche I* 5,66,100 September 7, 2011 229.40 5,66,100 Details of Tranche II** 3,00,000 November 23, 2011 109.95 3,00,000

1,03,156 Nil 4,62,944

Nil 3,00,000

Nil

Nil

34

Diluted EPS on issue of shares on exercise calculated as per AS 20 Method of calculation of employee compensation cost Weighted average exercise price of options Weighted average fair value of options

Rs. (188.06) as on March 31, 2012 Fair Value Method Rs. 229.40 Rs. 146.37 Rs. 109.95 Rs. 77.23

*The weighted average fair value of stock options granted during the year was Rs. 146.37. The Black-Scholes Model has been used for computing the weighted average fair value considering the following:
Particulars Share price on the date of grant (Rs.) Exercise price (Rs.) Expected volatility (%) Life of the options granted (years) Risk-free interest rate (%) Expected dividend rate (%) Fair value of the option Tranche vesting in FY 2012-13 229.55 229.40 72.96 4 8.30 0 140.08 Tranche vesting in FY 2013-14 229.55 229.40 72.96 5 8.29 0 153.38

** The weighted average fair value of stock options granted during the year was Rs. 77.23. The Black-Scholes Model has been used for computing the weighted average fair value considering the following:
Particulars Share price on the date of grant (Rs.) Exercise price (Rs.) Expected volatility (%) Life of the options granted (years) Risk-free interest rate (%) Expected dividend rate (%) Fair value of the option Tranche vesting in FY 2012-13 115.45 109.95 71.08 4 8.62 0 70.94 Tranche vesting in FY 2013-14 115.45 109.95 71.08 5 8.67 0 77.55 Tranche vesting in FY 2014-15 115.45 109.95 71.08 6 8.72 0 83.01

The details of Tranche I have been summarized below:


Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 5,66,100 1,03,156 4,62,944 4.4 Weighted average exercise price (Rs.) 229.40 229.40 229.40 146.37 As at March 31, 2011 Number of options Weighted average exercise price (Rs.) -

35

The details of Tranche II have been summarized below:


Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 3,00,000 3,00,000 5.7 Weighted average exercise price (Rs.) 109.95 109.95 77.23 As at March 31, 2011 Number of options Weighted average exercise price (Rs.) -

Details of options granted to Directors and key managerial personnel are set forth below:
Tranche II II II Name of Director/ key managerial personnel Mr. Geoffrey Tanner Woolley Mr. P .H. Ravikumar Dr. Tarun Khanna Total No. of options granted 1,00,000 1,00,000 1,00,000 No. of options exercised Total No. of options outstanding 1,00,000 1,00,000 1.00,000 No. of Equity Shares held -

G. SKS Microfinance Employees Stock Option Plan 2011 (ESOP 2011) Your Company instituted ESOP 2011 pursuant to a special resolution dated December 7, 2011 passed through Postal Ballot as per Section 192A of The Companies Act, 1956. The total number of shares (which mean Equity Shares of your Company and securities convertible into Equity Shares) that may be issued under ESOP 2011 are 13,50,000 Equity Shares. The ESOP 2011 came into effect on December 7, 2011 and shall remain in effect until all options granted under the ESOP 2011 have been exercised or have expired or such other date as may be decided by the Board of Directors. No options have been granted under ESOP 2011. Apart from the options granted under the ESOP 2007, ESOP 2008, ESOP 2008 (ID), ESOP 2009 and ESOP 2010, there are no outstanding financial instruments or any other rights which would entitle the existing promoters or shareholders or any other person any option to acquire your Companys Equity Shares. Place: Hyderabad Date: July 14, 2012 For and on behalf of the Board of Directors SD/- P .H. Ravikumar Non-Executive Chairman-Interim SD/M.R. Rao Managing Director and CEO

36

Information under Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, and forming part of the Directors Report for the Financial Year ended March 31, 2012. A. Employed throughout the year and in receipt of remuneration of Rs. 60,00,000/- and above:
S No. 1 2 3 Employee Name M.R. Rao S. Dilli Raj Srinivasa Reddy Vudumula A. V. Sateesh Kumar Designation MD and CEO CFO Sr. EVP Human Resources EVP Member Services Qualification MMS B.Com, MBA BE, PGD PM&IR (XLRI) PGDM (IIM) Age 48 44 44 Exp. (Years) 26 22 20 Joining Date Oct. 24 06 Jan. 28 08 Jun. 7 10 Gross Remuneration (Rs.) *1,06,36,671 **1,24,79,850 75,36,279 Designation & Previous Employment Head, Alternate Channels, ING Vysya Life CFO, First Leasing Co. of India Ltd. Head - HR, Maytas Infra Ltd. President (LifeInsurance), India Infoline

46

21

Jul. 8 10

66,44,670

* Includes variable pay of Rs. 54 .0 lakhs payable for the previous financial year. ** Includes variable pay of Rs. 37.5 lakhs payable for the previous financial year. B. Employed partly during the year and in receipt of remuneration of Rs. 5,00,000/- per month and above:
S No. 1 Employee Name Dr. Vikram Akula(*) Designation Executive Chairman Qualification B.A, M.A, Ph.D Age 45 Exp. (Years) 12 Joining Date Apr. 1 11 Gross Remuneration (Rs.) 31,06,666 Designation & Previous Employment Deccan Development Society Community Organizer; McKinsey & Co. Pantaloon Retail-Head Corporate Communication

Atul Takle

EVP-Communication

Diploma, MMM

55

26

May 18 10

7,56,037

* Resigned on November 23, 2011. Notes: 1. All appointments are contractual. 2. No Director is related to any other Director or employee of the Company listed above. 3. Remunerations received/ receivable includes Gross Salary (Fixed), Employers Contribution to PF, actual bonus and special incentive paid. 4. None of the employees listed above, individually or along with his/ her spouse and dependent children holds 2 percent or more, of the Equity Shares of the Company. Particulars pursuant to Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988:
A. (a) Conservation of energy: Energy conservation measures taken Maintained 50 roof-top Solar Photovoltaic Panels as an alternate source of electricity for your Companys branches at different locations across India. Distributed 14,408 D-Light solar lanterns during the year among your Companys Sangam managers across the Regional Offices.

(b) (c)

Additional investments and proposals, if any, being implement- Cumulative expenditure on these initiatives is ed for reduction of consumption of energy Rs. 2,54,82,953. Impact of the measures at (a) and (b) above for reduction of Saving of 120.8 MW energy per year. energy consumption and consequent impact on the cost of production of goods Total energy consumption and energy consumption per unit of - Not applicable production as per Form A of the Annexure in respect of industries specified in the Schedule thereto. Technology absorption: Efforts made in technology absorption as per Form B of the Refer Form B Annexure.

(d)

B. (e)

37

C. (f)

Foreign exchange earnings and outgo : Activities relating to exports; initiatives taken to increase ex- - Not applicable ports; development of new export markets for products and services; and export plans Earning Outgo 2011-2012 Rs. Nil Rs. 24,50,519 2010-2011 Rs. Nil Rs. 43,23,917

(g) (h)

FORM B
Efforts, in brief, made towards technology absorption, adaptation The Company designed specific tools, rules, and discipline for the and innovation organization, creating a unique identity in the microfinance industry, and helping the organization in terms of improving efficiency and productivity with low-cost valued solutions. Key areas of improvement are: 1) Developing enterprise core applications and business reporting & intelligence systems in managing the application portfolio for different products 2) Setting up advanced data center and business continuity solutions for the organization and designing hybrid connectivity in connecting SKS branches across India 3) Email - Messaging solutions with integrated knowledge and content management helping employees in different dimensions across head office and regional offices. 2. Benefits derived as a result of the above efforts, e.g., product Cost and time reduction in the operations of the Company. improvement, cost reduction, product development, import substitution, etc. 3. In case of imported technology (imported during the last five Not applicable years reckoned from the beginning of the financial year), following information may be furnished: a) Technology imported. b) Year of import. c) Has technology been fully absorbed? d) If not fully absorbed, areas where this has not taken place, reasons there for and future plans of action.

Place: Hyderabad Date: July 14, 2012

For and on behalf of the Board of Directors SD/- P .H. Ravikumar Non-Executive Chairman-Interim SD/M.R. Rao Managing Director and CEO

38

Management Discussion and Analysis


MICROFINANCE INDUSTRY The AP MFI Act and the AP microfinance crisis
Background to the AP MFI Act Andhra Pradesh is stated to have a unique leadership position in the Indian microfinance industry, as evidenced by the presence of the four largest MFIs in India in the state (Source: Sa-Dhan 2011 report). In March 2010, it accounted for more than 30.0 percent of all borrower accounts and outstanding loan portfolios in the case of MFIs (Source: SOS 2011 report). The following table provides details regarding the microfinance industry in AP:
Crores SHG loans (Rs.) MFI loans (Rs.) SHG members MFI customers Total MF clients (Source: SOS 2011 report) 2008 5,385.7 1,944.5 1.1 0.4 1.4 2009 8,902.1 3,565.2 1.6 0.5 2.1 2010 11,739.5 5210.7 1.7 0.6 2.4 2011 12,869.4 5,204.5 2.2 0.6 2.8

Even though the Government of AP made significant investments in subsidizing financial inclusion through Self-Help Group-Bank Linkage Programmes (SBL), MFIs had continued to increase lending to their customers. An added feature of this high level of MFI lending in the state was the low default rates with portfolio at risk being less than 1.0 percent for most of the MFIs. In contrast, the SBL programmes reported much higher default rates. The repayment rates under the SBL programmes were low (Source: SOS 2011 report and Indian Microfinance Crisis, 2010: Turf War or a Battle of Intentions, published by Intellecap in October 2010). The AP MFI Act On October 15, 2010, the Governor of AP promulgated the AP MFI Ordinance to protect the interests of Self-Help Groups (SHG) in AP by regulating money-lending transactions by MFIs and for achieving greater transparency with respect to such transactions in AP . Subsequently, on January 1, 2011, the Government of AP introduced the AP MFI Act. The AP MFI Ordinance and the AP MFI Act, among other things, provide for the registration of MFIs, impose a prohibition on security for loans provided to SHGs, require prior approval for the grant of further loans to SHGs or their members where the SHG has an outstanding loan from a bank and require that all repayments must be made only by monthly installments at the designated offices of the AP Government. The validity of the AP MFI Ordinance and the AP MFI Act has been challenged by several MFIs, including SKS Microfinance, in the Andhra Pradesh High Court. However, no final orders have been passed as yet and the matter is currently pending. Impact of the AP MFI Act The AP MFI Ordinance and the AP MFI Act had an immediate impact on the recoveries of MFIs. Without being able to hold centre meetings in which the customers were usually required to repay their loans, MFIs were unable to recover their loans. Recovery rates that were as high as 99.0 percent plummeted to as low as 10.0 percent (Source: SOS 2011 report). There was no effective way by which the MFIs could enforce repayments and this became a major concern for the MFI sector in AP . The main reasons for non-repayment of loans and alternative sources of funding after the exit of MFIs post the Andhra Pradesh crisis are set forth below:

Reasons for not paying MFI loans


(Source: SOS 2011 Report.)

Sources of credit (in the absence of MFI loans)

39

According to the results of a study conducted by MicroSave titled, What are Clients doing Post the Andhra Pradesh MFI Crisis?, as quoted in the SOS 2011 report, 90 percent of the customers were willing to repay and the primary reason for customers not repaying their loans was that no new loans were being offered. The top three reasons why borrowers preferred MFIs were timely loans, convenient installments and low interest rates. The study further found that customers who borrowed from other sources, reduced the scale of their businesses, postponed expenditure or sold assets in the absence of availability of credit from MFIs. Some customers borrowed from moneylenders at exorbitantly high rates. Set out below are the effective interest rates that such borrowers agreed to pay to the moneylenders. Type Moneylender/ Pawn broker Weekly loan moneylender Daily Finance Corporations Loan amount (Rs.) Up to 200,000 2,000 to 10,000 2,000 to 10,000 Effective interest rate 30% to 120% 160% to 225% 78% to 120%

Outstanding loans to MFIs pertaining to around fifty lakhs borrowers aggregated approximately Rs. 7,000 crore. In the short run, this dampened the credit demand and encouraged credit indiscipline. The effect of falling repayment rates on MFIs businesses was severe and total. This drastic fall in disbursement very clearly conveys the manner in which business has been stunted by the rapidly falling repayment rates (Source: SOS 2011 report). The situation after the AP microfinance crisis MFIs have tried to continue with their businesses in other states after the promulgation of the AP MFI Ordinance and enactment of the AP MFI Act with the levels of liquidity they had and to the extent banks allowed them to draw from the already sanctioned limits. Disbursements by MFIs in the first half of Fiscal 2011 were consistent with prior periods and that might explain the growth even with a lacklustre second half. However, MFIs have since scaled down their operations and reduced both customers and loans outstanding in a bid to contain risks and maintain repayments to banks. The first quarter of Fiscal 2012 witnessed contraction in loan portfolios both on account of liquidity constraints and the compliance issues arising from regulatory guidelines of the RBI for NFBC-MFIs (Source: SOS 2011 report). Banks restricted their lending to MFIs and stopped fresh disbursements. Rating agencies scaled down their ratings across the sector. The impact of re-rating of risk and denial of credit to MFIs has been felt in the first quarter of Fiscal 2012 (Source: SOS 2011 report). The Sa-Dhan 2011 Report considers action from the Central Government, the RBI, the Government of AP , banks, Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD), in addition to involvement from industry associations such as the Microfinance Institutions Network (MFIN) and itself, as important for the resolution of the AP microfinance crisis. The MFI Bill 2012 In July 2011, the Central Government released the Draft MFI Bill for public comment. The Draft MFI Bill was subsequently replaced by the MFI Bill 2012. The MFI Bill 2012 will require the approval of Indian Parliament as well as the assent of the President of India and publication in the Official Gazette before becoming a law. The MFI Bill 2012, which was presented before Indian Parliament on May 22, 2012, states that its provisions shall be effective notwithstanding anything inconsistent contained in any other law. Competitive landscape As of October 2010, a total of about Rs. 108.9 billion was outstanding in the hands of borrowers from the 10 largest MFIs in AP . Approximately 80.0 percent of the funding of this portfolio had come from banks and financial institutions. Faced with loan loss provisions to the extent of about Rs. 75.0 billion in respect of their lending to MFIs, banks were instrumental in developing a CDR package in respect of their larger MFI exposures (Source: SOS 2011 report). Of the larger MFIs in AP , SKS Microfinance and BASIX did not participate in the CDR package. Five MFIs Spandana, SHARE, Asmita, Trident and Future Financial Services participated in the CDR package amounting to more than Rs. 70.0 billion (Source: SOS 2011 report). The debt composition of the major MFIs that participated in the CDR package is set forth below:
Name of MFI Asmitha Future Financial Share Microfin Spandana Sphoorthy Trident Microfin Total (Source: SOS 2011 report) Total CDR exposure (Rs. in Crore) 1,234.0 98.9 2,160.3 2,854.0 125.7 6,473.0 Non-CDR exposure (Rs. in Crore) 140.5 60.6 241.5 471.9 23.5 938.0 Total debt (Rs. in Crore) 1,374.5 159.5 2,401.8 3,325.9 149.2 7,411.0

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The restructured loans are required to be repaid by the MFIs listed above over seven years after a one year moratorium. The restructured loans carry a rate of interest of 12.0 percent (Source: SOS 2011 Report). Some of the small and mid-sized MFIs, which are ineligible for the CDR package, are now facing bankruptcy and some have ended their operations (Source: Sa-Dhan 2011 report and SOS 2011 report).
Demand-supply scenario

The third edition of Inverting the Pyramid Report, published in 2009 by Intellecap, an independent industry research firm, estimates the total demand for microcredit to be approximately Rs. 330,050 crores and, as of 2009, MFIs met only 3.6 percent of this demand. The credit demand-supply gap has further widened in AP as MFI disbursements in the second half of Fiscal 2011 were only Rs. 8.5 crore as against disbursements of Rs. 5,035.0 crore in the first half of Fiscal 2011. A large part of this gap is currently being met by informal sources including moneylenders (Source: SOS 2011 report). However, this reduction does not reflect the fact that the demand for credit from poor households remains strong. NABARD estimates in its 2010 annual report that the AP microfinance crisis has created a credit gap of Rs. 4,000 crore in the state, which, if not fulfilled immediately, will have a serious impact on the productivity and financial strength of individuals. In relation to all other states in India, MFIs have collectively disbursed loans of Rs. 33,730 crore to clients and collected principal repayments of Rs. 27,320 crore during Fiscal 2011, with the top nine MFIs disbursing Rs. 26,920 crore during this period (Source: Sa-Dhan 2011 report). The credit gaps in each state, provided in the Sa-Dhan 2011 report, on the basis of 2010 data, are as set forth below:

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Rural client outreach Rural development is a key priority for the Government of India. As a result, MFIs focus on rural clients (Source: Sa-Dhan 2011 report). According to the Sa-Dhan 2011 report, of 3.2 crores clients, rural clients constitute 52.0 percent. Rural client outreach is critical as financial exclusion in rural areas is a formidable challenge.

(Source: Sa-Dhan 2011 report, based on 2010-11 data)

Demand for credit in rural India The demand drivers in rural India continue to be buoyant primarily due to following factors: Doubled Government expenditure on rural projects during the last three years: The Government of India has focused on rural development in the last few years and this has been a boon to the rural economy. The Central Governments various schemes have resulted in significantly higher disposable incomes for the rural population. These schemes have set a floor for wages of rural unskilled workers, leading to enhanced income and food demand in the rural economy. Set out below are details of allocation of Government resources under various rural schemes:
Union Budget /Schemes (Outlays) Fiscal 2009 Revised estimates (Rs. in Crore) Swarnajayanti Gram Swarozgar Yojana (SGSY) National Rural Employment Guarantee Schemes Rural Housing Schemes Pradhan Mantri Gram Sadak Yojana (PMGSY) 2,350 30,000 8,800 7,780 Fiscal 2010 Revised estimates (Rs. in Crore) 2,350 39,100 8,800 11,340 Fiscal 2011 Revised estimates (Rs. in Crore) 2,980 40,100 10,340 22,000 Fiscal 2012 Budgeted estimates (Rs. in Crore) 2,910 40,000 10,000 20,000

(Source: Planning Commission, available at http://planningcommission.nic.in/, as of January 25, 2012 and annual reports of the Ministry of Rural Development, Government of India, available at http://rural.nic.in/sites/annual-report.asp, as of January 25, 2012.)

Three-fold increase in minimum support prices (MSP): The Government has consistently raised the MSPs for food grains which has resulted in increase in agricultural income and spending. MSP per quintal for items such as arhar, wheat and common paddy has seen a substantial rise at CAGRs of 14.8 percent, 12.0 percent and 11.2 percent, respectively, during the six-year period between Fiscal 2006 and Fiscal 2012 (on an advanced estimates basis). In comparison, the increase in MSP per quintal from Fiscal 1998 to Fiscal 2006 was 5.7 percent, 3.1 percent and 4.0 percent, respectively. (Source: RBI, available at http://rbidocs.rbi.org.in/rdocs/Publications/ PDFs/025T_HBS120911.pdf, as of January 25, 2012 and the Ministry of Agriculture, Government of India, available at http://www.indg. in/agriculture/msp/MSP-English.pdf/, as of January 25, 2012). Record food production: The highest ever production of all food grains (including rice, wheat, coarse cereals and pulses) of around 24.2 crores tonnes was recorded in Fiscal 2011 (based on advance estimates), made possible due to a good monsoon, spread uniformly across the country (source: RBI, available at http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/017T_HBS120911.pdf, as of January 25, 2012). Increase in food inflation supported by agricultural growth: Rural population contributes 75.0 percent to Indias total population and about the same proportion to the low-income groups in India. Approximately 70.0 percent of rural Indias workforce remains primarily involved in agriculture and allied activities. Agriculture and allied activities contributed approximately 18.5 percent to Indias GDP in Fiscal 2011 at prices prevailing as of November 1, 2011. Government data shows that the food inflation for Fiscal 2011 was 11.4 percent and the commodity price index increased by around 10.0 percent during Fiscal 2011. High food prices imply a considerable rise in disposable rural income (source: Himanshu et al, Non-Farm Diversification and Rural Poverty Decline: A Perspective from Indian Sample Survey and Village Study Data, India Observatory, UK Department of International Development, Asia Research Centre, London School of Economics and Political Science, available at www.lse.ac.uk/collections/AsiaResearchCentre, as of January 25, 2012, key economic indicators prepared by the Ministry of Commerce and Industry, Government of India, available at http://eaindustry.nic.in/ Key_Economic_Indicators/Key_Economic_Indicators.pdf, as of February 23, 2012 and the Planning Commission, available at http:// planningcommission.nic.in/data/datatable/0211/data%201.pdf and http://planningcommission.nic.in/data/datatable/0211/data%2021. pdf, as of January 25, 2012). 42

NBFC-MFI directions and financial performance of MFIs Anticipating that pursuant to the enactment of the AP MFI Act, other state governments could start enacting their own legislations to regulate MFIs creating plurality of regulation which may leave scope for regulatory arbitrage, the RBI exercised its power to regulate NBFCs (Source: RBI Report on Trend and Progress of Banking in India 2010-11). The RBI, pursuant to its decision to accept the recommendations of the Malegam Committee, brought NBFC-MFIs under a separate regulatory framework, through NBFC-MFI directions. Many aspects of the NBFC-MFI directions are similar to the conditions introduced earlier on May 3, 2011, when the RBI decided to maintain the eligibility of MFIs for Priority Sector Lending (PSL). Definition of NBFC-MFIs and qualifying assets NBFCs are not allowed under the NBFC-MFI directions to extend microfinance loans in excess of 10.0 percent of their total assets without qualifying as NBFC-MFIs. NBFC-MFIs are required to have minimum net owned funds of Rs. 50 million. Further, at least 85.0 percent of their net assets (i.e., total assets other than cash and bank balances and money market instruments) of NBFC-MFIs should be qualifying assets. Loans which satisfy the following criteria have been classified as qualifying assets under the NBFC-MFI directions: Rural household annual income of borrowers should not exceed Rs. 60,000 or urban and semi-urban household income of borrowers should not exceed Rs. 120,000. Loan amounts should not exceed Rs. 35,000 during the first cycle and Rs. 50,000 for the subsequent cycle, with total indebtedness of each borrower not exceeding Rs. 50,000. Tenor of loans above Rs. 15,000 should not be less than 24 months with prepayment without penalty. At least 75.0 percent of the total loans should be utilized by borrowers for the purpose of income generation. Loan should be extended without collateral. Loans to be repayable on weekly, fortnightly or monthly installments, at the choice of the borrower.

Asset classification and provisioning The aggregate loan provision to be maintained by NBFC-MFIs at any point in time shall not be less than the higher of: 1 percent of the outstanding loan portfolio, or 50 percent of the aggregate loan installments, which are overdue for more than 90 days and less than 180 days and 100 percent of the aggregate loan installments, which are overdue for 180 days or more.

The RBI has, through its circular dated March 20, 2012, deferred the implementation of the asset classification and provisioning norms prescribed for NBFC-MFIs until April 1, 2013. Fair Practices in lending and multiple lending NBFC-MFIs are not allowed to collect any security deposit or margin. Further, more than two NBFC-MFIs are not allowed to lend to the same borrower or to borrowers who are members of a Joint Liability Group (JLG) or a SHG. NBFC-MFIs are also required to comply with the guidelines on Fair Practises Code prescribed by the RBI through its circular dated March 26, 2012. The RBIs policy measures have resulted in MFIs becoming more selective in client acquisition in order to lend only to low-income borrowers, lend within reasonable limits of their customers ability to service the loans, set up prudent practices in relation to recoveries and introduce grievance redressal mechanisms (Source: SOS 2011 report). Pricing of credit Pricing of loans must consist only of interest charges, processing charges and - insurance premium. NBFC-MFIs are also required to maintain a ceiling on their aggregate margin of 12.0 percent. Further, a ceiling of 26.0 percent has been placed on the interest on individual loans and processing charges have been capped at 1.0 percent of the gross loan amount.

Sources of funding
Lending by banks The major form of funding remains loans from banks. Events in AP demonstrated the close relationship between asset quality of MFIs and the asset quality of banks. In effect, the bank loans to MFIs turned out to be pass-through funding, with the intervening institutional structure of MFIs with a balance sheet of their own becoming irrelevant. The defaults at the level of the customers of MFIs turned into potential (and in some cases, real) defaults to banks (Source: SOS 2011 report).

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Following the AP crisis, banks did not sanction fresh loans, and stopped withdrawals from sanctioned loan accounts. Some banks recalled loans that were not due, ahead of the maturity date. Compared to 2010, loan disbursements by banks to MFIs in 2011 were markedly less by 30.0 percent. Only private sector banks increased their disbursements in 2011 by about 32.0 percent over 2010 (Source: SOS 2011 report). The interest rate on loans availed by the microfinance industry ranged from 12.0 percent to 13.0 percent. Larger MFIs have been able to get loans at relatively lower rate of interest compared to their smaller counterparts (Source: Sa-Dhan 2011 report). PSL funds Historically, the microfinance industry has relied on PSL funds as a significant source of funds as compared to other bank funds. In early 2011, the RBI accepted the recommendations of the Malegam Committee and, in May 2011, the RBI decided to maintain the eligibility of MFIs for PSL funds, subject to satisfaction of certain conditions by MFIs. However, it withdrew the eligibility of certain other categories of NBFCs to obtain PSL funds from banks. A committee set up by the RBI and headed by Mr. M.V. Nair has suggested certain revised guidelines for priority sector lending by banks. The recommendations of this committee have not been accepted as yet by the RBI and are subject to comments from the public. The conditions specified for access to PSL funds by MFIs related to qualifying assets and pricing guidelines and were similar to those covered under the NBFC-MFI directions. External commercial borrowings NBFC-MFIs are allowed to draw ECBs up to US$10 million (or its equivalent amount) in a financial year. MFIN MFIN is a self-regulatory organization of NBFC-MFIs and sets standards for good governance and accountability in the microfinance sector. MFIN has laid down a Code of Conduct that addresses issues related to transparency in pricing, responsible lending, ethical collection practices, sharing of credit information and fair recruitment practices. MFIN has also adopted a whistle-blower policy and appointed an enforcement committee to ensure its members abide by its Code of Conduct (Source: http://www.mfinindia.org/, as of January 25, 2012). Highmark Certain MFIN members, including SKS Microfinance, have invested in Alpha Micro Finance Consultants Private Limited, which in turn has set up a credit information bureau called High Mark Credit Information Services Private Limited (High Mark) to build credit information systems and to improve credit risk management within the MFI sector (Source: http://www.mfinindia.org/, available as of January 25, 2012). High Mark commenced its credit information services during 2011 and a large number of MFIs, both for-profit and not-for-profit, have signed up. Credit Information Bureau (India) Limited, or CIBIL, and Equifax Credit Information Services Private Limited, India, have also been active in this sphere (Source: SOS 2011 report). OVERVIEW OF BUSINESS Your Company is one of the largest MFIs in India in terms of the total value of loans outstanding and the number of borrowers, as of March 31, 2011, and the only such company to be publicly listed in India (Source: SOS 2011 report). Your Company is primarily engaged in providing microfinance services to low-income individuals in India. Your Companys core business is providing small value loans and certain other basic financial services to its Members. Your Company classifies Members with outstanding loans as its Borrowers. Your Companys Members are predominantly located in rural areas in India and they are extended loans mainly for use in small businesses or for other income-generating activities and not for personal consumption. These individuals often have no, or very limited, access to loans from other sources, which your Company believes, typically charge very high rates of interest. Your Company utilizes a village-centered, group lending model to provide unsecured loans to its Members. This model relies on a form of social collateral and ensures credit discipline through peer support within the group. Your Company believes this model makes its Members prudent in conducting their financial affairs and prompt in repaying their loans. Failure by an individual Borrower to make timely loan payments will prevent other Members in the group from being able to borrow from your Company in future; therefore, the group will typically make the payment on behalf of a defaulting Borrower and the group will use peer support to encourage the delinquent Borrower to make timely payments, effectively providing an informal joint guarantee on the Borrowers loan. In addition to your Companys core business of providing micro-credit, it uses its distribution channel to provide certain other financial products and services that its Members may need. Since Fiscal 2010, we have operated certain pilot programmes involving feebased services and secured lending that your Company now intends to gradually convert into separate business verticals. These pilot programmes primarily relate to the making of loans to its Members for the purchase of certain productivity-enhancing products such 44

as mobile handsets, loans for meeting the working capital requirements of small general stores known as Sangam Stores, and loans against gold as collateral. In addition, your Company has been administering a group endowment life insurance policy for its Members. Your Company intends to expand its involvement in these other financial products and services to the extent consistent with its strategic aspirations and margins. Your Company intends to operate some of these businesses through one or more subsidiaries in order to distinguish these businesses from your Companys core business of providing micro credit. As of March 31, 2012, your Company had approximately 54 lakh Members, including 43 lakh Borrowers across 1,461 branches in 18 states in India, with a gross loan portfolio of Rs. 1668.9 crore.

COMPETITIVE STRENGTHS
Your Company believes it has the following competitive strengths: Market leadership According to the SOS 2011 report, your Company is one of the largest MFIs in India in terms of the total value of loans outstanding and the number of borrowers, as of March 31, 2011. As of March 31, 2012, your Company had approximately 54 lakh Members, of which 43 lakh were our Borrowers. As of the same date, your Company had 1,461 branches with a presence in 18 states and gross loan portfolio of Rs. 1,668.9 crore. The average loan size per active Borrower during Fiscal 2012 and Fiscal 2011 was Rs. 3,920.6 and Rs. 6,585.3, respectively, as compared to an industry average of Rs. 5,709.0 during Fiscal 2011. The average number of Members per field level loan officer, or Sangam Manager, during the same periods was 517 and 477, respectively, as compared to an industry average of 363 during Fiscal 2011. The gross loan portfolio (which includes assigned loans and over-collateral towards assigned loans) per Sangam Manager, as of March 31, 2012 and March 31, 2011, was Rs. 16 lakh and Rs. 27 lakh, respectively. (Source: Sa-Dhan 2011 Report, in relation to the industry averages.) Your Company believes that its leading position in the microfinance sector enhances its reputation and credibility with its Members and lenders. This enhanced reputation and credibility has numerous benefits, including the ability to secure capital at lower costs, recruit and retain skilled employees, optimize staff productivity, retain its existing Borrowers and add new Members, and expand into new regions and product areas. Expertise in microfinance and ability to adapt to the changing regulatory environment Your Company believes that its long standing experience in the microfinance industry has given it a specialized understanding of the needs and behavior of the individuals in this segment across India, the complexities of lending to these individuals and issues specific to the microfinance industry in India and its processes. Your Company believes its expertise gives it a competitive advantage in this sector. As a result of its experience, your Company has developed skills in training its Members. Your Company uses its knowledge of its Members, including their culture, habits and education, to design customized financial products and pricing plans. Development of certain loan products is a result of its analysis of the capital requirements and cash flow of its Members businesses. Your Company believes this approach to developing the terms and components of its financial products gives it a competitive advantage. Further, consultation and dialogue with regulators and policy-makers in the recent past has provided it with an opportunity to understand their concerns. Your Company has already adopted several aspects of the new regulatory framework under the NBFC-MFI directions within its operations and has applied to the RBI for classification as an NBFC-MFI on December 21, 2011. For example, the ticket size of its income generating and mid-term loan products is less than Rs. 15,000, which helps it mitigate risks related to increased exposure to a particular borrower over an extended period. In addition, your Company provides its Borrowers with an option to repay their loans in weekly, fortnightly or monthly installments, subject to compliance with any applicable local laws. Your Company discontinued the collection of group insurance administrative charges from its Borrowers in January 2011. Further, your Company presently charges an effective interest rate of 24.6 percent in relation to its micro credit products, which is less than the effective interest rate of 26.0 percent prescribed under the NBFC-MFI directions. In addition to interest rates, your Company charges its Borrowers a loan processing fee of 1.0 percent of the loan amount disbursed. Well-capitalized balance sheet, low leverage and emphasis on asset and liability management Although your Companys financial condition has continued to deteriorate since the events in AP and it has incurred losses during Fiscal 2012 and relatively lower profits during Fiscal 2011, your Company believes that it has maintained sufficient financial discipline as well as a relative degree of financial strength during these periods. As of March 31, 2011 and March 31, 2012, your Companys net worth was Rs. 1,780.5 crore and Rs. 434.6 crore, respectively. According to the SOS 2011 report, your Companys net worth was the highest among MFIs as of March 31, 2011. Your Companys capital adequacy ratio was 35.4 percent of risk-weighted assets as of March 31, 2012, which is well above the requirement of 15.0 percent of risk-weighted assets prescribed by the RBI under the NBFC-MFI directions. Further, your Company believes that it employs relatively lower levels of leverage in its operations (Source: SOS 2011 report). As of March 31, 2011 and March 31, 2012, your Company had a debt to equity ratio of 1.3 and 2.4, respectively. Your 45

Company believes that these factors provide it with a competitive advantage when borrowing funds for its operations. Further, your Company believes that its relatively higher net worth enhances its ability to absorb unforeseen stresses that may arise during times of financial difficulty. For example, your Company believes that its higher net worth was the primary reason for it being able to withstand writeoffs of a portion of its loan portfolio and creation of loan loss provisions for non-performing loans in future financial periods aggregating to Rs. 1,173.5 crore during Fiscal 2012. In addition to traditional cash flow management techniques, your Company also manages its cash flow through active asset and liability management strategies. The proportion of its liquid assets (i.e., cash and bank balances, including deposits placed as security against its borrowings) to its total assets was 41.1 percent as of March 31, 2012. Further, your Company has structured its model to primarily borrow on a long term basis while lending on short term basis. Your Company believes that this allows it to better meet the growing loan demands of an increasing membership even if external borrowings and funding sources face temporary disruption. Access to multiple sources of capital Your Company constantly strives to diversify its sources of capital. During Fiscal 2011, your Company raised Rs. 722.2 crore through its IPO and its aggregate incremental borrowing, or draw downs, from banks, and financial and other institutions was Rs. 2,733.4 crores for the same year. As of March 31, 2011 and March 31, 2012, your Company had outstanding loans of Rs. 2,236.1 cro and Rs. 1,021.3 crore, respectively, from more than 20 banks, and financial and other institutions. Historically, the MFI sector has significantly relied on PSL funds from commercial banks. Your Company believes that the cost of such funds is considerably lesser than the cost of other bank funds. In early 2011, the RBI accepted the recommendations of the Malegam Committee and, in May 2011, the RBI decided to maintain the eligibility of MFIs to receive PSL funds, subject to the satisfaction of certain conditions. Your Company complies with the conditions prescribed by the RBI and is, therefore, eligible for PSL bank funds. In addition, once your Company is registered as an NBFC-MFI, it will be eligible to access ECBs up to US$10 million (or its equivalent amount) in a financial year without requiring any prior approvals. In addition to such funding, your Company has in the past demonstrated its ability to fund the growth of its operations and loan portfolio through issuances of equity, private and publicly traded debt securities such as redeemable non-convertible debentures, commercial paper, loans with various maturities raised from domestic and international banks, and the securitization of different components of its loan portfolio. During Fiscal 2012, your Company received Rs. 866.5 crore from assignment of loans of Rs. 1036.6 crore and also recognized income of Rs. 34.6 crore in this period. Assigned loans accounted for 41.1 percent of its total outstanding borrowed funds and funds from assignment of loans as of March 31, 2012. Your Company also borrows from diverse lenders such as public and private sector domestic banks, foreign banks and other institutional investors. As of March 31, 2012, no single creditor represented more than 15.4 percent of its total indebtedness. CARE has provided your Company with a grading of MFI 2+ or MFI Two plus as an MFI, which is the second highest obtainable grading on an eight point scale with MFI 1 being the highest and MFI 5 being the lowest. Your Company has regularly obtained credit ratings for its debt securities to improve its access to, and reduce its cost of capital. Several of its assignment transactions during FY12 were provisionally rated by CARE at A1+(SO), which is considered to indicate a strong capacity for timely payment of short-term debt obligations and carries the lowest credit risk for such securitized pools. Established and scalable operating model Your Company recognizes that establishing and growing a successful rural microfinance business in India involves the significant challenge of addressing a borrower base that typically lives in remote locations. To address this problem, your Company believes that it has designed a scalable model and developed systems and solutions for the following three components that it believes are required to effectively scale up its business: Capital: Despite the challenges facing the industry, your Company has been able to obtain the capital funds required to finance its lending operations in states outside AP . Capacity: With its pan-India presence and extensive distribution network, your Company believes it has the capacity to provide products and services to a large number of Members. Cost reduction: Your Company believes it has implemented technology and process based systems that reduce the cost of conducting transactions across a widespread branch network and a substantial Member base.

Further, your Company has standardized its recruitment and training programmes and materials so that they can easily be replicated across the entire organization. This standardized approach also allows employees to efficiently move from region to region based on demand and growth requirements. Your Company business processes, from Member acquisition to cash collections, have been standardized and appropriately documented. Your Company branch offices are similarly structured, allowing for the quick rollout of new branches. In addition, the terms and conditions of your Companys loan products are generally uniform throughout India. Your Company has an internal audit department that conducts an appraisal of operational and financial procedures across the organization with the aim to monitor and strengthen internal controls, and to determine the level of compliance with internal and external policies. These internal audit procedures have received an ISO 9001:2008 quality certification for quality management system of 46

the audit processes. In addition, a leading accountancy firm conducts an internal audit every quarter of its operations based at your Companys head offices in Hyderabad. Your Company recognizes that conducting business through millions of transactions across thousands of rural locations involves substantial repeat interactions with its Members and its employees, thus increasing operating costs. To reduce its operating costs, your Company has deployed a sophisticated technology platform and continually makes improvements to it. This allows your Company to improve field-level productivity by simplifying data entry, improving the accuracy and efficiency of collections and improving fraud detection. Your Company also gathers data on items related to its Members and loan portfolio, which is used for management decisionmaking. Pan-India presence and rural distribution network As of March 31, 2012, your Company had approximately 54 lakh Members, including 43 lakh Borrowers and 1,461 branches across 18 states in India, with approximately 1,278 branches and 34 lakh Members in states other than AP . Further, as of March 31, 2012, your Company had 13,596 branch managers, assistant managers and Sangam Managers who comprised 84.0 percent of its total workforce. During Fiscal 2012, each of its Sangam Managers managed approximately 517 Members on the average. Your Company believes that its presence throughout India and its distribution network in rural India results in significant competitive advantages, particularly in the following areas: Distribution platform: Your Companys pan-India presence allows it to lend across the country and enables it to mitigate its exposure to local economic factors and disruptions resulting from political circumstances or natural disasters. Furthermore, its well-developed distribution network in rural India gives it the capability to offer a variety of financial products nationally in areas that your Company believes most companies do not currently reach. Product pricing power: Your Company believes that its national presence and the ability to access a large Member base give it the leverage to negotiate favorable terms with institutions that want to distribute their products through its network, which results in lower pricing for the products that are distributed to its Members. For example, your Company collaborated with Nokia for financing of mobile phones for its Members. Your Company was able to finance 2.4 lakh and 3.1 lakh mobile phones during Fiscal 2011 and 2012, respectively.

Experienced management team and Board Your Companys Board is composed of experienced investors, industry experts and management professionals. Out of a total of six Directors on its Board, three are independent Directors. Your Company believes that it has a strong senior management team to lead it, which includes our Chief Executive Officer and Managing Director, Mr. M. Ramachandra Rao as well as our Chief Financial Officer, Mr. S. Dilli Raj. Your Companys senior management team continues to have members who have significant experience in the microfinance and financial services industry. Substantially, all members of your Companys senior management have over 20 years of experience with well-reputed national and multinational companies, particularly in the retail and commercial banking, and specialized lending and finance industries. The team has developed the knowledge to identify and offer products and services that meet the needs of its Members, while maintaining effective risk management and competitive margins. Your Companys middle management personnel also have significant experience and in-depth industry knowledge and expertise.

BUSINESS STRATEGY
Strengthen Client Protection Initiatives Pursuing Client Protection Initiatives will be a strategic priority for your Company. Your Company intends to invest up to Rs. 15 crore over the next three years towards these initiatives. Your Company has identified five elements to this strategy, being strengthening protection of privacy of its client data, transparent and responsible pricing of loans, redressal of grievances of its Members, avoidance of over-indebtedness and multiple borrowing among its Borrowers, and establishing appropriate collection practices by its employees. Your Company expects that the key drivers to achieve this strategy, among others, will be the voluntary adoption and maintenance of a ceiling of 3.0 percent per annum on the ROA from its micro-credit business, appointment of an independent ombudsman and further steps towards establishment of a robust grievance redressal mechanism for its Members. Your Company has appointed Mr. Verghese Jacob as the independent ombudsman in January 2012 and have established a dedicated toll free, customer care help-line to redress the grievances of its customers, in continuance of its efforts to establish a structure for customer protection and grievance redressal. Your Company intends to take further steps in this regard, such as conducting awareness campaigns about its recently established customer grievance redressal mechanisms, in order to increase the efficiency of these systems. Further, your Company has entered into an arrangement with ACCION International, a private, non-profit organization, to assess its client protection policies and processes through its SMART campaign and intend to enter into arrangements with other credible and independent agencies for this purpose. Your Company continues to place significant emphasis on compliance with corporate governance standards and has taken steps to realign the incentive system for its employees.

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Your Company has progressively reduced its interest rates whenever its costs have decreased and presently charges an effective interest rate of 24.6 percent in relation to its micro credit products, which is less than the effective interest rate of 26.0 percent prescribed under the NBFC-MFI directions. Further, your Company intends to increase the use of information provided by external credit information agencies to approve new loans, besides conducting its internal checks and processes, in order to prevent instances of multiple lending and over-borrowing among its Borrowers. While such measures may affect its growth rate in the near term, your Company believes that these measures will reduce risk and enhance its competitiveness and, as a result, its profitability. Significant increase in lending activity in non-AP states to meet the unmet demand-supply gap As a result of the adverse impact of the events in AP , five other large MFIs, which together commanded a significant market share in AP and other states recently entered into a CDR package amounting to over Rs. 7,000 crore (source: SOS 2011 report). Banks and financial institutions do not, in the ordinary course, provide additional lending to entities undergoing such debt restructuring. As such, your Company believes that bank funding will be more readily available to MFIs that are not subject to any debt restructuring, such as your Company, and particularly for use and expansion in states other than AP . Industry sources estimate the total demand for micro-credit in India to be approximately Rs. 330,050 crore and as of 2009, MFIs met only 3.6 percent of this demand (source: Inverting the Pyramid Report, 3rd edition, published by Intellecap in 2009). The credit demand-supply gap has further widened in AP as MFI disbursements in the second half of Fiscal 2011 were only Rs. 8.5 crore as against disbursements of Rs. 5,040 crore in the first half of Fiscal 2011 (source: SOS 2011 report). In relation to all states in India, MFIs collectively disbursed loans of Rs. 33,730 crore to clients during Fiscal 2011, with the top nine MFIs disbursing Rs. 26,920 crore during this period (source: Sa-Dhan 2011 report). A large part of this gap is currently being met by informal sources, including moneylenders. Your Company believes this represents an attractive business opportunity for MFIs such as your Company. Your Company primarily intends to provide loans to its existing 34 lakh Members in states other than AP and believes that it already has the network that it requires to distribute loans in these 17 states that it has been operating in for the last five years, in order to meet a portion of this credit demand-supply gap. As of March 31, 2012, it had 1,278 branches and a gross loan portfolio of Rs. 1,320 crore in states other than AP , which constituted 79 percent of its total outstanding loan portfolio. As of that date, future receivables (i.e., principal amounts falling due after March 31, 2012) from its gross loan portfolio was Rs. 1,262.1 crore, of which approximately 99.4 percent was attributable to its non-A.P . future receivables. Diversification of revenue streams and cross selling of products and services Your Company has built a large distribution network in rural India. As of March 31, 2012, we had 13,596 branch managers, assistant managers and Sangam Managers who comprised 84.0 percent of its total workforce, across 1,461 branches in 18 states. Your Company believes it can leverage this network to distribute financial and non-financial products of other institutions to its Members at a cost lower than that which its competitors can provide. Your Companys network also allows such distributors to access a segment of the market to which many do not otherwise have access. While your Company continues to focus on its core business of providing micro credit services, it intends to diversify into other businesses by scaling up certain pilot projects involving fee-based services and secured lending, gradually converting them into separate business verticals. Your Companys objective in these other businesses is to focus on lending that will allow it to sustain high repayment rates, increase Member loyalty and also provide economic benefits to its Members and their families. Your Company believes that such other products and services offer higher operating margins as compared to micro credit under the new regulatory framework and may help it increase its overall ROA. Your Companys initiatives in relation to financial products and services other than micro credit include providing: loans to its Members for the purchase of mobile handsets in association with Nokia. During Fiscal 2011 and Fiscal 2012, your Company financed 2.4 lakh and 3.1 lakh mobile phones, respectively. Your Company intends to expand this business further in the near future. loans to its Members under a pilot programme with Metro to operate local retail shops called kirana or Sangam stores to meet their working capital requirements, which in-turn were used to purchase supplies from Metro on a wholesale basis. Your Company had enrolled approximately 3,800 stores, including those operated by non-Members under this programme, as of March 31,2011. Your Company intends to further increase the number of stores in the near future and had enrolled 10,742 stores as of March 31, 2012. secured loans to its Members against gold as collateral. For this purpose, uour Company had started a pilot gold loan project with five branches, which was subsequently increased to 49 branches as of March 31, 2012, primarily across the states of Karnataka, Gujarat, Maharashtra and Uttar Pradesh. Your Company intends to further expand this business to other states in India and intends to pursue this business through a subsidiary, subject to successful results from the pilot projects and receipt of any required regulatory approvals.

Optimize the cost structure Your Company provides collateral-free credit to a majority of its Members at their doorstep and its Sangam Managers assist with the 48

processes related to credit verification. While this helps its Borrowers save on travel costs, it results in high operating expenses for your Company, particularly personnel and administrative costs. Personnel costs contributed 63.6 percent and 61.8 percent to your Companys operating expenses during Fiscal 2011 and Fiscal 2012, respectively. Your Company intends to optimize its cost structure by improving its ratio of Members per Sangam Manager, while realizing the benefits of economies of scale. Further, it intends to merge branches, both in AP and states other than AP . In addition, your Company intends to implement its growth objectives without adding a significant number of new branches or incurring substantial capital expenditure. Your Company intends to consolidate its Member base in the near future and expect to reduce costs associated with the acquisition of new Members, such as personnel costs, marketing and other administrative costs. There was a net reduction of approximately 918 branches during Fiscal 2012. Of these 918 branches, 384 were located in AP . In addition, your Company closed 78 branches in AP and terminated the services of approximately 1,200 employees in May 2012. As of March 31, 2012, your Company had 34 lakh Members in states other than AP and your Companys consolidation strategy involves completing its disbursement targets with this Member base in states other than AP . Other factors that your Company intends to focus on in order to optimize its cost structure include enhancing the productivity of its employees, introducing technology for expedient reporting and re-engineering its internal processes. Operational and financial highlights Beginning late Fiscal 2011 and continuing throughout Fiscal 2012, your company suffered losses largely because of regulatory developments related to AP MFI Act affecting the microfinance industry. During this period, the reduced level of credit flow from banks, due to the legislative uncertainty on MFI bill and desire for greater regulatory clarity, led to disbursement of fewer loans to your Companys members in states other than AP . As a result of the above, your Companys outstanding loan portfolio in other than AP states decreased in Fiscal 2011 and Fiscal 2012. However, post the December 2, 2011 NBFC-MFI directions by RBI, your company obtained incremental draw-downs of Rs. 998 crore in Q4-FY12, which is 2.4 times larger than the sum of Rs. 417 crore obtained in 9M-FY12. Also, after a decline over the last 5 quarters in loan portfolio in states other than AP , your company registered quarter-onquarter growth in the loan portfolio in states other than AP in Q4-FY12. Despite, the aforementioned movements in loan portfolio in states other than AP , the average loan recovery rates in states other than AP stood at 95.5 percent for FY12.
Operational highlights No. of branches No. of districts No. of employees No. of members (in Lakh) Disbursements for the year (Rs. in Crore) Gross loan portfolio (Rs. in Crore)*
*Includes assigned loan portfolio

Mar-09 1,353 307 12,814 39.5 4,485 2,456

Mar-10 2,029 341 21,154 67.8 7,618 4,321

Mar-11 2,379 378 22,733 73.1 7,831 4,111

Mar-12 1,461 329 16,194 53.5 2,737 1,669

Financial highlights Incremental borrowings* (Rs. in Crore) Total revenue (Rs. in Crore) Profit after tax (Rs. in Crore) Total assets (Rs. in Crore) Return on average asset Return on average equity

Mar-09 3,762 554 80 3,039 3.9% 18.3%

Mar-10 5,132 959 174 4,047 4.9% 21.5%

Mar-11 5,338 1,270 112 4,326 2.3% 7.5%

Mar-12 1,823 472 (1,361) 1,681 (46.7%) (118.9%)

*Amount of sanctions received from banks and financial institutions

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Financial performance in 2011-12 Particulars 2011-12 Rs. in Crore Income from operations Other income Gross revenue Employee benefit expenses Finance costs Other expenses Depreciation and amortization Provisions and write-offs Total expenditure Profit before tax Tax expense Profit after tax 435.7 36.6 472.3 261.1 200.1 151.3 10.0 1,173.5 1,796.1 -1,323.7 36.9 -1,360.6 Per cent to Revenue 92.3% 7.7% 100.0% 55.3% 42.4% 32.0% 2.1% 248.5% 380.3% -280.3% 7.8% -288.1% 2010-11 Rs. in Crore 1,175.5 94.1 1,269.5 326.3 349.5 170.4 16.1 236.2 1,098.6 170.9 59.3 111.6 Per cent to Revenue 92.6% 7.4% 100.0% 25.7% 27.5% 13.4% 1.3% 18.6% 86.5% 13.5% 4.7% 8.8% Increase/ Decrease -62.9% -61.1% -62.8% -20.0% -42.7% -11.2% -38.0% 396.8% 63.5% -874.6% -37.8% -1318.8%

Income from operations: Income from operations decreased by 62.9 percent to Rs. 435.7 crore in fiscal 2012 from Rs. 1,175.5 crore in fiscal 2011. This decrease is primarily due to a decrease in average gross loan portfolio by 41.7 percent from Rs. 4,694.4 crore in fiscal 2011 to Rs. 2,734.8 crore in fiscal 2012. The opening and closing gross loan portfolio for the fiscal 2012 was Rs. 4,110.7 crore (March 2011) and Rs. 1,668.9 crore (March 2012) respectively. Other income: Other income decreased by 61.1 percent to Rs. 36.6 crore in fiscal 2012 from Rs. 94.1 crore in fiscal 2011. The fall in other income is primarily due to decrease in income from group insurance administrative charges by Rs. 53.8 crore. Your Company discontinued collection of group insurance administration charges from your Companys borrowers in January 2011. There is a decrease in income from insurance commission by Rs. 8.2 crore, as your Company stopped the pilot project of distribution of new life insurance policies from May 2010. Interest income from fixed deposits increased by Rs. 4.3 crore in fiscal 2012 due to an increase in cash and bank balances from Rs. 557.9 crore in fiscal 2011 to Rs. 689.9 crore in fiscal 2012. Other fee income increased by 46.3 percent from Rs. 3.9 crore in fiscal 2011 to Rs. 5.7 crore in fiscal 2012. Other fee income relates to fee received from strategic alliance partners for financing their products, such as mobile phones and on the purchases made by the kirana stores owned by your Companys borrowers. Financial expenses: Your Companys financial expense represents 11.1 percent of the total expenses for fiscal 2012. Financial expenses decreased by 42.7 percent from Rs. 349.5 crore in fiscal 2011 to Rs. 200.14 crore in fiscal 2012 due to a decrease in average borrowings by 48.1 percent from Rs. 2,879.6 crore in fiscal 2011 to Rs. 1,493.1 crore in fiscal 2012. The opening and closing borrowings for the fiscal 2011 was Rs. 2,236.1 crore (March 11) and Rs. 1,021.3 crore (March 12) respectively. Employee benefit expenses: Personnel expenses consist of salaries and employee benefits. Personnel expenses decreased by 20 percent from Rs. 326.3 crore in fiscal 2011 to Rs. 261.1 crore as of March 31, 2012, which was due to decrease in headcount from 22,733 at the end of fiscal 2011 to 16,194 at the end of fiscal 2012. Other expenses: Other expenses decreased by 11.2 percent from Rs. 170.4 crore in fiscal 2011 to Rs. 151.3 crore in fiscal 2012. This decrease is primarily due to merger of 918 branches and decrease in travelling and conveyance expenses. Depreciation and amortization: Depreciation and amortization decreased by 38.0 percent to Rs. 10.0 crore in fiscal 2012 from Rs. 16.1 crore in fiscal 2011. The decrease was primarily due to the lower net addition of fixed and intangible assets such as computers, vehicles, software and furniture of Rs. 2.6 crore in fiscal 2012 from Rs. 22.1 crore in fiscal 2011. Provisions and write-offs: Provisions and writeoffs represented 65.3 percent of total expenses for fiscal 2012 and increased by 396.8 percent from Rs. 236.2 crore in fiscal 2011 to Rs 1,173.5 crore in fiscal 2012. This increase was primarily the result of an increase in bad debts written off of Rs. 1,089.8 crore or 1,381.0 percent, primarily due to additional write-offs in respect of the AP loan portfolio. Risk management Risk is an integral part of your Companys business and sound risk management is critical to the success of the organization. As a financial intermediary, your Company is exposed to risks that are particular to its lending and the environment within which it operates. Your 50

Company has put in place an Enterprise-wide Risk Management (ERM) programme based on the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. Your Company has identified and implemented comprehensive policies and procedures to assess, monitor and manage risk throughout your Company. The risk management process is continuously improved and adapted to the changing global risk scenario. The agility of the risk management process is monitored and reviewed for appropriateness with the changing risk landscape. The process of continuous evaluation of risks includes taking stock of the risk landscape on an event-driven basis. Your Company has an elaborate process for Risk Management. This rests on the three pillars of Business Risk Assessment, Operational Controls Assessment and Policy Compliance processes. Major risks identified by the businesses and functions are systematically addressed through mitigating actions on a continuing basis. These are discussed with both the Management Committee and the Audit Committee. Some of the risks relate to competitive intensity and changing legal and regulatory environment. The Audit Committee of the Board reviews the risk management policies in relation to various risks and regulatory compliance issues. Internal Audit and Internal Control Your Company has well established Internal Audit Department in place, which sees to the adherence to systems, policies and procedures. The guidelines received on various issues of control from Reserve Bank of India, Government of India, Board and the Audit Committee of the Board have become part of the Internal Control System for better compliance at all levels. The Internal Audit Department comprises 328 employees, headed by a senior management personnel with reporting lines to the Chairman of the Board of Directors, the Audit Committee of the Board and Chief Financial Officer (CFO). The Internal Audit department carries out a regular independent appraisal of various activities undertaken by your Company through its branches, regional offices and conducts various purpose-based audits also as per the necessity/ periodicity as decided by the Audit Committee of Board from time to time. The scope of various audits is modified suitably on a continuous basis to cope with the ever changing scenario of the microfinance industry. The Internal Audit of the head office has been outsourced to KPMG with a view to having an external agency review the internal control process of your Company. The Audit Committee of the Board reviews the performance of the Internal Audit on a continuous basis, gives directions to its functionaries and reviews effectiveness of the Internal Control Systems. The Internal Audit function has been certified with ISO 9001:2008. Your Companys internal control systems are commensurate with the nature of its business and the size and complexity of its operations. These are routinely tested and cover all branches, regional offices and head office. Significant audit observations and follow-up actions thereon are reported to the Audit Committee. The Audit Committee reviews adequacy and effectiveness of your Companys internal control environment and monitors the implementation of audit recommendations including those relating to strengthening of your Companys risk management policies and systems. Human Resources Human Resources (HR) functions focus during the year was Employee Engagement, Change Management and Building Human Capital. The fiscal was filled with major challenges of sustaining employee morale, change management and balancing growth aspirations of both individuals and organization. HR ably carved and implemented various interventions creating positive as well as supportive environment to overcome the challenges: HR further strengthened the process of inclusive culture at your Company by analyzing feedback of employees across 18 states and resolving the same in a timely manner with minimal escalations. Your Company was able to attract talent to fill gaps in leadership roles. HR has ensured strict compliance to applicable laws and reduced the risk by efficient handling of various notices and visits of officials. HR has continued interventions in building confidence and boosting the morale of staff during this year, thus enabling employees to manoeuvre during the challenging period in a positive manner. Cumulative coverage of ESOPs to employees is 77.0 percent with primary focus on retention, productivity and co-creation of wealth as well as a sense of ownership in your Company. HR supported field staff for speedy mediclaims and ensured proper checks to reduce the risk of rejections. Strengthened the disciplinary process with focus to enhance employee conduct and reduce employee grievances while providing fair chance. Total learning hours during the year were recorded as 86,928 across India with primary focus to enhance behavioural and managerial skills of employees. Also, aimed at building leadership pipeline to meet the future requirements within. Your Company has a dedicated team of 223 trainers who have successfully delivered 2,13,302 hours of technical training for field force in nine major Indian languages. Training covers areas like processes, products and policies with a robust testing mechanism measuring the effectiveness of programmes. In addition to the mandatory process trainings, your Company trained employees extensively on Sa-Dhan Code of Conduct, SMART principles of Customer Protection and Ethical Staff behavior (SKS CoC). Conducted Leadership Training Programme for BMs/ UMs/ AMs. Implemented CARE as one of employee engagement initiatives. This model was built to describe simple yet powerful ideas to motivate employees and build an energized and friendly work environment. This entire module is designed to deliver high-value programmes and boosting the spirits of the employees. CARE stands for: C- Creative Communication, A-Appreciation for All, R- Reward & recognition, E-Energy and Enthusiasm. Conducted Team Building Workshops for Leaders to demonstrate team spirit and an approach of shared vision in their work. 51

Continued Spoken English programmes for field staff to improve their language skills. This will enable them to interact effectively with senior management and external stakeholders. HR has been promptly providing services to the employee base of 16,194 across India as on March 31, 2012. The manpower distribution is: field staff including regional office employees 15,867 (98 percent) and head office staff - 327 (2 percent). Overall employee strength of your Company is 16,194 as on March 31, 2012. Attrition rate observed during FY11-12 was 37.3 percent. Product pricing power: Your Company believes that its national presence and the ability to access a large Member base give it the leverage to negotiate favorable terms with institutions that want to distribute their products through its network, which results in lower pricing for the products that are distributed to its Members. For example, your Company collaborated with Nokia for financing of mobile phones for its Members. Your Company was able to finance 2.4 lakh and 3.1 lakh mobile phones during Fiscal 2011 and 2012, respectively.

Information Technology Technology combined with business process change brings the greatest return. Information technology provides the opportunity to update and innovate business processes. Through such innovation, technology can become lever in creating the potential for an industry to achieve dramatic increases in scale. The value that technology delivers when it is used as a catalyst for change and an enabler of new business models has been seen repeatedly. Emerging markets require innovative, appropriate technologies that are designed for scale. Innovation should find a balance between the best that technology has to offer and the constraints of the local context. It also needs to find a balance between simply adhering to existing business practices and driving toward business model innovation. Your Company is focused on technology solutions that drive us to exponential growth and it is actively working on following areas: Initiate cost-effective total Branch connectivity solution and strengthen existing communication channels. Centralization of data for real-time decision-making. Building strong business intelligence reporting and analytics capability. Consolidation of network, storage and hardware infrastructure by using cloud and virtualization services to drive economies of scale. Use of advanced communication channels like video conferencing to increase productivity & efficiencies. Build robust a framework to strengthen technology assets, artifacts and data. Your Company believes the execution of the above initiatives will help it to achieve its goals.

Fund raising Your Companys debt funding sources are broad based and as of March 31, 2011, its total outstanding borrowings and funds from assignment of loans from public sector banks, domestic private banks, foreign banks, and financial and other institutions were 43.1 percent, 33.0 percent, 7.8 percent and 16.1 percent, of its total borrowed funds and funds from assignment of loans, respectively. As of March 31, 2012, its total outstanding borrowings and funds from assignment of loans from public sector banks, domestic private banks, foreign banks, and financial and other institutions were 56.9 percent, 27.4 percent, 5.2 percent and 10.5 percent of its total borrowed funds and funds from assignment of loans, respectively. Following the introduction of the AP MFI Ordinance and the AP MFI Act and the subsequent events in AP , lending banks have ceased to provide credit in respect of its outstanding AP loan portfolio. Funding for its non-AP loan portfolio continued, albeit at substantially reduced levels, given the regulatory uncertainty as well as the on going stress in our AP loan portfolio. However, as a result of greater regulatory clarity in the last quarter of Fiscal 2012 after the issuance of the NBFC-MFI directions by the RBI on December 2, 2011, your Company is able to access Rs. 997.5 crore in incremental funds from bank borrowings and loan portfolio assignments and was able to increase its new loan disbursements in non-AP states during the last quarter of Fiscal 2012 by 146.5 percent. Furthermore, one of the key recommendations of the Malegam Committee was maintaining priority sector status for MFIs. In early 2011, the RBI accepted its recommendations of the Malegam Committee and, in May 2011, the RBI decided to maintain the eligibility of MFIs for PSL, subject to satisfaction of certain conditions in relation to qualifying assets and pricing by MFIs. However, it withdrew the eligibility of certain other categories of NBFCs to obtain PSL funds. Your Company expects this perceived change in its policy by the RBI to reduce some of the strain experienced by it in accessing bank funds as a result of the events in AP . In addition, in December 2011, the RBI has permitted NBFC-MFIs to access external commercial borrowings up to US$10 million (or its equivalent amount) in a financial year without requiring any prior approvals. Cash management All of your Companys disbursements and collections from Borrowers are done in cash, making cash management an important element of the business. To reduce the potential risks of theft, fraud and mismanagement, your Company has implemented an integrated cash management system since July 2009 that was operational in approximately 1,365 of its branches as of March 31, 2012. The system utilizes an Internet banking software platform that interfaces with various banks to provide your Company with up-to-date real-time cash information for these branches and the loan activity in them. Your Company believes this integrated system augments its management information systems and facilitates its bank reconciliations, audits and cash flow management. The system also reduces errors. Your Company has adopted a cash investment policy that limits cash investments to interest-bearing fixed deposit accounts. Your Company does not invest our cash in any other instruments or securities. 52

Distribution network Your Companys fund-based and fee-based products are distributed by its branch managers, assistant managers and Sangam Managers, who use weekly Sangam meetings as a distribution platform. During FY12, each of its Sangam Managers managed approximately 517 Members on an average. As of March 31, 2012, your Company had 13,596 branch managers, assistant managers and Sangam Managers, who comprised 84.0 percent of our total workforce. As of March 31, 2012, we had 1,461 branches. Administrative support staff and management personnel at our area and regional offices provide support to our branches. These personnel are typically locally hired and trained so that they have a strong understanding of the local areas in which they will work. We ensure, however, that they are not appointed to the same village or region of villages to avoid a conflict of interest. In many cases, our Sangam Managers come from the same villages our Members reside in. We believe this has the additional benefit of creating additional employment in the rural villages in which we operate. We train each employee through a two-month programme that covers both financing principles and field operations. In addition, we also maintain a direct customer contact programme (Sangam Leader Meeting). As part of this programme, Members in a Sangam elect a Sangam leader to serve as the key contact and relationship person for the Sangam with our organization. We conduct Sangam Leaders Meetings to inform them of our current and historical events, which allow them to better communicate the objectives of our organization to our Members and better understand their expectations of our services.

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New initiatives We have built a large distribution network in rural India. As of March 31, 2012, we had 13,596 branch managers, assistant managers and Sangam Managers who comprised 84.0 percent of our total workforce, across 1,461 branches in 18 states. We believe we can leverage this network to distribute financial and non-financial products of other institutions to our Members at a cost lower than that which our competitors can provide. Our network also allows such distributors to access a segment of the market to which many do not otherwise have access. While we continue to focus on our core business of providing micro-credit services, we intend to diversify into other businesses by scaling up certain pilot projects involving fee-based services and secured lending, gradually converting them into separate business verticals. Our objective in these other businesses is to focus on lending that will allow us to sustain high repayment rates, increase Member loyalty and also provide economic benefits to our Members and their families. We believe that such other products and services offer higher operating margins as compared to micro-credit under the new regulatory framework and may help us increase our overall ROA. We currently offer certain loan products that Members can use to purchase products that we believe will increase the productivity of Members and their businesses. We are selective about the products for which we issue such loans. To ensure our loan is used for the purchase of the specified product, we first enter in to a strategic relationship with the supplier of the product that we have selected and specify that the loan disbursement will be made directly to the supplier of the product rather than to the Member. We have two programmes under this category, namely Mobile Phone Loans and Sangam Store Loans. Mobile Phone Loans After a successful pilot programme with Nokia during FY10-11 for financing of mobile phones for our Members, we extended this initiative to 11 states in India. The annual effective interest rate of the mobile phone loans programme is 26.0 percent and the loan processing fee is 1.0 percent. We are also paid a processing/ referral fee by Nokia and its distributors. The term of this loan is typically 25 weeks. The price of the mobile phones financed by us ranges from Rs. 1,800 to Rs. 3,000. Principal and interest payments are due on a weekly basis during the term of the loan. As of March 31, 2011 and March 31, 2012, Mobile Phone Loans constituted 0.4 percent and 1.3 percent, respectively, of our total outstanding loan portfolio. Sangam Store Loans We are also undertaking a pilot project involving a business-to-business loan programme with Metro to fund the working capital requirements of our Members and certain non-members who own and operate kirana or Sangam stores. The programme allows these stores to purchase their inventory of consumer goods and groceries from Metro at wholesale prices. Loan amounts range from Rs. 2,500 to Rs. 12,500 and are interest free. The term of the loan is seven days. Non-members are serviced on the basis of cash-on-delivery. We may also offer credit to non-members upon completing satisfactory credit appraisals and obtaining requisite approvals. We receive a fixed commission from Metro for the total purchases a store makes from it while utilizing our productivity loan. Gold Loans For the year 2008, India was the worlds largest consumer of gold due to a strong preference for gold jewellry among Indian households and its widespread use as a savings instrument (Source: India Gems and Jewellery: A Sector Study published by Export-Import Bank of India in February 2010). During FY11, we launched a gold loan pilot product in five branches across the states of Gujarat and Karnataka under the name of Swarnapushpam to provide personal or business loans to our Members to meet their short-term liquidity requirements. These loans are secured by gold jewellry. This programme was subsequently extended to 49 branches, primarily across the states of Karnataka, Gujarat, Maharashtra and Uttar Pradesh in India. As of March 31, 2012, we had 326 employees working at these 49 branches. The loan amount ranges from Rs. 2,000 to Rs. 100,000. Loan repayments can be made in full at maturity, or equated monthly installments or quarterly installments and the tenure may be up to 12 months, at the option of the borrower. In addition, there are no penal or preclosure charges and the borrower can choose to make partial prepayments. The annual effective interest rate of the gold loans typically varies between 12.0 percent and 25.3 percent, and is determined based on the loan-to-value ratio, tenure of the loan and the repayment frequency. As such, our gold loan products do not qualify as micro-credit products. As of March 31, 2012, our gold loan portfolio was Rs. 26.5 crore, which constituted 3.5 percent of our total outstanding loan portfolio as of March 31, 2012. We intend to operate our gold loan business through a subsidiary, subject to successful results from the pilot projects and receipt of any required regulatory approvals.

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Report on Corporate Governance as on March 31, 2012


I. Company philosophy SKS Microfinance Limited (your Company) is committed to conducting its business in accordance with applicable laws, rules and regulations. Your Company, which follows the highest standards of business ethics and ethical conduct, is known for adopting corporate best practices. In line with this approach, your Company has been complying with Clause 49 of the Equity Listing Agreement on Corporate Governance framed by the Securities and Exchange Board of India (SEBI). In addition, your Company complies with the Reserve Bank of Indias Master Circular on Corporate Governance issued vide DNBS(PD) CC No. 288/ 03.10.001/ 2012-13 dated July 2, 2012, as it has been registered with the apex regulator of the banking sector as an NBFC Non-Deposit Accepting Systematically Important (NBFC-ND-SI) under Section 45-IA of the RBI Act, 1934. Adherence to the highest standards of integrity, transparency, fair practice and ethical behavior are fundamental to your Companys business model. Your Companys mission is to provide financial services to low-income households, and your Company believes that it can best be achieved by following our core values: Right focus - Customer first: Your Companys products, processes and people are all focused on creating the highest value for the customer. This includes being respectful to customers, understanding the needs of customers and being transparent with customers. Right means - Ethics always: Your Company will follow ethical practices in all its relationships at all times, including following the law both in letter and spirit. This includes not offering bribes, not paying or taking commissions, and not taking any other short-cuts. Right way - Consistent quality: Your Company will have standardized processes as these will enable it to reach out to most customers cost effectively. Your Company will foster innovation but in a way that ensures consistent quality.

II. Board of Directors A. Composition of the Board The Board of Directors has been implementing the principles of Corporate Governance as envisaged in Clause 49 of the Equity Listing Agreement and RBIs Master Circular. Your Companys Corporate Governance framework is based on an effective, independent Board, separation of the supervisory role of the Board from the executive management team and proper constitution of Committees of the Board. The Board functions either as a full Board or through various Committees constituted to oversee specific operational areas. The management provides the Board with detailed reports on the performance of your Company periodically. As the Chairman of your Company is a non-executive Director of your Company, at least one-third of the Board of Directors is required to consist of independent directors, as required under the Corporate Governance norms provided in Clause 49 of the Equity Listing Agreements. Currently, the Board consists of six members out of which except for the Managing Director, all the other members are Non-Executive Directors, including three Independent Directors.

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B. Directorships held by the members of the Board as on March 31, 2012


Name of the Director Mr. Geoffrey Tanner Woolley Non-Executive-Independent Director Mr. M.R. Rao, Managing Director and CEO Mr. P .H. Ravikumar Non-Executive Chairman (Interim), Independent Director Mr. Paresh Patel, Non-Executive Director Mr. Sumir Chadha, Non-Executive Director Dr. Tarun Khanna Non-Executive-Independent Director Mr. V. Chandrasekaran# Nominee Director of SIDBI Non-Executive-Independent Director Indian Public Companies* 1 1 7 Committee Membership** 1 1 4 Chairperson of Committees** 4

1 3 2 1

1 1 1 1

1 -

Note: There is no inter-se relationship amongst the Board members of your Company. * Directorships in Indian Public Companies (Listed and Unlisted Companies) including in SKS Microfinance Limited. ** As required under Clause 49 of the Equity Listing Agreement, the disclosure includes Membership/ Chairpersonship of Audit Committee; Shareholders/ Investors Grievance Committee and Remuneration & Compensation Committee in Indian Public Companies (Listed & Unlisted) including SKS Microfinance Limited. # Small Industries Development Bank of India (SIDBI) withdrawn its nomination of Mr. Chandrasekaran w.e.f. June 8, 2012 . C. The Board procedures

The Board is presented with relevant information on various matters relating to the working of your Company especially those that require deliberation at a strategic level, ahead of each Board meeting. All statutory and material information is placed before the Board to enable them in effective and efficient decision-making. Different functional heads provide presentations to the Board on various issues concerning the operations of your Company from time to time. The Board has separate and independent access to the core management team all the time. In addition to items which are required to be placed before the Board for their noting and/ or approval, the following information is also being provided to the Board: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Annual operating plans/ budgets and any updates. Capital budgets and any updates. Quarterly results of your Company and its operating divisions or business segments. Minutes of meetings of the Audit Committee and other Committees of the Board. The information on recruitment and remuneration of senior officers just below the Board level, including appointment/ removal of the Chief Financial Officer and the Company Secretary. Show-cause, demand, prosecution and penalty notices, which are materially important. Fatal or serious accidents, dangerous occurrences, etc. Any material default in financial obligations to and by the Company. Any issue which involves possible public or product liability claims of substantial nature. Details of any joint venture or collaboration agreement. Any significant development in Human Resources. Details of foreign exchange exposures and the steps taken by the management to limit the risks of adverse exchange rate movement, if material. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer, etc.

During the FY11-12, five (5) Board Meetings were held on May 6, 2011; July 26, 2011; November 7, 2011; November 23, 2011 and January 19, 2012. The gap between any two meetings has not been more than four months.

56

Attendance of each Director at the Board meetings during the Financial Year 2011-12:
Name Meetings attended during 2011-12 3 5 4 4 2 3 0 2 5 3 Meetings participated through electronic means incl. audio 0 0 0 1
#

Participation overall (including through electronic means) 60% 100% 80% 100% 100% 80% 0% 100% 100% 75%

Eighth AGM held on July 20, 2011 No Yes Yes No No No N.A No No Yes

Mr. Geoffrey Tanner Woolley Mr. M.R. Rao Mr. P .H. Ravikumar Mr. Paresh Patel Mr. Pramod Bhasin * Mr. Sumir Chadha Mr. Suresh Gurumani ** Dr. Tarun Khanna Mr. V. Chandrasekaran Dr. Vikram Akula ***

0 1
#

0 3# 0 0

* Mr. Pramod Bhasin resigned with effect from August 12, 2011. ** Mr. Suresh Gurumani resigned with effect from May 27, 2011. *** Dr. Vikram Akula resigned with effect from November 23, 2011. # Participated through audio conference and no sitting fee has been paid for participating through electronic means. III. Board Committees In terms of Clause 49 of the Listing Agreement and RBI guidelines on Corporate Governance, your Company has constituted Boardlevel committees, namely: (i) (ii) (iii) (iv) (v) Audit Committee. Shareholders and Investors Grievance Committee. Remuneration & Compensation Committee. Nomination Committee. Asset Liability Management/ Risk Management and Finance Committee.

The Board is responsible for constituting, assigning, co-opting members of the committee(s), fixing their terms of reference and also delegating their powers from time to time. The minutes of the meetings are circulated to the Board for its information and confirmation. 1. AUDIT COMMITTEE

With a view to complying with the various requirements under the Companies Act, 1956 as also codes of Corporate Governance as framed by the SEBI and the RBI, the Audit Committee has been set up with a majority of the members being Independent Directors. The Committee is headed by an Independent Director as the Chairman. A) Terms of reference of the Audit Committee are as follows: 1. Duty of the Chairman: The Chairman of the Audit Committee shall be present at the Annual General Meeting of the Company to provide any clarification on matters relating to audit. 2. Invitation: The Audit Committee may invite such of the executives, as it considers appropriate, to be present at the meetings of the Committee. However, on occasions, it may also meet without the presence of any executives of the Company. The Managing Director and Chief Executive Officer, the Chief Financial Officer, Head of Internal Audit and a representative of the statutory auditor may be present as invitees for the meetings of the Audit Committee. 3. Role of the Company Secretary: The Company Secretary shall act as the Secretary to the Committee.

4. Meetings of the Audit Committee and Quorum: The Audit Committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the Audit Committee whichever is greater, but there should be a minimum of two Independent members present. 5. Powers of the Audit Committee: The Audit Committee shall have powers, which should include the following: 1. To investigate any activity within its terms of reference. 57

6.

2. 3. 4.

To seek information from any employee. To obtain outside legal or other professional advice. To secure attendance of outsiders with relevant expertise, if it considers it necessary.

Role of the Audit Committee - The role of the Audit Committee shall include the following: To oversee your Companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. To recommend to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory Auditor and the fixation of audit fees. To approve payments to the statutory auditors for any other services rendered by the statutory auditors. To review, with the management, the annual financial statements before submission to the Board for approval, with particular reference to: Matters required to be included in the Directors Responsibility Statement which will be part of the Boards report in terms of clause (2AA) of Section 217 of the Companies Act, 1956. Changes, if any, in accounting policies as also practices and reasons for the same. Major accounting entries involving estimates based on the exercise of judgment by the management. Significant adjustments made in the financial statements arising out of audit findings. Compliance with listing and other legal requirements relating to the financial statements. Disclosure of any related party transactions. Qualifications in the draft audit report.

1. 2. 3. 4.

a. b. c. d. e. f. g. 5. 5A. 6. 7. 8. 9. 10. 11. 12. 13.

To review, with the management, the quarterly financial statements before submission to the Board for approval. To review, with the management, the statement of uses/ application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/ prospectus/ notice and the report submitted by the monitoring agency verifying the utilization of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter. To review, with the management, the performance of statutory and internal auditors, and adequacy of the internal control systems. To review the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. To discuss with internal auditors on any significant findings and follow-up there on. To review the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board. To discuss with the statutory auditors, before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors. To review the functioning of the whistle-blower mechanism. To carry out any other function as mentioned in the terms of reference of the Audit Committee.

B. Composition and meetings during the year The Audit Committee currently consists of the following members:
Name of Member Mr. P .H. Ravikumar Mr. Paresh Patel Mr. V. Chandrasekaran Designation Chairman Member Member No. of Meetings attended during FY 2011-12 7 5 7

Seven meetings of the Committee were held during the year i.e. on April 13, 2011; May 4, 2011; July 22, 2011; July 26, 2011 (adjourned); November 3, 2011; November 7, 2011; January 13, 2012 and January 18, 2012. 2. SHAREHOLDERS/ INVESTORS GRIEVANCE COMMITTEE With a view to complying with various requirements under the Code of Corporate Governance framed by SEBI, the Board has set up its Shareholders/ Investors Grievance Committee with an Independent Director as its Chairman. A. Terms of reference of the Shareholders/ Investors Grievance Committee are as follows: a. To review and redress the Shareholders and Investors Grievances like transfer of shares, debentures, non-receipt of balance sheet and declared dividend.

58

b. c. d. e. f.

To deal with all aspects relating to the issue and allotment of shares and debentures and/ or other securities of your Company. To consider and approve sub-division, consolidation, transfer and issue of duplicate share and debenture certificates. Authority to take a decision in any other matter in relation to the above functions/ powers. To delegate any of the powers mentioned above to your Company executives. The Company Secretary of your Company shall act as Secretary to the Committee and shall keep the Board informed about the decisions of the Committee.

B. Composition and meetings during the year The Committee currently consists of the following members:
Name of Member Mr. M.R. Rao Mr. P .H. Ravikumar Mr. Pramod Bhasin* Dr. Tarun Khanna Designation Member Chairman Member Member No. of Meetings attended during FY2011-12 4 3 1 2

*Ceased to be a member with effect from August 12, 2011. Four meetings of the Committee were held during the year i.e. on May 6, 2011; July 26, 2011; November 7, 2011 and January 19, 2012. The Committee was constituted on May 7, 2012 to include Mr. V. Chandrasekharan. However, SIDBI withdrew its nomination of Mr. Chandrasekharan w.e.f. June 8, 2012. Mr. Sudershan Pallap, Company Secretary, is the Compliance Officer. Number of investors including shareholders complaints received FY2011-12: 73 complaints. Number solved to the satisfaction of investors including shareholders: During FY2011-12, 75 complaints were resolved to the satisfaction of the investors, including two complaints pending on March 31, 2011. The Committee was reconstituted on May 7, 2012. Number of pending complaints: No complaints were pending as on March 31, 2012. 3. REMUNERATION AND COMPENSATION COMMITTEE With a view to complying with various requirements under the Companies Act, 1956 and the Code of Corporate Governance as framed by SEBI, the Remuneration and Compensation Committee (RCC) was set up with all Non-Executive Directors. It is headed by an Independent Director as its Chairman. The RCC was constituted to discharge the Boards responsibilities relating to the compensation of your Companys Executive Directors and senior management. The RCC has the overall responsibility of evaluating and approving the compensation plans, policies and programmes for Executive Directors and senior management of your Company. A. Terms of reference of the RCC: 1. To determine on behalf of the Board and on behalf of the shareholders with agreed terms of reference, your Companys policy on specific remuneration packages for Executive Directors including pension rights and any compensation payment. 2. To determine the revenue matrix, salary and bonus to be paid to Whole-Time-Director(s) or Managing Director of your Company. 3. To determine the sitting fee to be paid to the members of the Board. 4. To determine the revenue matrix, salary and bonus to be paid to key management personnel of your Company. 5. To identify, appoint and review the performance of key management personnel of your Company. 6. To make recommendation to the Board of Directors with respect to the compensation to be paid to the Executive Directors and key management personnel of your Company. 7. To determine the criteria for the grant of options or shares under the Stock Option or Stock Purchase Scheme. 8. To consider any other matter as may be required under the Stock Option or Stock Purchase Scheme of your Company. 9. To authorize to implement any matter in relation to the above functions/ powers. 10. To delegate any of the powers mentioned above to your Company executives. 11. Quorum of the Committee shall be three members of the Committee present personally.

59

B. Composition and meetings during the year The RCC currently consists of the following members:
Name of Member Mr. Geoffrey Tanner Woolley Mr. Pramod Bhasin* Mr. Sumir Chadha Dr. Tarun Khanna Designation Member Member Member Chairman No. of Meetings attended during FY11-12 2 2 2 1

* Ceased to be a member with effect from August 12, 2011. Two meetings of the RCC were held during the year i.e. on May 6, 2011 and July 26, 2011. C. Remuneration policy The Remuneration and Compensation Committee determines and recommends to the Board the compensation payable to the Directors. All Board-level compensation (except sitting fee) is approved by the Shareholders and separately disclosed in the Financial Statements. a. Criteria for making payments to Independent Directors

The Independent Directors of your Company play a crucial role in independent functions of the Board. They bring an external perspective to decision-making and provide leadership and strategic guidance while maintaining objective judgments. They also oversee Corporate Governance framework of your Company. Your Company does not pay any remuneration to the Independent Directors other than Sitting Fees for attending the meeting of the Board, as approved by the Board within the permissible limits of the Companies Act, 1956 and ESOPs as per Schemes of your Company. Sitting fees paid to Independent Directors during FY2011-12:
Name of the Director # Mr. Geoffrey Tanner Woolley Mr. P .H. Ravikumar Mr. V. Chandrasekhran Dr. Tarun Khanna
#

Sitting fees (Rs.) 33,416 70,000 80,000 -

No sitting fee has been paid to Directors for participation through electronic means.

B. Criteria for making payments to Executive Directors: Payment of remuneration to Executive Directors is determined and recommended by the RCC to the Board for its approval, which is approved by the Shareholders of your Company. Remuneration paid to Executive Directors:
Name Mr. M.R. Rao Dr. Vikram Akula** Salary & Incentives 99.96* 31.06 Value of Perquisites 2.54 Contribution to Provident Fund 3.87 ESOPs 26,76,271
#

(Rs. in lakh)
Total 106.37 31.06

* Includes variable pay of Rs. 54.00 lakh for the FY2010-11. ** Resigned as Executive Director with effect from November 23, 2011. # 906,734 stock options under ESOP 2007 have been exercised by Dr. Vikram Akula as on March 31, 2012 and the same were subsequently allotted on May 4, 2012.

60

The details of the equity shares/ ESOPs held by the Directors as on March 31, 2012 are as follows:
Name of the Director Mr. Geoffrey Tanner Woolley Mr. M.R. Rao Mr. P .H. Ravikumar Dr. Tarun Khanna No of Shares held 2,94,166 Nil 15,400 1,14,500 stock options under (ESOP 2008)(ID) and ESOP 2010. 8,080 1,36,000 stock options under (ESOP 2008)(ID) and ESOP 2010. No. of ESOPs held and name of the Scheme Nil 1,36,000 stock options under (ESOP 2008)(ID) and ESOP 2010.

4.

NOMINATION COMMITTEE

With a view to complying with the requirements under the Code of Corporate Governance framed by the RBI, the Board has set up the Nomination Committee with all Non-Executive Directors to ensure that the general character of the management or the proposed management of the non-banking financial company shall not be prejudicial to the interest of its present and future stakeholders and to ensure fit and proper credentials/ status of proposed/ existing Directors of your Company. The Committee is headed by an Independent Director as its Chairman. A. Terms of reference of the Nomination Committee are as follows: 1. 2. 3. 4. To ensure fit and proper credentials of proposed/ existing Directors; Appointment and re-appointment of Directors on the Board; Filling a vacancy on the Board; and Appointment of members to the Executive Committee of the Board.

B. Composition and meetings during the year Nomination Committee currently consists of the following members:
Name of Member Mr. Geoffrey Tanner Woolley Mr. Sumir Chadha Dr. Tarun Khanna Designation Member Member Chairman No. of Meetings attended during FY11-12 1 1 1

One meeting of the Committee was held during the year i.e. on May 6, 2011. 5. ASSET LIABILITY MANAGEMENT/ RISK MANAGEMENT AND FINANCE COMMITTEE

With a view to complying with the requirements under the Code of Corporate Governance framed by the RBI, the Board has set up the Asset Liability Management/ Risk Management Committee for monitoring the asset liability gap and to strategize action to mitigate risks associated with your Company. Further, the Board has previously constituted the Finance Committee with a view to catering to the various borrowing requirements of your Company and delegated its powers including reviewing and approving various kinds of loan facilities. The Asset Liability Management and Risk Management and Finance Committee were re-constituted by the Board of Directors on November 7, 2011 by merging the Finance Committee with the Asset Liability Management/ Risk Management Committee. The Committee is headed by a Non-Executive Director as its Chairman. A. Terms of reference of the Asset Liability Management/ Risk Management Committee are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. Reviewing operational risk (including sub risk for operational risk), information technology risk and integrity risk. Addressing concerns regarding asset liability mismatches and interest rate risk exposure. Taking strategic actions to mitigate the risk associated with the nature of the business. Achieving optimal return on capital employed, while maintaining acceptable levels of risk including and relating to liquidity, market and operational aspects and adhering to the policies and regulations. Preparing a report on statement of short-term dynamic liquidity, structural liquidity and interest rate sensitivity to the RBI. Apprising the Board of Directors at regular intervals regarding the process for putting in place a progressive risk management system and risk management policy and strategy. Reviewing and approving the loan facilities (on-balance sheet and/ or off-balance sheet) and borrowings within the limits specified. Reviewing the facilities beyond their limits and, thereafter, propose to the Board. Nominating and designating representative(s) to carry out the required documentation for the facilities approved by the Committee. 61

10. 11. 12. 13. 14. B.

Reviewing the annual budget and revisions made to the business plan, and making specific recommendations to the Board on its adoption, including where desirable, comments on expense levels, revenue structures, fees and charges, adequacy of the proposed funding levels as also adequacy of provision for reserves. Reviewing the funding mix from time to time to ensure mitigation of risk concentration in terms of specific lender or lender class. Reviewing of cash flows in comparison to the liquidity metric. Reviewing the targeted credit limits (funnel). Power to open bank accounts in the name of your Company in and outside India. Composition and meetings during the year

Asset Liability Management/ Risk Management and Finance Committee consist of the following members:
No. of Meetings attended during FY2011-12 Name of Member Mr. M.R. Rao Mr. P .H. Ravikumar Mr. Paresh Patel Designation Member Member Chairman Asset Liability Management/ Risk Management 2 3 2 Asset Liability Management/ Risk Management and Finance Committee 3 4 1

Three meetings of the Asset Liability Management/ Risk Management Committee were held during the year i.e. on May 4, 2011; July 22, 2011; November 3, 2011. Three meetings of the revised Asset Liability Management/ Risk Management and Finance Committee were held on January 18, 2012; January 27, 2012, February 16, 2012 and March 14, 2012. Further, the Committee was split on May 7, 2012 into two committees, namely A. Finance Committee; and B. Asset Liability Management / Risk Management Committee. The Asset Liability Management/ Risk Management Committee was reconstituted on May 7, 2012 to include Mr. V. Chandrasekaran as member of the Committee. However, SIDBI has withdrawn the nomination of Mr. V. Chandrasekaran w.e.f. June 8, 2012. IV. General Body Meetings The Annual General Meeting (AGM) is the principal forum for interaction with shareholders, where the Board answers specific queries raised by the shareholders. The Board acknowledges its responsibility towards its shareholders and, therefore, encourages open and active dialogue with all its shareholders, be it individuals, domestic institutional investors or foreign investors. Details of the last three Annual General Meetings are given below:
Year 2008 - 09 2009 - 10 Location # 2-3-578/1, Maruti Mansion, Kachi Colony, Nallagutta, Minister Road, Secunderabad - 500 003. Ashoka Raghupati Chambers, 1-10-60 to 61, Opp. to Shoppers Stop, Begumpet, Hyderabad - 500 016. Sri Sathya Sai Nigamagamam, D.No.8-3-987/2, Srinagar Colony, Hyderabad - 500 073. Date & Time September 30, 2009 at 11.30 am July 16, 2010 at 4.30 pm July 20, 2011 at 1.00 pm Whether any special resolutions were passed in the previous 3 AGMs Yes (5 Special Resolutions) Yes (3 Special Resolutions)

2010-11

Yes (1 Special Resolution)

V. Postal Ballot During the year, your Company conducted voting through Postal Ballot in accordance with Section 192A of the Companies Act, 1956 read with the Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 including any statutory modification or re-enactment thereof for the time being in force. Mr. K.V.S. Subramanyam, Practicing Company Secretary, acted as the Scrutinizer for conducting the postal ballot process. The results were announced on December 7, 2011 and the voting pattern of the same is as under:

62

Item Nos. as given in Postal Ballot Notice Item No. 1 as a Special Resolution for further issue of capital under section 81 (1A) of the Companies Act, 1956. Item No. 2 as an Ordinary Resolution for increase in the Authorized Share Capital from Rs. 95 crore to Rs. 135 crore and amendment to Capital clause in the Memorandum of Association of your Company. Item No. 3 as a Special Resolution for additional new objects in the main objects clause of the Memorandum of Association of your Company. Item No. 4 as a Special Resolution for amendments to all Employee Stock Option (ESOP) plans of your Company to extend the maximum permissible exercise period by three years, provided, however, that within this maximum permissible period the precise exercise period for specific stock options will be determined by the Board and/ or the Remuneration and Compensation Committee. Item No. 5 as a Special Resolution for institution of SKS Microfinance Employee Stock Option Plan 2011.

Votes cast in favour 45806652

Votes cast against 13808597

Invalid votes 2127

Result Approved with the requisite majority Approved with the requisite majority Approved with the requisite majority Approved with the requisite majority

51259137

8355494

2745

51258876

8355774

2726

45772102

13842595

2679

45631496

13982112

3768

Approved with the requisite majority

VI. Shareholders Disclosures regarding the appointment or re-appointment of Directors According to the Articles of Association, one-third of the Directors retire by rotation and, if eligible, seek re-appointment at the Annual General Meeting of shareholders. As per the provisions of Articles of Association, Mr. P .H. Ravi Kumar and Mr. Paresh Patel will retire in the ensuing Annual General Meeting. The Board has recommended the re-appointment of the retiring Directors. The detailed profiles of these Directors are provided in the Notice convening the Annual General Meeting. Investor Grievances and Share Transfer System The Board of Directors has constituted Shareholders/ Investors Grievance Committee to examine and redress complaints from shareholders and investors. Share Transfer System About 90.53 percent of the Equity Shares of your Company are in electronic form. Transfer of these Shares is done through the depositories with no involvement of your Company. As regards transfer of Shares held in physical form, the transfer documents can be lodged with the Registrar and Share Transfer Agent, Karvy Computershare Private Limited at the address given below. Transfer of shares in physical form is normally processed within 15 days from the date of receipt, if the documents are complete in all respects. The Company Secretary & Compliance Officer is empowered to approve transfers up to 500 number of shares and a single committee member of Shareholders/ Investors Grievance Committee up to 2,000 number of shares. The above limits are approved by the Shareholders/ Investors Grievance Committee in its meeting held on July 16, 2010. Registrar & Share Transfer Agent Address for correspondence KARVY COMPUTERSHARE PRIVATE LIMITED Registrars and Share Transfer Agents Plot No. 17 to 24, Near Image Hospital Vittalrao Nagar, Madhapur, Hyderabad 500 081, Andhra Pradesh (India) Tel. : 91 40 2343 1595, Fax : 91 40 2342 0814 E-mail : tpraju@karvy.com Outstanding GDRs/ ADRs/ Warrants or any Convertible instruments, conversion date and likely impact on equity. Your Company has not issued any GDRs/ ADRs, warrants or other instruments which are pending for conversion.

63

Distribution of Shareholding as on March 31, 2012


Range of Equity Shares held 1 5,000 5,001 10,000 10,001 20,000 20,001 30,000 30,001 40,000 40,001 50,000 50,001 1,00,000 1,00,001 & Above TOTAL No. of Shareholders 54307 1073 402 154 69 40 87 114 56246 Percentage 96.55 1.91 0.72 0.27 0.12 0.07 0.16 0.20 100.00 No. of Shares 31,55,483 8,22,423 5,86,150 3,86,910 2,44,534 1,85,928 6,08,097 6,63,67,370 7,23,56,895 Amount 3,15,54,830 82,24,230 58,61,500 38,69,100 24,45,340 18,59,280 60,80,970 66,36,73,700 72,35,68,950 Percentage 4.36 1.14 0.81 0.53 0.34 0.26 0.84 91.72 100.00

64

Shareholding pattern as on March 31, 2012


No. of Shareholders (III) As a percentage of (A+B) = (VI) As a percentage of (A+B+C)=(VII) No. of Shares (VIII) Total No. of Shares No. of Shares held (IV) in dematerialized form (V) Total Shareholding as a percentage of total No. of Shares Shares pledged or other wise encumbered As a percentage (IX)=(VIII)/ (IV)*100

Category Code (I)

Category of Shareholder (II)

(A) 0 0 0 0 5 5 0 0 4 0 0 4 9 26,655,527 18,300,878 0 0 18,300,878 26,655,527 0 0 18,300,878 18,300,878 0 0 0 0 0.00 0.00 25.29 0.00 0.00 25.29 36.84 8,354,649 8,354,649 11.55 8,354,649 8,354,649 11.55 0 0 0.00 0 0 0.00 0.00 0.00 11.55 11.55 0.00 0.00 25.29 0.00 0.00 25.29 36.84 0 0 0.00 0.00 0 0 0.00 0.00

Promoter and Promoter Group 0 0 0 0 0 0 0 0 0 0 0 0 0 N.A N.A 3 1 0 0 1,697,250 1,807,461 0 0 1,697,250 1,807,461 0 0 2.35 2.50 0.00 0.00 2.35 2.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N.A N.A -

(1)

Indian

(a)

Individuals/ Hindu Undivided Family

(b)

Central Government/ State Government(s)

(c)

Bodies Corporate

(d)

Financial institutions/ Banks

(e)

Any other

Trusts

Sub-Total (A)(1)

(2)

Foreign

(a)

Individuals (non-resident individuals/ foreign individuals)

Individuals

(b)

Bodies Corporate

(c)

Institutions

(d)

Any other (specify)

Sub-Total (A) (2)

Total Shareholding of Promoter and Promoter Group (A) = (A)(1)+(A)(2)

(B)

Public Shareholding

(1)

Institutions

(a)

Mutual Funds/ UTI

(b)

Financial institutions/ Banks

(c)

Central Government/ State Government(s)

(d)

Venture Capital Funds

65

66
No. of Shareholders (III) As a percentage of (A+B) = (VI) 1 37 0 0 42 812 54,645 26 4 1 501 2 1 3 204 56,195 56,237 56,246 72,356,895 45,701,368 30,827,875 259,269 12,787,018 12,787,018 259,269 23,979,730 38,853,223 65,508,750 8,080 8,080 309,566 15,400 4,377,968 139,102 307,730 0 18,300,878 18,300,878 25.29 0.43 6.05 0.43 0.01 17.67 0.36 42.61 63.16 100.00 N.A 758,235 615,569 1.05 4,917,132 4,812,967 6.80 7,102,877 5,342,325 9.82 9.82 6.80 1.05 25.29 0.43 6.05 0.43 0.01 17.67 0.36 42.61 63.16 100.00 N.A N.A 0 N.A N.A 0.00 N.A 14,873,493 14,873,493 20.56 20.56 0 0 0.00 0.00 0 0 0.00 0.00 9,702,116 9,702,116 13.41 13.41 N.A 0 1,666,666 1,666,666 2.30 2.30 As a percentage of (A+B+C)=(VII) No. of Shares (VIII) As a percentage (IX)=(VIII)/ (IV)*100 N.A 0.00 Total No. of Shares No. of Shares held (IV) in dematerialized form (V) Total Shareholding as a percentage of total No. of Shares Shares pledged or other wise encumbered 56,246 72,356,895 65,508,750 100.00 100.00 0 0.00

Category Code (I)

Category of Shareholder (II)

(e)

Insurance companies

(f)

Foreign Institutional Investors

(g)

Foreign venture capital investors

(h)

Any other (specify)

Sub-Total (B) (1)

(2)

Non-institutions

(a)

Bodies Corporate

(b)

i. Individuals/ Individual Shareholders holding nominal share capital up to Rs. 1 lakh. ii. Individual Shareholders holding nominal share capital in excess of Rs. 1 lakh.

(c)

Any other (specify)

Trusts

Non-resident Indians

Resident Directors

Non-resident Directors

Foregin bodies

Clearing members

Sub-total (B)(2)

Total Public Shareholding (B)=(B)(1)+(B)(2)

TOTAL (A)+(B)

(C)

Shares held by custodians and against which depository receipts have been issued

GRAND TOTAL (A)+(B)+(C)

Dematerialization of shares and liquidity Your Companys shares are tradable compulsorily in electronic form and, through Karvy Computershare Private Limited, Registrars and Share Transfer Agents. Your Company has established connectivity with both the depositories, that is, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). The International Securities Identification Number (ISIN) allotted to your Companys Shares under the Depository System is INE180K01011. As on March 31, 2012, 90.53 percent of your Companys shares were held in dematerialized form (demat) and the rest in physical form. Shares held in demat and physical forms as on March 31, 2012 are as follows:
Category Demat form: NSDL Demat form: CDSL Total Physical form Grand Total Number of Shareholders 37,694 18443 56,137 109 56246 Number of Shares 62756058 2752692 65508750 6848145 72356895 Percentage to total equity 86.73 3.80 90.53 9.47 100

VII. Disclosures i. ii. Disclosures on materially significant related party transactions that may have potential conflict with the interests of Company at large. There are no materially significant related party transactions with your Companys promoters, Directors, key managerial personnel or their relatives, which may have potential conflict with the interest of your Company at large. Disclosures on transactions with related parties, as required under the Indian Accounting Standard 18, have been incorporated in the Notes to the Accounts, being part of the Annual Report. Details of non-compliance: There has been no instance of non-compliance with any legal requirements nor have there been any strictures imposed by any stock exchange, SEBI or any statutory authority, on any matters relating to the capital market over the last three years.

iii. Details of compliance with mandatory requirements and adoption of the non-mandatory requirements of this clause. Your Company has fulfilled the following non-mandatory requirements as prescribed in Annexure I D to Clause 49 of the Equity Listing Agreements with the stock exchanges: a. b. c. d. e. The requirement regarding the Non-Executive Chairman is complied with by your Company. None of the Independent Directors on your Companys Board have served for a tenure exceeding nine years from the date when the new Clause 49 has come into effect. Your Company has set up a Remuneration and Compensation Committee, details of which have been given earlier in this report. There are a few comments in the Audit Report which have suitably been addressed in the Directors Report. The Company has adopted a whistle-blower policy and has established the necessary mechanism for the employees to report their concerns about unethical behavior. No person has been denied access to the Audit Committee.

Your Company has established a mechanism for employees to report their concerns about unethical behavior, actual or suspected fraud, or violation of your Companys Code of Conduct or ethics policy. It also provides for adequate safeguards against victimization of employees who avail of the mechanism, and also allows direct access to the Chairperson of the Audit Committee in exceptional cases. Your Company further affirms that no employee has been denied access to the Audit Committee. Compliance with Code of Conduct for the Members of the Board and senior management personnel Your Company has adopted a Code of Conduct (Code) for the Members of the Board and senior management personnel as required under Clause 49 of the Equity Listing Agreement. All the Board Members and the senior management personnel have affirmed compliance of the Code. The Annual Report of your Company contains a declaration to this effect signed by the Managing Director. As required under Clause 49 of the Equity Listing Agreement, the CEO/ CFO certification is provided in the Annual Report.

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Corporate Governance Compliance Certificate M/s. BS & Company, Company Secretaries certified on the Corporate Governance requirement as per Clause 49 of the Listing Agreement, is given in the Annexure to the Directors Report section in the Annual Report. Secretarial audit A qualified practicing Company Secretary carried out secretarial audit to reconcile the total admitted equity capital with NSDL and CDSL as also the total issued and listed equity capital. The secretarial audit report confirms that the total issued/ paid-up capital is in agreement with the total number of Shares in physical form and the total number of dematerialized Shares held with the NSDL and the CDSL. VII. Means of communication The quarterly, half yearly and annual results of your Company are published in leading newspapers in India and in Andhra Pradesh including The Financial Express and Vaartha. The results are also displayed on your Companys website, www.sksindia.com. Your Companys press releases, issued from time to time, are displayed on the website. Presentations made to the institutional investors and analysts after the declaration of the quarterly, half yearly and annual results are also displayed on the website. A Management Discussion and Analysis statement is part of your Companys Annual Report. IX. General Shareholder Information (i) Annual General Meeting Date Time Venue : August 10, 2012 : 10.00 am : Bhaskara Auditorium, B. M. Birla Science Centre, Adarsh Nagar, Hyderabad 500 063

(ii) Financial Calendar Year ending AGM in : March 31, 2012 : August 2012

(iii) Date of Book Closure/ Record Date : As mentioned in the Notice of the AGM to be held on August 10, 2012 (iv) Listed on (1) National Stock Exchange of India Limited Exchange Plaza, Bandra Kurla Complex Bandra (E), Mumbai 400 051 (2) BSE Limited Floor 25, P . J. Towers, Dalal Street Mumbai 400 001 Listing Fees as applicable have been paid. (vi) Corporate Identification Number (CIN) of your Company : L65999AP2003PLC041732 (viii) Market price data: High, low (based on closing prices) and number of shares traded during each month in the FY11-12 since its listing on National Stock Exchange of India Limited and BSE Limited: Monthly High, Low (based on closing prices) at Bombay Stock Exchange*
Month Apr-11 May-11 Jun-11 Jul-11 Aug-11 High Price 564 465.50 419.10 608.65 423 Low Price 453 262 327.60 314 198.35 Close Price 454.60 358.95 344.65 409.30 198.35 No. of Shares 1515625 11500930 3064423 13683712 3453606

Stock Code

: SKS MICRO

Stock Code

: 533228

68

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

320 238 218.30 123.90 105.40 149.80 149.40

188.45 190.25 93 90.20 85 88.25 110

246 200.70 93 93.30 88.85 134.15 118.65

3353057 1276876 4715653 3285391 4623165 11452131 5543779

* Source : www.bseindia.com Monthly High, Low (based on closing prices) at National Stock Exchange @
Month Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
@

High Price 564.90 458.00 420.00 604.40 428.00 320.45 238.40 219.35 124.00 104.75 151.35 148.70

Low Price 405.00 255.00 327.65 314.30 198.10 190.05 190.00 93.40 89.30 82.00 88.15 110.50

Close Price 453.05 395.15 344.45 410.8 198.1 246.05 201.85 93.4 93.65 88.9 133.95 118.4

No .of Shares 2946849 24080190 6162017 28924750 6975252 7194545 3216773 10041055 8004135 10932760 24047403 12045688

Source: www.nseindia.com

(ix) Performance of the Share Price of your Company in comparison to:


Source: www.bseindia.com and www.nseindia.com

Bombay Stock Exchange SENSEX

69

National Stock Exchange NIFTY

Address for correspondence As on March 31, 2012, your Company has 1,461 branches, 32 regional offices and operates from its Registered Office at Hyderabad. Investors and shareholders can correspond at the Registered Office of your Company at the following address: Mr. Sudershan Pallap Company Secretary SKS Microfinance Limited 3rd Floor, My Home Tycoon Block A, 6-3-1192 Kundanbagh, Begumpet Hyderabad - 500 016, Andhra Pradesh (India) email: skscomplianceofficer@sksindia.com CEO/ CFO CERTIFICATION In accordance with Clause 49 (V) of the Listing Agreement, a certificate by CEO/ CFO was submitted to the Board. CEO CERTIFICATION ON CODE OF CONDUCT I, M.R. Rao, Managing Director and Chief Executive Officer of SKS Microfinance Limited. hereby declare that all the Board members and senior managerial personnel have affirmed for the year ended March 31, 2012 compliance with the Code of Conduct of your Company laid down for them. Place: Hyderabad Date: May 7, 2012 SD/M.R. Rao Managing Director and CEO

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CORPORATE GOVERNANCE CERTIFICATE To, The Members SKS Microfinance Limited Hyderabad We have examined all relevant records of SKS Microfinance Limited (your Company) for the purpose of certifying the compliance of the conditions of Corporate Governance under Clause 49 of the Listing Agreement with Bombay Stock Exchange Limited and National Stock Exchange Limited for the financial year ended 31.03.2012 (i.e. 01.04.2011 to 31.03.2012). We have obtained all information and explanations which to the best of our knowledge and belief were necessary for the purpose of certification. The Compliance of the conditions of Corporate Governance is the responsibility of the Management. Our examination was limited to the procedure and implementation thereof. This certificate is neither an assurance as to the future viability of your Company nor of the efficacy or effectiveness with which the Management has conducted the affairs of your Company. On the basis of our examination of the records produced, explanations and information furnished, we certify that your Company has complied with all the mandatory conditions of the said Clause 49 of the Listing Agreement. For BS & Company Company Secretaries SD/(Nithyakalyani M) Associate Partner C.P . No.: 10712 Place: Hyderabad Date: 18.05.2012

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Auditors Report
To The Members of SKS Microfinance Limited 1. 2. 3. 4. 5. We have audited the attached Balance Sheet of SKS Microfinance Limited (the Company) as at March 31, 2012 and also the Statement of Profit and Loss and Cash Flow Statement for the year ended on that date annexed thereto. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As required by the Companies (Auditors Report) Order, 2003 (as amended) (the Order) issued by the Central Government of India in terms of sub-section (4A) of Section 227 of the Companies Act, 1956 (the Act), we enclose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order. Without qualifying our opinion, we draw attention to Note 2(t)(i) to the financial statements, as regards regulatory matters affecting the Company, and consequent implications thereof on the financial statements. Further to our comments in the Annexure referred to in paragraph 3 above, we report that: We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit; In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books; The Balance Sheet, Statement of Profit and Loss and Cash Flow Statement dealt with by this report are in agreement with the books of account; In our opinion, the Balance Sheet, Statement of Profit and Loss and Cash Flow Statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Act; On the basis of the written representations received from the directors, as on March 31, 2012, and taken on record by the Board of Directors, we report that none of the directors is disqualified as on March 31, 2012 from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Act

i. ii. iii. iv. v.

vi. In our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Act, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India; a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2012; b) in the case of the Statement of Profit and Loss, of the loss for the year ended on that date; and c) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

SD/For S. R. Batliboi & Co. Firm registration number: 301003E Chartered Accountants SD/per Viren H. Mehta Partner Membership No.: 048749 Mumbai May 8, 2012 72

Annexure referred to in paragraph 3 of our report of even date Re: SKS Microfinance Limited (the Company) (i) (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets. (b) All fixed assets have not been physically verified by the management during the year but there is a regular programme of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. No material discrepancies were noticed on such verification. (c) There was no disposal of substantial part of fixed assets during the year.

(ii) The Company is a Non-Banking Financial Company (NBFC) engaged in the business of providing loans and does not maintain inventory. Therefore the provisions of clause 4(ii) of the Order are not applicable to the Company. (iii) (a) According to the information and explanations given to us, the Company has not granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 301 of the Act. Accordingly, the provisions of clause 4(iii)(a) to (d) of the Order are not applicable to the Company and hence not commented upon. (b) According to information and explanations given to us, the Company has not taken any loans, secured or unsecured, from companies, firms or other parties covered in the register maintained under section 301 of the Act. Accordingly, the provisions of clause 4(iii)(e) to (g) of the Order are not applicable to the Company and hence not commented upon. (iv) In our opinion and according to the information and explanations given to us, there is an adequate internal control system commensurate with the size of the Company and the nature of its business, for the purchase of fixed assets and for rendering of services. The activities of the Company do not involve purchase of inventory and the sale of goods. During the course of our audit, we have not observed any major weakness or continuing failure to correct any major weakness in the internal control system of the Company in respect of these areas.

(v) In our opinion, there are no contracts or arrangements that need to be entered in the register maintained under Section 301 of the Act. Accordingly, the provisions of clause 4(v)(b) of the Order is not applicable to the Company and hence not commented upon. (vi) The Company has not accepted any deposits from the public. (vii) In our opinion, the Company has an internal audit system commensurate with the size and nature of its business. (viii) To the best of our knowledge and as explained, the Central Government has not prescribed maintenance of cost records under clause (d) of sub-section (1) of section 209 of the Act for the products of the Company.

(ix) (a) The Company is generally regular in depositing with appropriate authorities undisputed statutory dues including provident fund, investor education and protection fund, employees state insurance, income-tax, sales-tax, wealth-tax, service tax, customs duty, excise duty, cess and other material statutory dues applicable to it. (b) According to the information and explanations given to us, no undisputed amounts payable in respect of provident fund, investor education and protection fund, employees state insurance, income-tax, wealth-tax, service tax, sales-tax, customs duty, excise duty cess and other material statutory dues were outstanding, at the year end, for a period of more than six months from the date they became payable.

(c) According to the information and explanation given to us, there are no dues of income tax, sales-tax, wealth tax, service tax, customs duty, excise duty and cess which have not been deposited on account of any dispute. (x) The Companys accumulated losses at the end of the financial year are more than fifty percent of its net worth and it has incurred cash losses in the current financial year. The Company had not incurred any cash losses in the immediately preceding financial year. (xi) Based on our audit procedures and as per the information and explanations given by the management, we are of the opinion that the Company has not defaulted in repayment of dues to a financial institutions and banks. The Company did not have any outstanding dues in respect of debenture-holders during the year. (xii) According to the information and explanations given to us and based on the documents and records produced before us, the Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. 73

(xiii) In our opinion, the Company is not a chit fund or a nidhi/ mutual benefit fund/ society. Therefore, the provisions of clause 4(xiii) of the Order are not applicable to the Company. (xiv) In our opinion, the Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provision of clause 4(xiv) of the Order, are not applicable to the Company. (xv) According to the information and explanations given to us, the Company has not given any guarantee for loans taken by others from bank or financial institutions. (xvi) Based on the information and explanation given to us by the management, term loans were applied for the purpose for which the loans were obtained, though idle/ surplus funds which were not required for immediate utilization at relevant time were gainfully invested in liquid assets payable on demand. (xvii) According to the information and explanations given to us and on an overall examination of the balance sheet of the Company, we report that no funds raised on short-term basis have been used for long-term investment. (xviii) The Company has not made any preferential allotment of shares to parties or companies covered in the register maintained under section 301 of the Act. (xix) The Company did not have any outstanding debentures during the year. (xx) The Company has not raised money by public issue during the year. (xxi) We have been informed that during the year there were instances of cash embezzlements by the employees of the Company aggregating Rs.25,091,317; and loans given to non-existent borrowers on the basis of fictitious documentation created by the employees of the Company aggregating Rs.133,313,975. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. The outstanding balance (net of recovery) aggregating Rs.142,440,656 has been written off. SD/For S. R. Batliboi & Co. Firm registration number: 301003E Chartered Accountants SD/per Viren H. Mehta Partner Membership No.: 048749 Mumbai May 8, 2012

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Balance Sheet as at March 31, 2012


Notes Equity and liabilities Shareholders funds Share capital Reserves and surplus Share application money pending allotment Non-current liabilities Long-term borrowings Long-term provisions Current liabilities Short-term borrowings Other current liabilities Short-term provisions TOTAL Assets Non-current assets Fixed assets Tangible assets Intangible assets Intangible assets under development Non-current investments Deferred tax assets (net) Long-term loans and advances Other non-current assets Current assets Current investments Trade receivables Cash and bank balances Short-term loans and advances Other current assets TOTAL Summary of significant accounting policies 2.1 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

3 4 5 6 7

723,568,950 3,578,132,812 4,301,701,762 45,128,151 2,845,505,474 435,131,667 3,280,637,141 1,309,056,001 7,623,351,712 245,333,837 9,177,741,550 16,805,208,604

723,239,100 17,081,975,642 17,805,214,742 2,973,120 6,401,791,510 433,304,715 6,835,096,225 4,411,306,403 13,828,100,236 381,614,090 18,621,020,729 43,264,304,816

8 9 7

10 11 12 13 14 15

161,925,600 42,611,110 1,560,000 2,000,000 3,039,234,447 220,167,425 3,467,498,582 2,103,602 6,691,815,468 6,456,695,947 187,095,005 13,337,710,022 16,805,208,604

218,648,591 64,341,582 28,226,800 2,000,000 357,098,519 1,144,812,607 411,358,867 2,226,486,966 35,560,993 15,561,581 5,195,795,574 35,365,267,645 425,632,057 41,037,817,850 43,264,304,816

16 17 18 14 15

The accompanying notes are an integral part of the financial statements As per our report of even date SD/For S. R. Batliboi & Co. For and on behalf of the Board of Directors of Firm Registration number : 301003E SKS Microfinance Limited Chartered Accountants per Viren H. Mehta Partner Membership No.048749 SD/- SD/ P .H. Ravikumar M.R.Rao Non-Executive Chairman Managing Director and Chief Executive Officer Place: Mumbai Date: May 08, 2012 SD/- S.Dilli Raj Chief Financial Officer SD/Sudershan Pallap Company Secretary

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Statement of profit and loss for the year ended March 31, 2012
Notes Income Revenue from operations Other income Total revenue (I) Expenses Employee benefit expenses Finance costs Other expenses Depreciation and amortization expense Provisions and write-offs Total expenses (II) (Loss)/ profit before tax (III)=(I)-(II) Tax expenses Current tax Deferred tax (Excess)/ short provision of tax relating to earlier years Total tax expense (IV) (Loss)/ profit for the year (III)-(IV) Earnings per equity share [nominal value of share Rs.10 (March 31, 2011: Rs.10)] Basic (Computed on the basis of total (loss)/ profit for the year) Diluted (Computed on the basis of total (loss)/ profit for the year) Summary of significant accounting policies 2.1 26 (188.06) (188.06) 16.10 15.24 357,098,519 11,417,193 368,515,712 (13,605,969,164) 725,000,000 (134,466,101) 2,123,039 592,656,938 1,116,307,951 21 22 23 24 25 2,611,188,394 2,001,444,485 1,512,733,091 100,197,104 11,734,916,312 17,960,479,386 (13,237,453,452) 3,263,467,726 3,495,316,770 1,703,860,485 161,495,861 2,362,290,416 10,986,431,258 1,708,964,889 19 20 4,357,008,419 366,017,515 4,723,025,934 11,754,714,208 940,681,939 12,695,396,147 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

The accompanying notes are an integral part of the financial statements As per our report of even date SD/For S. R. Batliboi & Co. For and on behalf of the Board of Directors of Firm Registration number : 301003E SKS Microfinance Limited Chartered Accountants per Viren H. Mehta Partner Membership No.048749 SD/- SD/ P .H. Ravikumar M.R.Rao Non-Executive Chairman Managing Director and Chief Executive Officer Place: Mumbai Date: May 08, 2012 SD/- S.Dilli Raj Chief Financial Officer SD/Sudershan Pallap Company Secretary

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Cashflow statement for the year ended March 31, 2012


31-Mar-12 (Rupees) Cash flow from operating activities (Loss)/ profit before tax Non-cash adjustment to reconcile (loss)/ profit before tax to net cash flows Interest on shortfall in payment of advance income tax Depreciation and amortization Provision for employee benefits Loss/ (profit) on sale of fixed assets Employee stock compensation expense Contingent provision against standard assets Provision for non-performing assets Portfolio loans and other balances written off Loss from assignment of loans Other provisions and write offs Operating (loss)/ profit before working capital changes Movements in working capital : Increase/ (decrease) in other current liabilities Decrease/ (increase) in trade receivables Decrease/ (increase) in long-term loans and advances Decrease/ (increase) in short-term loans and advances Decrease/ (increase) in other current assets Decrease/ (increase) in other non-current assets Cash generated from /(used in) operations Direct taxes paid (net of refunds) Net cash flow from/ (used in) operating activities (A) Cash flows from investing activities Purchase of fixed assets, including capital work in progress and capital advances Proceeds from sale of fixed assets Purchase of current investments Proceeds from sale of current investments Margin money deposit (net) Net cash flow (used in)/ from investing activities (B) Cash flows from financing activities Proceeds from issuance of equity share capital (including share application money) Share issue expenses Long-term borrowings (net) Short-term borrowings (net) Net cash flow (used in)/ from in financing activities (C) Net increase/ (decrease) in cash and cash equivalents (A + B + C) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year (refer note 18) Summary of significant accounting policies 2 47,685,801 (9,043,699,679) (3,102,250,402) (12,098,264,280) 629,886,075 3,891,476,905 4,521,362,980 7,307,365,545 (366,862,160) (4,654,712,278) 66,962,390 2,352,753,497 (3,883,320,524) 7,774,797,430 3,891,476,906 (26,865,488) 2,972,255 35,560,993 (690,759,820) (679,092,060) (231,655,238) 1,852,301 (35,560,993) 272,744,390 7,380,460 (917,687,384) 11,060,282 (1,906,858,668) 16,976,800,657 238,537,052 5,445,661 13,449,478,515 (42,236,100) 13,407,242,415 (2,504,474,125) 10,320,366 (840,887,142) (6,433,578,014) (159,180,244) (32,037,098) (5,522,135,294) (721,319,188) (6,243,454,481) 14,681,565 100,197,104 (2,891,638) (1,042,300) 96,925,414 (196,037,812) (12,283,881) 11,686,774,593 256,463,412 336,847,910 (957,819,085) 15,353,133 161,495,861 (9,722,842) 682,100 70,368,441 168,527,595 357,457,452 789,125,768 1,047,179,601 128,268,965 4,437,700,963 (13,237,453,452) 1,708,964,889 31-Mar-11 (Rupees)

77

The accompanying notes are an integral part of the financial statements As per our report of even date SD/For S. R. Batliboi & Co. For and on behalf of the Board of Directors of Firm Registration number : 301003E SKS Microfinance Limited Chartered Accountants per Viren H. Mehta Partner Membership No.048749 SD/- SD/ P .H. Ravikumar M.R.Rao Non-Executive Chairman Managing Director and Chief Executive Officer Place: Mumbai Date: May 08, 2012 SD/- S.Dilli Raj Chief Financial Officer SD/Sudershan Pallap Company Secretary

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1. 2.

Corporate information SKS Microfinance Limited (the Company) is a public company domiciled in India and incorporated under the provision of the Companies Act, 1956 (the Act). The Company is a non-deposit accepting non-banking financial company or NBFC-ND registered with the Reserve Bank of India (RBI). Its shares are listed on two stock exchanges in India. The Company is engaged primarily in providing micro finance services to women in the rural areas of India who are enrolled as members and organized as Joint Liability Groups (JLG). The Company has its operation spread across 18 states. In addition to the core business of providing micro-credit, the Company uses its distribution channel to provide certain other financial products and services to the members. Programs in this regard primarily relate to providing of loans to the members for the purchase of certain productivity-enhancing products such as mobile handsets, loans for meeting the working capital requirements of small general stores known as Sangam stores and loans against gold as collateral. Basis of preparation The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in India (Indian GAAP). The Company has prepared these financial statements to comply in all material respects with the Accounting Standards notified by Companies (Accounting Standards) Rules, 2006, (as amended), the relevant provisions of the Companies Act, 1956 and the provisions of the RBI as applicable to a non banking financial company. The financial statements have been prepared on an accrual basis and under the historical cost convention except interest on loans which have been classified as non-performing assets and are accounted for on realisation basis. The accounting policies adopted in the preparation of financial statements are consistent with those of previous year, except for the change in accounting policy explained below. 2.1. Summary of significant accounting policies a. Change in accounting policy

Presentation and disclosure of financial statements During the year ended March 31, 2012, the revised Schedule VI notified under the Companies Act 1956, has become applicable to the Company, for preparation and presentation of its financial statements. The adoption of revised Schedule VI does not impact recognition and measurement principles followed for preparation of financial statements. However, it has significant impact on presentation and disclosures made in the financial statements. The Company has also reclassified the previous year figures in accordance with the requirements applicable in the current year. b. Use of estimates

The preparation of financial statements in conformity with the generally accepted accounting principles requires the management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities, at the end of the reporting period. Although these estimates are based on the managements best knowledge of current events and actions, uncertainty about these assumptions and estimates could result in the outcomes requiring a material adjustment to the carrying amounts of assets or liabilities in future periods. c. Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Interest income on loans given is recognised under the internal rate of return method. Income including interest or discount or any other charges on non-performing asset is recognised only when realised. Any such income recognised before the asset became non-performing and remaining unrealised shall be reversed. Interest income on deposits with banks is recognised on a time proportion accrual basis taking into account the amount outstanding and the rate applicable.

i. ii.

iii. Membership fees from members are recognised on an upfront basis. The Company has discontinued the collection of membership fees since January 2011. iv. Loan processing fees are amortised over the tenure of the loan on straight-line basis. In accordance with the RBI guidelines for securitisation of standard assets, the Company accounts for any loss arising from assignment/ securitisation immediately at the time of sale and the profit/ premium arising from securitisation is

v. 79

amortised over the life of the underlying portfolio loans/ securities.

vi. Commission income on insurance agency activities is recognised on accrual basis. vii. Dividend income is recognised when the right to receive payment is established by the balance sheet date. viii. All other income is recognised on an accrual basis. d. Tangible fixed assets

All fixed assets are stated at historical cost less accumulated depreciation and impairment losses, if any. Cost comprises the purchase price and any attributable cost of bringing the asset to its working condition for its intended use. e. i. ii. f. Intangible assets Goodwill is amortised using the straight-line method over a period of five years. Computer software costs are capitalised and amortised using the written down value method at a rate of 40% per annum. Depreciation Depreciation on tangible fixed assets is provided on the written down value method as per the rates prescribed under Schedule XIV of the Companies Act, 1956 which is also as per the useful life of the assets estimated by the management. Fixed assets costing up to Rs.5,000 individually are fully depreciated in the year of purchase. Impairment

i. ii. g.

The carrying amounts of assets are reviewed at each balance sheet date if there is any indication of impairment based on internal/ external factors. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the assets net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. After impairment, depreciation is provided on the revised carrying amount of the asset over its remaining useful life. h. Leases

Finance leases, which effectively transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the lower of the fair value and present value of the minimum lease payments at the inception of the lease term and disclosed as leased assets. Lease payments are apportioned between the finance charges and reduction of the lease liability based on the implicit rate of return. Finance charges are recognised as finance costs in the statement of profit and loss. Lease management fees, legal charges and other initial direct costs are capitalised. A leased asset is depreciated on a straight-line basis over the useful life of the asset or the useful life envisaged in Schedule XIV to the Companies Act, 1956, whichever is lower. Leases where the lessor effectively retains, substantially all the risks and benefits of ownership of the leased item, are classified as operating leases. Operating lease payments are recognised as an expense in the statement of profit and loss on a straightline basis over the lease term. i. Investments

Investments which are readily realisable and intended to be held for not more than a year from the date on which such investments are made, are classified as current investments. All other investments are classified as long-term investments. Current investments are carried in the financial statement at lower of cost and fair value determined on an individual investment basis. Long-term investments are carried at cost. However, provision for diminution in value is made to recognise a decline other than temporary in the value of the investments. On disposal of an investment, the difference between the carrying amount and disposal proceeds are charged or credited to the statement of profit and loss. j. Borrowing costs

All borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

80

k. i. ii.

Foreign currency transactions All transactions in foreign currency are recognised at the exchange rate prevailing on the date of the transaction. Foreign currency monetary items are reported using the exchange rate prevailing at the close of the financial year.

iii. Exchange differences arising on the settlement of monetary items or on the restatement of Companys monetary items at rates different from those at which they were initially recorded during the year, or reported in previous financial statements, are recognised as income or as expenses in the year in which they arise. l. Retirement and other employee benefits Retirement benefits in the form of provident fund are a defined contribution scheme. The contributions to the provident fund are charged to the statement of profit and loss of the year when the contributions to the respective funds are due. There are no other obligations other than the contribution payable to the provident funds. Gratuity liability is a defined benefit obligation and is provided for on the basis of an actuarial valuation on projected unit credit method made at the end of each financial year. Actuarial gains/ losses are immediately The Company treats accumulated leave expected to be carried forward beyond twelve months, as long-term employee benefit for measurement purposes. Such long-term compensated absences are provided for based on the actuarial valuation using the projected unit credit method at the year-end. Actuarial gains/ losses are immediately taken to the statement of profit and loss and are not deferred.

i. ii. iii.

iv. Accumulated leave, which is expected to be utilised within the next 12 months, is treated as short-term employee benefit. The Company measures the expected cost of such absences as the additional amount that it expects to pay as a result of the unused entitlement that has accumulated at the reporting date. 81 m. Income taxes Tax expense comprises of current and deferred tax. Current income tax is measured at the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961, enacted in India. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. Deferred income taxes reflect the impact of timing differences between taxable income and accounting income originating during the current year and reversal of timing differences for the earlier years. Deferred tax is measured using the tax rates and the tax laws enacted or substantively enacted at the reporting date. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit and loss. Deferred tax assets are recognised for deductible timing differences only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. In situations where the Company has unabsorbed depreciation or carry forward tax losses, all deferred tax assets are recognised only if there is virtual certainty supported by convincing evidence that they can be realised against future taxable profits. The carrying amount of deferred tax assets are reviewed at each reporting date. The Company writes-down the carrying amount of deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which deferred tax asset can be realised. Any such write-down is reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available. n. Earnings per share

Basic earnings per share is calculated by dividing the net profit or loss for the year attributable to equity shareholders (after deducting preference dividend and attributable taxes) by the weighted average number of equity shares outstanding during the year. Partly paid equity shares are treated as fraction of an equity share to the extent that they were entitled to participate in dividends related to a fully paid equity share during the reporting year. For the purpose of calculating diluted earnings per share, the net profit or loss for the year attributable to equity shareholders and the weighted average number of shares outstanding during the year are adjusted for the effects of all dilutive potential equity shares. o. Provisions

A provision is recognised when the Company has a present obligation as a result of past event, it is probable that an outflow of

resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are not discounted to their present value and are determined based on the best estimate required to settle the obligation at the reporting date. These estimates are reviewed at each reporting date and adjusted to reflect the current best estimates. p. Contingent liabilities

A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Company or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in extremely rare cases where there is a liability that cannot be recognised because it cannot be measured reliably. The Company does not recognise a contingent liability but discloses its existence in the financial statements. q. Cash and cash equivalents

Cash and cash equivalents for the purpose of cash flow statement comprise cash in hand and cash at bank and short-term investments with an original maturity of three months or less. r. Share based payments

In case of stock option plan, measurement and disclosure of the employee share-based payment plans is done in accordance with SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and the Guidance Note on Accounting for Employee Share-based Payments, issued by the Institute of Chartered Accountants of India. The Company measures compensation cost relating to employee stock options using the fair value method. Compensation expense is amortised over the vesting period of the option on the straight line basis. s. i. Classification of loan portfolio Loans under JLG are classified as follows:
Andhra Pradesh Less than 180 days Overdue for 180 720 days Overdue over 720 days Other States Less than 8 weeks Overdue for 8 weeks 25 weeks Overdue for more than 25 weeks

Asset classification Standard assets Non-performing assets Sub-standard assets Loss assets

Overdue refers to interest and/ or installment remaining unpaid from the day it became receivable. ii. All other loans and advances are classified as standard, sub-standard, doubtful, and loss assets in accordance with the extant Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as amended from time to time. t. i. Provisioning policy for portfolio loans and loan assets under assignment/ securitisation For the state of Andhra Pradesh:

The Government of Andhra Pradesh promulgated The Andhra Pradesh Micro Finance Institution (Regulation of Money Lending) Ordinance 2010 on October 15, 2010, subsequently enacted the same as The Andhra Pradesh Micro Finance Institution (Regulation of Money Lending) Act, 2011 (Act 1 of 2011) on December 31, 2010 and notified by Gazette on January 1, 2011 (AP MFI Act). In compliance with the said Ordinance/ Act, the frequency of the JLG loan repayments in the state of Andhra Pradesh changed from a weekly to a monthly basis. In January 2011, a sub-committee of the Central Board of Directors of the RBI (the Malegam Committee), in its recommendations, suggested that the provision for loan loss should be made with reference to the ageing of the overdue loan installments. Subsequent to this, RBI vide its circular dated January 19, 2011, addressed to banks, stated that the problems afflicting the Micro Finance Institutions (MFIs) sector are not necessarily on account of any credit weakness per-se but were mainly due to environmental factors and extended the special regulatory asset classification benefit to restructured MFI accounts as well.

82

Due to the continued evolving environment, with no precedence, following the enactment of AP MFI Act and the resultant impact on the field operations in Andhra Pradesh the Company reassessed it estimate on the portfolio in the state of Andhra Pradesh as follows:
Asset classification Standard assets Sub-standard assets Loss assets Arrear period Less than 180 days Overdue for 180 - 720 days Overdue over 720 days Provision (%) 0.25% 10% 100%

The above-mentioned estimates for the provisioning of the loan portfolio in the state of Andhra Pradesh are based on the asset classification and provisioning norms as prescribed in the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007. Further, on December 2, 2011, the RBI, vide its circular no. DNBS.CC.PD.No. 250/03.10.01/2011-12, introduced a new category of NBFCs - Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) whereby the directions for NBFCs to be registered as NBFC-MFI have been notified. These directions provide the regulatory framework, including the prudential norms for asset classification and provisioning, applicable to microfinance institutions on being registered as NBFCMFIs. The norms relating to asset classification and provisioning were to be applicable with effect from April 1, 2012 to all NBFCs registered as NBFC-MFI. However, subsequent to the above circular, the RBI (vide its circular dated March 20, 2012) deferred the implementation of the asset classification and provisioning norms, laid down in the NBFC-MFI Directions, to April 1, 2013. The Company continues to apply the estimates given in the table above on the portfolio in the state of Andhra Pradesh as at March 31, 2012. ii. For states other than Andhra Pradesh

Loans are provided for as per the managements estimates, subject to the minimum provision required as per Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 as amended from time to time. The provisioning norms adopted by the Company for JLG loans are as follows:
Asset Standard assets Sub-standard assets Loss assets Arrear period Less than 8 weeks Over 8 weeks - 25 weeks More than 25 weeks Estimated Provision adopted by the Company Note 1 50% Write Off

Note 1: Standard asset provision is linked to the Portfolio at Risk (PAR) as shown below: Portfolio at risk 0 1% Above 1% to 1.5% Above 1.5% to 2% Above 2% Estimated Provision adopted by the Company (% of Standard Assets) 0.25% 0.50% 0.75% 1.00%

iii. Provision for losses under assignment arrangements is made as higher of the incurred loss and provision as per the Company provisioning policy for JLG loans subject to the maximum guarantee given to respective assignee bank or financial institution. iv. All other loans and advances are provided for in accordance with the extant Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as amended from time to time. v. All overdue loans where the tenure of the loan is completed and in the opinion of the management amount is not recoverable, are written off.

83

Notes to financial statements for the year ended March 31, 2012
3. Share capital Authorized shares 122,000,000 (March 31, 2011: 82,000,000) equity shares of Rs.10/- each 13,000,000 (March 31, 2011: 13,000,000) preference shares of Rs.10/- each Issued, subscribed and fully paid-up shares 72,356,895 (March 31, 2011: 72,323,910) equity shares of Rs.10/- each fully paid up Total issued, subscribed and fully paid-up share capital

(Amount in Rupees unless otherwise stated) 31-Mar-12 (Rupees) 1,220,000,000 130,000,000 31-Mar-11 (Rupees) 820,000,000 130,000,000

723,568,950 723,568,950

723,239,100 723,239,100

(a) Reconciliation of the shares outstanding at the beginning and at the end of the reporting year Equity shares
31-Mar-12 No. of Shares At the beginning of the year Issued during the year - Initial public offer Issued during the year - Stock options Outstanding at the end of the year 72,323,910 32,985 72,356,895 (Rupees) 723,239,100 329,850 723,568,950 31-Mar-11 No. of Shares 64,527,219 7,445,323 351,368 72,323,910 (Rupees) 645,272,190 74,453,230 3,513,680 723,239,100

(b) Terms/ rights attached to equity shares The Company has only one class of equity shares having par value of Rs.10 per share. Each holder of equity shares is entitled to one vote per share. Any dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting. Dividend declared and paid would be in Indian rupees. In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders. Share capital includes 16,096,483 (March 31, 2011: 54,162,963) equity shares that are locked-in. (c) Aggregate number of shares issued for consideration other than cash during the period of five years immediately preceding the reporting date: The Company has issued 1,554,777 shares (March 31, 2011: 1,521,792) during the period of five years immediately preceding the reporting date on exercise of options granted under stock option plans wherein part consideration was received in the form of services rendered to the Company. (d) Details of shareholders holding more than 5% shares in the Company
Equity shares of Rs.10 each fully paid Sandstone Investment Partners, I Kismet Microfinance Westbridge Ventures II,LLC (Formerly Sequoia Capital India II LLC) Sequoia Capital India Growth Investments I Vinod Khosla Kismet SKS II Equity shares of Rs.10 each fully paid Sandstone Investment Partners, I Kismet Microfinance Westbridge Ventures II,LLC (Formerly Sequoia Capital India II LLC) Sequoia Capital India Growth Investments I Deutsche Securities Mauritius Ltd. Vinod Khosla Kismet SKS II As at March 31, 2012 No. of Shares 8,341,792 5,634,809 5,105,847 4,951,474 4,238,866 3,660,500 As at March 31, 2011 No. of Shares 8,341,792 5,634,809 5,105,847 4,951,474 4,447,500 4,238,866 3,660,500 % holding in the class 11.53% 7.79% 7.06% 6.85% 6.15% 5.86% 5.06% % holding in the class 11.53% 7.79% 7.06% 6.85% 5.86% 5.06%

84

As per the records of the Company, including its register of shareholders/ members and other declarations received from shareholders regarding beneficial interest, the above shareholding represents both legal and beneficial ownerships of shares. Further, SKS Trust Advisors Private Limited, sole trustee for five trusts mentioned below, holds equity shares in the Company on behalf of these five trusts as the registered shareholder. These trusts individually hold less than 5% equity shares in the Company:
Name of the Trust SKS Mutual Benefit Trust, Narayankhed SKS Mutual Benefit Trust, Medak SKS Mutual Benefit Trust, Sadasivpet SKS Mutual Benefit Trust, Jogipet SKS Mutual Benefit Trust, Sangareddy 31-Mar-12 No. of Shares 1,705,585 1,662,266 1,662,266 1,662,266 1,662,266 31-Mar-11 No. of Shares 1,705,585 1,662,266 1,662,266 1,662,266 1,662,266

(e) For details of shares reserved for issue under the employee stock option (ESOP) plan of the Company, refer note 32.

85

Notes to financial statements for the year ended March 31, 2012 4. Reserves and surplus Securities premium account Balance as per the last financial statements Add: Additions on initial public offer Add: Additions on stock option exercised (cash premium) Add: Transferred from stock options outstanding (non-cash premium) Less: Share issue expenses (net of deferred tax) Closing Balance Stock options outstanding Gross stock compensation for options granted in earlier years Add: Gross compensation for options granted during the year Less: Gross compensation for options lapsed/ forfeited during the year Less: Deferred employee stock compensation Less: Transferred to securities premium on exercise of stock options Closing Balance Statutory reserve Balance as per the last financial statements Add: Amount transferred from surplus balance in the statement of profit and loss Closing Balance Surplus/ (deficit) in the statement of profit and loss Balance as per last financial statements Add: Profit/ (Loss) for the year Less: Transferred to Statutory Reserve [@ 20% of profit after tax as required by section 45-IC of Reserve Bank of India Act, 1934] Net surplus/ (deficit) in the statement of profit and loss Total reserves and surplus

(Amount in Rupees unless otherwise stated) 31-Mar-12 (Rupees) 13,124,632,991 5,200,920 2,659,559 13,132,493,470 31-Mar-11 (Rupees) 6,143,323,329 7,147,510,075 78,915,440 21,056,906 (266,172,759) 13,124,632,991

178,832,237 241,256,584 (74,663,006) (157,395,970) (2,659,559) 185,370,286

223,596,198 1,929,655 (25,636,710) (87,727,806) (21,056,906) 91,104,431

773,239,958 773,239,958

549,978,368 223,261,590 773,239,958

3,092,998,262 (13,605,969,164) (10,512,970,902) 3,578,132,812 31-Mar-12 (Rupees) 45,128,151 45,128,151

2,199,951,901 1,116,307,951 (223,261,590) 3,092,998,262 17,081,975,642 31-Mar-11 (Rupees) 2,973,120 2,973,120

5. Share application money pending allotment Share application money pending allotment on exercise of options

The share application money represents the amount received towards exercise of options by employees and independent directors. The Company has received application for 906,734 equity shares (March 31, 2011: 25,994) of face value of Rs. 10 each at a total cash premium of Rs.36,060,811 (March 31, 2011: Rs.2,713,180). In addition to the cash premium, the allotment of these shares would also result in a non-cash premium of Rs.6,603,305, by way of stock option expenditure, which will be transferred to securities premium account from stock options outstanding. The Company has sufficient authorized share capital to cover the share capital amount on allotment of shares out of share application money.

86

Non-current portion 6. Long-term borrowings Term loans Indian rupee loan from banks (secured) Indian rupee loan from financial institutions (secured) Indian rupee loan from non banking financial companies (secured) Other loans and advances Finance lease obligation (secured) The above amount includes Secured borrowings Unsecured borrowings Amount disclosed under the head other current liabilities (note 9) Net amount 2,845,505,474 2,845,505,474 6,401,791,510 6,401,791,510 2,698,073 2,845,505,474 10,664,703 6,401,791,510 2,162,889,450 655,666,643 24,251,308 5,176,790,853 1,075,000,000 139,335,954 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

Current maturities 31-Mar-12 (Rupees) 5,016,477,846 919,333,357 114,732,114 31-Mar-11 (Rupees) 9,072,099,988 2,146,731,828 320,083,986

7,916,834 6,058,460,151 6,058,460,151 (6,058,460,151) -

6,957,991 11,545,873,793 11,545,873,793 (11,545,873,793) -

Financial lease obligation is secured by the hypothecation of computers and laptops taken on lease. Refer note (b) of note 18 - cash and cash equivalents. Nature of security a) Loans secured by hypothecation (exclusive charge) of portfolio loans b) Loans secured by hypothecation (exclusive charge) of portfolio loans and margin money deposits Total outstanding 31-Mar-12 5,067,028,496 3,826,322,223 8,893,350,718 31-Mar-11 12,340,239,532 5,589,803,077 17,930,042,609

87

6. Long-term borrowings (Contd.) Terms of repayment of long term borrowings as on March 31, 2012 Due between 1 to 2 Years No. of installments Amount (in Rupees) No. of installments Amount (in Rupees) No. of installments Amount (in Rupees) No. of installments 2,735,315 2,452,991 5 1,129,180 Amount (in Rupees) Due between 2 to 3 Years Due between 3 to 4 Years Due between 4 to 5 Years Total

Due within 1 year

Original maturity of loan

Interest rate

No. of installments

Amount (in Rupees)

Monthly repayment schedule 8 12 12 12 12 12 12 12 36,000,000 1 3,000,000 100,000,020 5 41,666,635 1,847,784 12 2,128,990 12 6,485,059 12 7,471,990 4 100,000,020 5 41,666,635 133,200,000 8 89,166,670 250,000,000 83,333,333 222,222,223 555,555,556 500,000,000 246,000,000 355,566,670 20,833,333 166,666,667 500,000,000 22,320,757 9,162,665 500,000,000 75,000,000

12.50% - 13%

12

333,333,333

13% - 13.50%

12

166,666,667

1-3 Yrs

12

246,000,000

13.50% - 14%

12

133,200,000

20,833,333

166,666,667

10% - 11%

12

358,333,345

12

5,628,393

Above 5 Yrs

11% - 12%

12

1,603,721

12

358,333,345

12.50% - 13%

12

36,000,000

88

89
3 4 1 3 4 1 2 2 4 95,168,888 244,720,000 2,162,695,662 2 125,000,000 83,333,333 122,360,000 673,794,253 166,800,000 2 83,000,000 5,188,306 31,249,994 41,668,335 400,000,000 2 200,000,000 1,129,180 125,000,007 291,666,674 83,333,333 8,333,309 300,000,003 171,428,571 200,000,000 1,000,000,000 83,333,333 208,335,269 72,916,662 416,600,000 107,500,000 200,000,000 42,200,000 450,000,000 62,800,000 165,835,351 416,666,667 375,000,000 40,000,000 124,700,000 41,666,667 87,200,000 41,666,664 18,755,901 10,000,000 285,506,667 611,800,000 25,000,000 8,893,350,718

Quarterly repayment schedule

9% - 10%

166,666,667

10% - 11%

83,333,333

11% - 12%

8,333,309

300,000,003

171,428,571

12.50% - 13%

200,000,000

400,000,000

83,333,333

166,666,933

41,666,668

13% -13.50%

166,800,000

107,500,000

1-3 yrs

200,000,000

42,200,000

450,000,000

62,800,000

13.50% - 14%

165,835,351

333,333,333

250,000,000

40,000,000

14% -14.50%

124,700,000

41,666,667

87,200,000

14.50% -15%

41,666,664

18,755,901

10,000,000

8 - 9%

190,337,779

3-5 yrs

9 - 10%

244,720,000

14.50% -15%

25,000,000

Total

6,050,543,317

6. Long-term borrowings (Contd.) Terms of repayment of long term borrowings as on March 31, 2012 Due between 1 to 2 Years No. of installments Amount (in Rupees) No. of installments Amount (in Rupees) No. of installments Amount (in Rupees) No. of installments 7,166,757 83,333,270 3,000,000 4 12,577,029 Amount (in Rupees) Due between 2 to 3 Years Due between 3 to 4 Years Due between 4 to 5 Years Total

Due within 1 year

Original maturity of loan

Interest rate

No. of installments

Amount (in Rupees)

Monthly repayment schedule 12 12 3 8 12 12 12 36,000,000 12 36,000,000 1 716,666,690 12 200,000,040 5 5,700,468 12 6,391,701 12 166,682,660 20,833,333 246,000,000 333,317,353 8 222,238,214 888,888,889 498,000,000 104,166,667 416,682,660 28,571,000 7,142,874 36,919,945 2,440,000,000 345,000,000 -

11%- 12%

12

333,333,322

12% - 12.5%

12

252,000,000

1-3 Yrs

12.50% - 13%

12

83,333,333

12

250,000,000

28,571,000

13.50% - 14%

7,142,874

Above 5 Yrs

11 - 12%

12

5,083,990

12

1,440,000,000

12.50% - 13%

12

270,000,000

Quarterly repayment schedule

90

91
4 4 3 2 4 4 2 4 2 1 4 4 83,333,333 83,333,333 41,666,667 200,000,000 83,333,333 107,500,000 83,333,600 1 20,833,800 83,333,333 1 20,833,335 8,333,322 471,428,571 166,666,667 3 125,000,002 458,333,335 66,666,667 733,333,337 146,666,667 37,500,000 16,666,667 11,250,000 31,250,000 1,000,000,000 1,250,000 80,000,000 24,999,989 187,500,002 187,501,000 322,500,000 166,666,667 325,714,286 600,000,000 8,370,000 15,666,667 208,333,332 166,666,667 30,000,000 166,666,666 349,999,700 83,333,333 166,666,667

83,333,333

9% - 10%

166,666,667

66,666,667

733,333,337

10% - 11%

146,666,667

37,500,000

16,666,667

11,250,000

31,250,000

1-3 yrs

528,571,429

1,250,000

11% - 12%

80,000,000

16,666,667

83,333,333

83,333,600

215,000,000

83,333,333

325,714,286

400,000,000

8,370,000

15,666,667

12% - 12.50%

166,666,665

1-3 yrs

83,333,333

30,000,000

83,333,333

349,999,700

1 3 3 4 4 1 3 3 87,200,000 124,700,000 40,000,000 250,000,000 2 125,000,000 333,333,333 1 83,333,333 62,800,000 450,000,000 100,000,000 1,050,000,000 146,000,000 750,000,000 625,000,000 200,000,000 291,500,000 218,550,000 142,857,143 150,000,000 124,999,997 202,966,973 204,000,000

41,660,000

41,660,000

100,000,000

600,000,000

83,200,000

333,333,333

250,000,000

1-3 yrs

12.50%-13%

160,000,000

166,800,000

218,550,000

142,857,143

150,000,000

124,999,997

202,966,973

116,800,000

92

93
Due between 1 to 2 Years No. of installments
2 3 1 1 4 4 1 2 4,983,170,437 25,000,000 42,200,000 244,720,000 4 190,337,777 1 95,168,889 244,720,000 1,179,519,314 10,000,000 1 41,666,663 18,750,000 122,360,000 215,860,027 41,666,666 12,577,029

6. Long-term borrowings (Contd.) Terms of repayment of long term borrowings as on March 31, 2012 Due between 2 to 3 Years No. of installments Amount (in Rupees) No. of installments Amount (in Rupees) No. of installments Amount (in Rupees) Due between 3 to 4 Years Due between 4 to 5 Years Total

Due within 1 year Amount (in Rupees)

Original maturity of loan

Interest rate

No. of installments

Amount (in Rupees)

150,000,000

150,000,000 90,000,000 125,000,000 21,750,000 52,502,997 218,181,828 43,750,000 166,666,664 208,333,331 166,666,668 50,000,000 25,000,000 9,333,333 160,000,000 33,333,331 99,999,996 428,259,999 795,340,000 213,000,000 25,000,000 75,000,000 249,850,000 17,930,042,609

90,000,000

13%-13.50%

83,333,334

21,750,000

52,502,997

218,181,828

25,000,000

1-3 yrs

166,666,664

13.50%-14%

166,666,668

166,666,668

40,000,000

25,000,000

9,333,333

14%-15%

160,000,000

33,333,331

99,999,996

8% - 9%

142,753,333

9% - 10%

183,540,000

3-5 yrs

12%-12.50%

170,800,000

13.50%-14%

25,000,000

50,000,000

Bullet repayment schedule

1-3 yrs

14-15%

249,850,000

Total

11,538,915,802

Notes to financial statements for the year ended March 31, 2012 Long-term 7. Provisions Provision for employee benefits Provision for gratuity (refer note 33) Other provisions Provision for taxation (Net of advance tax) Contingent provision against standard assets (refer note 35) Provision for non-performing assets (refer note 35) Provision for loss on assigned loans (refer note 2t (iii)) 82,902 393,202,382 393,285,284 435,131,667 8. Short-term borrowings Loan repayable on demand Cash credit from banks (secured) Other loans and advances Indian rupee loan from banks (secured) Commercial paper (unsecured) The above amount includes Secured borrowings Unsecured borrowings Indian rupee loan from banks are term loans secured by hypothecation of portfolio loans. 9. Other current liabilities Trade payables (including acceptances) (refer note 38 for details of dues to micro and small enterprises) Other liabilities Current maturities of long-term borrowings (note 6) Current maturities of finance lease obligation (note 6) Interest accrued but not due on borrowings Interest accrued and due on borrowings Provision for leave benefits Employee benefit payable Statutory dues payable Expenses and other payable Payable towards asset assignment/ securitisation transactions Unamortized income Unamortized interest income Unamortized loan processing fees Unamortized group insurance administrative charges 41,846,383 41,846,383 31-Mar-12 (Rupees)

(Amount in Rupees unless otherwise stated) Short-term 31-Mar-11 (Rupees) 27,624,087 27,624,087 194,365 405,486,263 405,680,628 433,304,715 31-Mar-12 (Rupees) 121,304,131 45,627,591 78,402,115 245,333,837 245,333,837 31-Mar-12 (Rupees) 1,259,056,001 50,000,000 1,309,056,001 1,309,056,001 31-Mar-11 (Rupees) 100,655,010 241,553,940 39,405,140 381,614,090 381,614,090 31-Mar-11 (Rupees) 1,474,917,575 2,250,000,000 686,388,828 4,411,306,403 3,724,917,575 686,388,828

Cash credit from banks is secured by hypothecation of portfolio loans and margin money deposit and is repayable on demand. 31-Mar-12 (Rupees) 31-Mar-11 (Rupees) -

6,050,543,317 7,916,834 44,110,802 6,564,577 36,790,649 214,659,305 25,305,690 264,843,629 873,167,059

11,538,915,802 6,957,991 123,896,084 1,565,347 53,904,583 306,783,275 35,034,231 240,843,072 1,272,142,817

99,449,850 7,623,351,712

78,068,888 169,988,146 13,828,100,236

94

Notes to financial statements for the year ended March 31, 2012 10. Tangible assets Furniture and fixtures (Rupees) Cost At April 1, 2010 Additions Disposals At March 31, 2011 Additions Disposals At March 31, 2012 Depreciation At April 1, 2010 Charge for the year Disposals At March 31, 2011 Charge for the year Disposals At March 31, 2012 Net Block At March 31, 2011 At March 31, 2012 31,115,000 34,694,112 120,666,666 72,228,276 47,720,099 43,817,311 95,269,996 37,900,041 (605,890) 132,564,147 8,802,591 (11,157,546) 130,209,192 109,399,778 78,450,060 (1,990,010) 185,859,828 48,627,857 (4,678,792) 229,808,893 10,220,455 7,148,308 (150,459) 17,218,304 7,386,710 (2,591,792) 22,013,222 120,303,324 44,078,880 (703,057) 163,679,147 12,823,920 (11,599,763) 164,903,304 239,138,355 71,457,551 (4,069,412) 306,526,494 793,297 (5,282,622) 302,037,169 41,710,884 23,735,803 (508,284) 64,938,403 6,839,730 (5,947,600) 65,830,533 Computers (Rupees) Office equipments (Rupees)

(Amount in Rupees unless otherwise stated) Vehicles (Rupees) 2,791,150 2,791,150 2,791,150 Assets on lease (Computers) (Rupees) 22,581,051 22,581,051 22,581,051 Total (Rupees) 403,943,713 161,853,285 (5,280,753) 560,516,245 20,456,947 (22,829,985) 558,143,207

535,872 583,892 1,119,764 433,908 1,553,672

5,105,611 5,105,611 7,527,017 12,632,628

215,426,101 129,187,912 (2,746,359) 341,867,654 72,778,082 (18,428,130) 396,217,606

1,671,386 1,237,478

17,475,440 9,948,423

218,648,591 161,925,600

The Company does not have any other assets on lease except as disclosed above. All assets have been recognized at cost 11. Intangible assets Gross block At April 1, 2010 Purchase At March 31, 2011 Purchase At March 31, 2012 Amortization At April 1, 2010 Charge for the year At March 31, 2011 Charge for the year At March 31, 2012 Net block At March 31, 2011 At March 31, 2012 64,341,582 42,611,110 64,341,582 42,611,110 36,391,908 3,309,227 39,701,135 39,701,135 63,129,229 28,998,722 92,127,951 27,419,022 119,546,973 99,521,137 32,307,949 131,829,086 27,419,022 159,248,108 39,701,135 39,701,135 39,701,135 97,210,583 59,258,950 156,469,533 5,688,550 162,158,083 136,911,718 59,258,950 196,170,668 5,688,550 201,859,218 Goodwill Computer software Total

95

Notes to financial statements for the year ended March 31, 2012 12. Non-current investments Non-trade investments (valued at cost) Investment in equity instruments (unquoted) 200,000 (March 31, 2011 : 200,000) Equity shares of Rs.10/- each fully paidup in Alpha Micro Finance Consultants Private Limited Aggregate amount of unquoted investments 13. Deferred tax asset (net) Deferred tax asset Difference due to disallowance of expenses under section 43B of Income tax Act, 1961 Difference due to disallowance of provision against standard assets and non performing assets Differences in depreciation and other differences in block of fixed assets and intangible assets as per tax and books of accounts Effect of lease accounting Deferred tax created on unamortized preliminary expenses under section 35D of Income tax Act, 1961 Deferred tax asset (net)

(Amount in Rupees unless otherwise stated) 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

2,000,000 2,000,000 2,000,000 31-Mar-12 (Rupees) -

2,000,000 2,000,000 2,000,000 31-Mar-11 (Rupees) 17,489,342 230,514,662 5,530,539 1,295,008 102,268,968 357,098,519

The Company has incurred a loss for the year ended March 31, 2012. The net deferred tax asset amounting to Rs.4,603,632,682 as at March 31, 2012 has not been recognized. The said sum of Rs.4,603,632,682 will be available to offset tax on future taxable income.

96

Notes to financial statements for the year ended March 31, 2012 Non-current 14. Loans and advances A. Portfolio Loans Joint liability group loans Unsecured, considered good* Unsecured, considered doubtful** Individual loans Unsecured, considered good* Secured, considered good* Secured, considered doubtful** 33,160,853 52,429,654 85,590,507 2,880,910,824 Joint liability group loans placed as collateral towards asset assignment/ securitisation transaction (refer note 27) Unsecured, considered good (A) 2,880,910,824 2,795,320,317 2,795,320,317 31-Mar-12 (Rupees)

(Amount in Rupees unless otherwise stated) Current 31-Mar-11 (Rupees) 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

842,920,094 842,920,094 77,745,918 77,745,918 920,666,012

4,495,337,719 33,847,211,151 4,495,337,719 33,847,211,151 2,401,279 269,001,081 271,402,360 3,214,908 17,903,794 21,118,702

4,766,740,079 33,868,329,853

920,666,012

1,374,051,292 1,374,051,292

1,239,837,922 1,239,837,922

6,140,791,371 35,108,167,775

* Represents standard assets in accordance with classification of assets as per RBI Prudential norms for NBFCs (refer note 35) ** Represents sub-standard assets in accordance with classification of assets as per RBI Prudential norms for NBFCs (refer note 35) B. Security deposits Unsecured, considered good (B) C. Advances recoverable in cash or kind Unsecured, considered good Unsecured, considered doubtful Provision for doubtful advances (C) D. Other loans and advances Employee Loans (secured, considered good) Loans to SKS Microfinance Employees Benefit Trust (unsecured, considered good) (refer note 37) Advance fringe benefit tax (net of provision) Advance income tax (net of provision) Prepaid expenses (D) Total (A+B+C+D) 54,168,606 937,183 41,632,117 96,737,906 3,039,234,447 43,423 60,906,186 937,183 4,845,654 66,732,446 1,144,812,607 46,640,529 46,640,529 6,456,695,947 80,572,903 80,572,903 5,365,267,645 27,074,802 65,402,387 92,477,189 (65,402,387) 27,074,802 59,419,872 16,179,096 75,598,968 (16,179,096) 59,419,872 247,721,710 247,721,710 247,721,710 176,526,967 176,526,967 176,526,967 34,510,915 34,510,915 97,994,277 97,994,277 21,542,337 21,542,337 -

97

Notes to financial statements for the year ended March 31, 2012 Non Current 15. Other assets Non-current bank balances (note18) Interest accrued on investments Interest accrued but not due on portfolio loans Interest accrued and due on portfolio loans Income accrued but not due on asset assignment/ securitisation transactions Interest accrued but not due on deposits placed with banks Others-unsecured, considered good Others-unsecured, considered doubtful Provision for others, considered doubtful 31-Mar-12 (Rupees) 207,950,000 12,217,425 14,374,012 234,541,437 (14,374,012) 220,167,425 16. Current investments Current investments (valued at lower of cost and fair value, unless stated otherwise) Other than trade - Unquoted Investment in pass through certificate of India Microfinance Loan Receivable Trust (IMLRT) August 2010 - Series A2 Aggregate amount of unquoted investments

(Amount in Rupees unless otherwise stated) Current 31-Mar-12 (Rupees) 16,315,407 11,925,236 81,998,455 65,853,805 11,002,102 187,095,005 187,095,005 31-Mar-12 (Rupees) 31-Mar-11 (Rupees) 1,768,891 67,727,564 7,423,071 286,597,318 51,356,954 10,758,258 425,632,056 425,632,056 31-Mar-11 (Rupees) 31-Mar-11 (Rupees) 383,324,000 28,034,867 4,002,231 415,361,098 (4,002,231) 411,358,867

Current

35,560,993 35,560,993 35,560,993

17. Trade receivables Other receivables (Outstanding for a period less than six months from the date they are due for payment) Unsecured, considered good Doubtful Provision for doubtful trade receivables

31-Mar-12 (Rupees)

31-Mar-11 (Rupees)

2,103,602 6,054,893 8,158,495 (6,054,893) 2,103,602

15,561,581 3,657,196 19,218,777 (3,657,196) 15,561,581

The Company does not have any trade receivables outstanding for a period exceeding six months from the date they are due for payment

98

Non-current 18. Cash and bank balances Cash and cash equivalents Balances with banks: (refer note (a & b) below) On current accounts Deposits with original maturity of less than three months Cash on hand Other bank balances Margin money deposit (refer note (c) below) Amount disclosed under non-current assets (note 15) 207,950,000 207,950,000 207,950,000) 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

Current 31-Mar-12 (Rupees) 31-Mar-11 (Rupees)

1,681,936,086 3,326,045,754 2,825,665,753 13,761,141 15,431,151 - 4,521,362,980 3,891,476,905 550,000,000

383,324,000 2,170,452,488 1,304,318,668 383,324,000 2,170,452,488 1,304,318,668 (383,324,000) - 6,691,815,468 5,195,795,573

Note (a): Includes collections amounting to Rs.72,027,445, received towards loans given as collateral which are to be placed as a margin money deposit subsequently, in accordance with assignment agreement. Note (b): Owing to lower amount of primary security (i.e.portfolio loans) available and the time given to create specific securities, the Company has ear-marked bank balance amounting to Rs.3,047,722,987 as security which will be utilized for creation of portfolio loans subsequently. Note (c): Represent margin money deposits placed to avail term loans from banks, financial institutions and as cash collateral in connection with asset assignments/ securitization transactions.

99

Notes to financial statements for the year ended March 31, 2012 19. Revenue from operations Interest income Interest income on portfolio loans Income from assignment/ securitisation of loans (refer note 27) Other operating revenue Loan processing fees Membership fees Recovery against loans written off Interest on margin money deposits*

(Amount in Rupees unless otherwise stated) 31-Mar-12 (Rupees) 3,588,690,548 346,033,272 89,659,729 224,822,026 107,802,844 4,357,008,419 31-Mar-11 (Rupees) 10,308,543,947 1,193,928,139 99,481,848 56,140,867 96,619,407 11,754,714,208

* Represents interest on margin money deposits placed to avail term loans from banks, financial institutions and on deposits placed as cash collateral in connection with asset assignments/ securitization. 20. Other income Interest on fixed deposits Insurance commission Other fee income Group insurance administration charges Profit on sale of assets Miscellaneous income 31-Mar-12 (Rupees) 108,636,938 23,777,405 56,583,650 169,988,146 1,042,300 5,989,076 366,017,515 21. Employee benefit expenses Salaries and bonus/ incentives Leave benefits Contribution to Provident Fund Contribution to Employee State Insurance Corporation Gratuity expenses (refer note 33) Staff welfare expenses Stock option expenditure 31-Mar-12 (Rupees) 2,249,405,840 24,540,280 82,965,293 41,781,519 14,222,296 105,961,298 92,311,868 2,611,188,394 22. Finance costs Interest On term loans from banks On term loans from financial institutions On term loans from non banking financial companies On other loans On bank overdraft facility On debentures On shortfall in payment of advance income tax Finance charges for leased assets Other finance costs Bank charges 1,390,902,135 247,701,971 37,127,705 13,611,172 139,013,833 14,681,565 1,965,099 146,976,895 9,464,110 2,001,444,485 2,317,690,430 543,661,397 67,571,174 186,220,705 111,610,511 68,469,859 15,353,133 1,099,504 153,569,614 30,070,443 3,495,316,770 31-Mar-12 (Rupees) 31-Mar-11 (Rupees) 66,002,618 105,608,467 38,668,418 708,467,266 21,935,170 940,681,939 31-Mar-11 (Rupees) 2,844,478,814 48,325,732 102,619,867 49,242,698 30,335,931 121,374,931 67,089,753 3,263,467,726 31-Mar-11 (Rupees)

100

Notes to financial statements for the year ended March 31, 2012 23. Other expenses Rent Rates and taxes Insurance Repairs and maintenance Plant and machinery Others Electricity charges Travelling and conveyance Communication expenses Printing and stationery Legal and professional fees Directors' sitting fees Directors stock option expenditure Auditors' remuneration (refer details below) Other provisions and write off Loss on sale of fixed assets Miscellaneous expenses

(Amount in Rupees unless otherwise stated) 31-Mar-12 (Rupees) 203,480,583 10,183,886 96,984,397 7,244,317 86,055,454 31,380,694 443,314,795 70,548,134 35,513,881 161,852,133 183,416 4,613,546 7,531,416 336,847,910 16,998,529 1,512,733,091 31-Mar-11 (Rupees) 199,879,997 11,349,318 60,786,289 19,229,786 108,791,694 35,660,616 630,837,648 117,629,416 131,073,728 153,936,392 355,000 3,278,688 7,190,825 128,268,965 682,100 94,910,023 1,703,860,485 31-Mar-11 (Rupees) 4,200,000 1,650,000 120,000 1,220,825 7,190,825

Payment to auditors As auditor: Audit fee Limited review In other capacity: Other services (certification fees) Reimbursement of expenses

31-Mar-12 (Rupees) 4,200,000 2,250,000 200,000 881,416 7,531,416

An amount of Rs.Nil (March 31, 2011: Rs.4,358,229) has been paid for services rendered in connection with the initial public offer which was included in share issue expenses and adjusted against the securities premium account. 24. Depreciation and amortization expense Depreciation of tangible assets Amortization of intangible assets 31-Mar-12 (Rupees) 72,778,082 27,419,022 100,197,104 25. Provisions and write-offs Contingent provision against standard assets (refer note 35) Provision for non-performing assets (refer note 35) Portfolio loans and other balances written off Loss from assigned loans 31-Mar-12 (Rupees) (196,037,812) (12,283,881) 11,686,774,593 256,463,412 11,734,916,312 31-Mar-11 (Rupees) 129,187,912 32,307,949 161,495,861 31-Mar-11 (Rupees) 168,527,595 357,457,452 789,125,768 1,047,179,601 2,362,290,416

101

26. Earnings per share (EPS) The following reflects the (loss) / profit and share data used in the basic and diluted EPS computations: 31-Mar-12 (Rupees) Net (loss)/ profit for calculation of basic EPS Net (loss)/ profit for calculation of diluted EPS (13,605,969,164) (13,605,969,164) No. of shares Weighted average number of equity shares in calculating basic EPS Effect of dilution: Stock options granted under ESOP* Weighted average number of equity shares in calculating diluted EPS 72,349,449 Nil 72,349,449 31-Mar-11 (Rupees) 1,116,307,951 1,116,307,951 No. of shares 69,343,888 3,919,448 73,263,336

*For the period April 1, 2011 to March 31, 2012, since the impact of conversion of potential equity shares is anti-dilutive in nature, the same has not been considered in calculation of diluted EPS. 27. Assignment/ securitisation of loans During the year the Company has sold loans through direct assignment/ securitisation. The information on direct assignment activity of the Company as an originator is as shown below: Particulars Total number of loans assigned/ securitised Total book value of loans assigned/ securitised Sale consideration received for loans assigned/ securitised Income recognised in the statement of profit and loss Particulars Credit enhancements provided and outstanding: Interest subordination Principal subordination Cash collateral* 81,998,455 1,362,917,707 1,116,228,254 481,676,008 1,239,837,922 988,333,533 For the year ended March 31, 2012 1,049,285 8,664,779,356 8,664,779,356 346,033,272 As at March 31, 2012 For the year ended March 31, 2011 1,108,982 8,110,873,573 8,110,873,573 1,193,928,139 As at March 31, 2011

* Includes collections amounting to Rs.72,027,445, received towards loans given as collateral which are to be placed as a margin money deposit subsequently, in accordance with assignment agreement. Under the agreement for the assignment/ securitisation of loans, the Company has transferred all the rights and obligations relating to such loan assets assigned/ securitised as shown above. The credit enhancements given by the Company under these asset assignment/ securitisation transactions have been disclosed in note 31 below.

28. Segment information The Company operates in a single reportable segment i.e. lending to members, which have similar risks and returns for the purpose of AS 17 on Segment Reporting notified under the Companies (Accounting Standard) Rules, 2006 (as amended). The Company operates in a single geographical segment i.e. domestic.

29. Related parties a. Names of the related parties with whom transactions have been entered
Dr. Vikram Akula, Executive Chairman from April 1, 2011 to November 23, 2011 (Non-executive Chairman upto March 31, 2011) Mr. Suresh Gurumani, Managing Director and Chief Executive Officer (till 03.10.2010) Mr. M.R.Rao, Managing Director and Chief Executive Officer from October 4, 2010 (Chief Operating Officer upto October 3, 2010) Mr. S. Dilli Raj, Chief Financial Officer

Key Management Personnel

102

b. Related party transactions Key Management Personnel Particulars Transactions during the year Salary, incentives & perquisites Mr. Suresh Gurumani Salary, incentives & perquisites Mr. M.R. Rao* Salary, incentives & perquisites Mr. S. Dilli Raj* Commission Dr. Vikram Akula Salary Dr. Vikram Akula Receipt of share application money Dr. Vikram Akula** Balances as at year end Incentive payable Mr. M.R. Rao Incentive payable Mr. S. Dilli Raj Loans & advances Dr. Vikram Akula Share application money pending allotment Dr. Vikram Akula** 5,400,000 3,750,000 1,800,883 45,128,151 10,636,671 12,479,850 3,106,666 45,128,151 13,452,853 14,776,648 10,130,744 17,501,643 31-Mar-12 31-Mar-11

* Salary, incentives and perquisites for Mr.M.R.Rao and Mr.S.Dilli Raj include amounts of Rs.5,400,000 and Rs. 3,750,000 respectively, which were duly approved as variable pay for the financial year 2010-11. Such variable pay amounts were relinquished by Mr.M R Rao and Mr.S Dilli Raj voluntarily, given the general liquidity concerns post the enactment of the AP MFI Act. However, given the increase in the liquidity in the fourth quarter of financial year 2011-12, Mr.M R Rao and Mr.S Dilli Raj requested the Company for reinstatement of the said variable pay, which was approved by the Compensation Committee and the Board of Directors were notified. Accordingly, the said amounts of variable pay, which were relinquished in financial year 2010-11, have been charged in the current year and paid thereafter. The Company has been advised that a specific approval from the Central Government is not required for such payment to Mr.M R Rao given that it relates to financial year 2010-11, year in which the Company reported profits. ** Represents share application money received by the Company from Dr. Vikram Akula towards 906,734 options out of 2,676,271 stock options held by him. The allotment of options exercised was pending as on March 31, 2012 and the same were subsequently allotted on May 4, 2012. 30. Capital and other commitments Estimated amounts of contracts remaining to be executed on capital account (net of capital advances) and not provided:
Particulars For purchase/ development of computer software For purchase of fixed assets 31. Contingent liabilities not provided for Particulars Credit enhancements provided by the Company towards asset assignment/ securitisation (including cash collaterals, principal and interest subordination) Tax on items disallowed by the Income Tax department not acknowledged as debt by the Company* March 31, 2012 2,479,983,502 30,302,298 March 31, 2011 1,952,301,516 48,549,551 March 31, 2012 915,000 March 31, 2011 6,135,400 22,900

* Based on the expert opinion obtained by the Company, crystallisation of liability on these items is not considered probable.

103

32. Stock option scheme

The Company has provided various share-based payment schemes to its Directors and Employees. The plans in operation are Plan I (Managing Director), Plan II (Other Independent Directors) and Plan III (Employees) while a, b, c, d, e are the different grants made under these plans. During the year ended March 31, 2012, the following series were in operation: Plan I (c) Dec 8, 2008 Oct 30, 2008 Nov 8, 2008 Jan 16, 2008 Jan 16, 2008 Jan 16, 2008 Jan 16, 2008 Oct 15, 2007 Oct 15, 2007 Oct 15, 2007 Oct 15, 2007 Jan 5, 2010 Jan 8, 2010 Feb 1, 2008 Feb 1, 2008 Nov 10, 2008 July 29, 2009 Feb 1, 2010 Plan II (a) Plan II (b) Plan II (c) Plan II (d) Plan II (e) Plan II (f) Nov 23, 2011 Nov 23, 2011 Jan 8, 2010,

Particulars

Plan I (a)

Plan I (b)

Date of grant

Oct 15, 2007

Nov 10, 2008

Date of Board approval

July 31, 2007

Oct 30, 2008

Date of shareholder's approval 900,000 Rs.300 Equity 25 % equally at the end of each year *Immediate **Immediate *Immediate Equity Equity Equity Rs.70.67 Rs.70.67 Rs.70.67 30,000 15,000 6,000 18,000 Rs.300 Equity *Immediate

Sept 8, 2007

Nov 8, 2008

Jul 16, 2010 90,000 Rs.300 Equity 25% equally at the end of each year 300,000 Rs.109.95 Equity End of year 1 33% End of year 2 33% End of year 3 34% 36 months from the date of vesting Refer note 1 ESOP 2008-ID 36 months from the date of vesting Refer note 1 ESOP 2008-ID 60 months from the date of grant Refer note 1 ESOP 2008-ID 36 months from the date of vesting Refer note 1 ESOP 2008 ID ESOP 2010

Number of options granted

1,852,158

1,769,537

Exercise price

Rs.49.77

Rs.300

Method of settlement

Equity

Equity

Vesting period

Immediate

Immediate

Exercise period Refer note 1 ESOP 2008 ESOP 2008-ID Refer note 1 Refer note 1 ESOP 2008-ID

48 months from the date of vesting

60 months from the date of vesting

48 months from the date of grant

36 months from the date of vesting

36 months from the date of vesting

Vesting conditions

Refer note 1

Refer note 1

Name of the plan

ESOP 2007

ESOP 2008

104

105
Plan III (b) Dec 15, 2009 Nov 4, 2009 Dec 10, 2009 Dec 10, 2009 Dec 10, 2009 Dec 10, 2009 Nov 4, 2009 May 4, 2010 May 4, 2010 Dec 15, 2009 May 4, 2010 May 4, 2010 Sep 7, 2011 Sep 7, 2011 Nov 8, 2008, Sep 30, 2009, July 16, 2010 1,486,329 Rs.229.40 Equity 50 % equally at the end of each year Plan III (c) Plan III (d) Plan III (e) Plan III (f) 1,313,160 Rs.150 Equity 20 % equally at the end of each year 20 % equally at the end of each year 20 % equally at the end of each year Equity Equity Equity 20 % equally at the end of each year Rs.300 Rs.150 Rs.300 568,000 4,340 6,000 72 months from the date of grant Refer note 1 ESOP 2009 ESOP 2009 ESOP 2009 Refer note 1 Refer note 1 72 months from the date of grant 72 months from the date of grant 72 months from the date of grant Refer note 1 ESOP 2009 36 months from the date of vesting Refer note 1 ESOP 2008 ESOP 2009 ESOP 2010

Particulars

Plan III (a)

Date of grant

Nov 3, 2009

Date of Board approval

July 29, 2009

Date of shareholder's approval

Sep 30, 2009

Number of options granted

514,750

Exercise price

Rs.300

Method of settlement

Equity

Vesting period

End of year 1 40% End of year 2 25% End of year 3 25% End of year 4 10%

Exercise period

60 months from the date of grant

Vesting conditions

Refer note 1

Name of the plan

ESOP 2009

* 1/3rd of the options can be exercised within first twelve months from grant date; another 1/3rd of the options can be exercised within twenty four months from grant date and the rest being exercised within thirty six months from grant date.

** 1/2 of the options can be exercised within twenty four months from grant date; another 1/2 of the options can be exercised within thirty six months from grant date.

Note 1: Option holders are required to continue to hold the services being provided to the Company at the time of exercise of options.

The details of Plan I (a) have been summarised below:


Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 906,734 906,734 Weighted average exercise price (Rs.) 49.77 49.77 7.28 As at March 31, 2011 Number of options 906,734 906,734 906,734 0.6 Weighted average exercise price (Rs.) 49.77 49.77 49.77 7.28

* Notice of exercise received for 906,734 options; however the allotment is pending as on March 31, 2012. These shares have been subsequently allotted on May 4, 2012. The weighted average share price on the date of receipt of such notice for exercise was Rs.214.66 (Previous year: Rs.Nil). The details of Plan I (b) have been summarised below:
Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 1,769,537 1,769,537 1.6 300.00 300.00 2.92 1,769,537 1,769,537 2.6 300.00 300.00 2.92 1,769,537 Weighted average exercise price (Rs.) 300.00 As at March 31, 2011 Number of options 1,769,537 Weighted average exercise price (Rs.) 300.00

The details of Plan I (c) have been summarised below:


Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 675,000 450,000 225,000 225,000 0.2 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 1.81 As at March 31, 2011 Number of options 675,000 675,000 1.6 Weighted average exercise price (Rs.) 300.00 300.00 1.81

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The details of Plan II (a) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted Weighted average exercise price (Rs.) As at March 31, 2011 Number of options 30,000 30,000 Weighted average exercise price (Rs.) 70.67 70.67 15.28

* Includes notice received for exercise of 5,000 options; however allotment was pending as on March 31, 2011. The weighted average share price on the date of receipt of such notice for exercise was Rs.664.94. The weighted average share price on the date of exercise of other 25,000 stock options was Rs.1,180.65. The details of Plan II (b) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (years)** Weighted average fair value of options granted 15,000 15,000 15,000 0.8 Weighted average exercise price (Rs.) 70.67 70.67 70.67 17.72 As at March 31, 2011 Number of options 15,000 15,000 Weighted average exercise price (Rs.) 70.67 70.67 17.72

* Notice of exercise received for 15,000 options; however the allotment of shares was pending as on March 31, 2011. Subsequently, in the current year, the Company refunded the share application money received towards such options, within 180 days of its receipt and the options are outstanding and exercisable as on March 31, 2012. The weighted average share price on the date of receipt of such notice for exercise was Rs.664.94. ** Original exercise period ending on February 1, 2011, extended upto February 1, 2013.

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The details of Plan II (c) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (years)** Weighted average fair value of options granted 4,000 4,000 4,000 0.8 Weighted average exercise price (Rs.) 70.67 70.67 70.67 52.14 As at March 31, 2011 Number of options 6,000 2,000 4,000 4,000 0.6 Weighted average exercise price (Rs.) 70.67 70.67 70.67 70.67 52.14

* Includes notice received for exercise of 1,000 options; however allotment was pending as on March 31, 2011. The weighted average share price on the date of receipt of such notice for exercise was Rs.664.94. ** Original exercise period ending on November 10, 2011, extended upto February 1, 2013. The weighted average share price on the date of exercise of other 1,000 stock options was Rs.1,166.54. The details of Plan II (d) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 18,000 18,000 18,000 0.3 Weighted average exercise price (Rs.) 300.00 300.00 300.00 21.57 As at March 31, 2011 Number of options 18,000 18,000 12,000 1.3 Weighted average exercise price (Rs.) 300.00 300.00 300.00 21.57

* Notice of exercise received for 15,000 options; however the allotment of shares was pending as on March 31, 2011. Subsequently, in the current year, the Company refunded the share application money received towards such options, within 180 days of its receipt and the options are outstanding and exercisable as on March 31, 2012. The weighted average share price on the date of receipt of such notice for exercise was Rs.664.94.

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The details of Plan II (e) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year* Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 85,500 36,000 49,500 22,500 2.8 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 72.53 As at March 31, 2011 Number of options 90,000 4,500 85,500 18,000 3.8 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 72.53

* Notice received for exercise of 4,500 options; however allotment was pending as on March 31, 2011.The weighted average share price on the date of receipt of such notice for exercise was Rs.664.94. The details of Plan II (f) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted The details of Plan III (a) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 57,000 2,200 260,640 117,928 2.6 300.00 300.00 300.00 300.00 41.18 319,840 Weighted average exercise price (Rs.) 300.00 As at March 31, 2011 Number of options 502,250 37,500 144,910 319,840 40,990 3.6 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 300.00 41.18 300,000 300,000 5.7 Weighted average exercise price (Rs.) 109.95 109.95 77.23 As at March 31, 2011 Number of options Weighted average exercise price (Rs.) -

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs.394.87 (Previous year: Rs.690.46).

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The details of Plan III (b) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 975,792 167,892 19,537 788,363 235,548 3.6 Weighted average exercise price (Rs.) 150.00 150.00 150.00 150.00 150.00 115.30 As at March 31, 2011 Number of options 1,237,040 147,790 113,458 975,792 104,392 4.6 Weighted average exercise price (Rs.) 150.00 150.00 150.00 150.00 150.00 115.30

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs.325.79 (Previous year: Rs.642.96). The details of Plan III (c) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 401,000 116,100 360 284,540 73,400 3.6 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 300.00 69.29 As at March 31, 2011 Number of options 562,000 94,000 67,000 401,000 26,600 4.6 Weighted average exercise price (Rs.) 300.00 300.00 300.00 300.00 300.00 69.29

The weighted average share price for the period during which stock options were exercised on a regular basis was Rs.374.27 (Previous year: Rs.634.98). The details of Plan III (d) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 3,990 898 388 2,704 230 4.1 Weighted average exercise price (Rs.) 150 150 150 150 150 233.75 As at March 31, 2011 Number of options 4,340 350 3,990 5.1 Weighted average exercise price (Rs.) 150 150 150 233.75

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The weighted average share price for the period during which stock options were exercised on a regular basis was Rs.399.32 (Previous year: Rs.Nil). The details of Plan III (e) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted The details of Plan III (f) have been summarised below: Particulars As at March 31, 2012 Number of options Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 1,486,329 270,194 1,216,135 4.4 Weighted average exercise price (Rs.) 229.40 229.40 229.40 146.37 As at March 31, 2011 Number of options Weighted average exercise price (Rs.) 3,000 3,000 600 4.1 Weighted average exercise price (Rs.) 300 300 300 152.53 As at March 31, 2011 Number of options 6,000 3,000 3,000 5.1 Weighted average exercise price (Rs.) 300 300 300 152.53

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Details of exercise price for stock options outstanding as at March 31, 2012: Series Range of exercise prices Number of options outstanding (31-Mar-12) Number of options outstanding (31-Mar-11) Weighted average remaining contractual life of options (in years) (31-Mar-12) 1.6 0.2 0.8 0.8 0.3 2.8 2.6 3.6 3.6 4.1 4.1 5.7 4.4 Weighted average remaining contractual life of options (in years) (31-Mar-11) 0.6 2.6 1.6 0.6 1.3 3.8 3.6 4.6 4.6 5.1 5.1 Weighted average exercise price

Options outstanding as on 31-Mar-11 and 31-Mar-12: Plan I (a) Plan I (b) Plan I (c) Plan II(a) Plan II(b)* Plan II (c) Plan II (d) Plan II (e) Plan III (a) Plan III (b) Plan III (c) Plan III (d) Plan III (e) Plan II (f) Plan III (f) 49.77 300.00 300.00 70.67 70.67 70.67 300.00 300.00 300.00 150.00 300.00 150.00 300.00 109.95 229.40 1,769,537 225,000 15,000 4,000 18,000 49,500 260,640 788,363 284,540 2,704 3,000 300,000 1,216,135 906,736 1,769,537 675,000 4,000 18,000 85,500 319,840 975,792 401,000 3,990 3,000 49.77 300.00 300.00 70.67 70.67 70.67 300.00 300.00 300.00 150.00 300.00 150.00 300.00 109.95 300.00

Options granted during the year and outstanding as on 31-Mar-12:

* Notice of exercise for 15,000 options was received on March 11, 2011; however the allotment was pending as on March 31, 2011. Subsequently, in the current year, the Company refunded the share application money received towards such options, within 180 days of its receipt and the options are outstanding and exercisable as at March 31, 2012. Stock options granted during the year: Plan II (f): The weighted average fair value of stock options granted during the year was Rs.77.23. The Black-Scholes Model has been used for computing the weighted average fair value considering the following: Particulars Share price on the date of grant (Rs.) Exercise price (Rs.) Expected volatility (%) Life of the options granted (years) Risk-free interest rate (%) Expected dividend rate (%) Fair value of the option Tranche vesting in FY 2012-13 115.45 109.95 71.08 4 8.62% 0% 70.94 Tranche vesting in FY 2013-14 115.45 109.95 71.08 5 8.67% 0% 77.55 Tranche vesting in FY 2014-15 115.45 109.95 71.08 6 8.72% 0% 83.01

Plan III (f): The weighted average fair value of stock options granted during the year was Rs.146.37. The Black-Scholes Model has been used for computing the weighted average fair value considering the following: Particulars Share price on the date of grant (Rs.) Exercise price (Rs.) Expected volatility (%) Life of the options granted (years) Risk-free interest rate (%) Expected dividend rate (%) Fair value of the option Tranche vesting in FY 2012-13 229.55 229.40 72.96 4 8.30% 0% 140.08 Tranche vesting in FY 2013-14 229.55 229.40 72.96 5 8.29% 0% 153.38

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Volatility of the share price of the Company has been calculated as the standard deviation of the closing prices for a period of one year ending on the date of grant. Effect of the share-based payment plans on the statement of profit and loss and on its financial position: Particulars Directors stock option expenditure Employees stock option expenditure Subtotal Total compensation cost pertaining to equity-settled employee share based payment Particulars Stock options outstanding (gross) Deferred compensation cost outstanding Stock options outstanding (net) 33. Retirement benefits The Company has a defined benefit gratuity plan. Every employee who has completed five years or more of service is eligible for gratuity on cessation of employment and it is computed at 15 days salary (last drawn salary) for each completed year of service. The scheme is funded with an insurance Company in the form of a qualifying insurance policy. The following tables summarise the components of net benefit expense recognised in the statement of profit and loss and the funded status and amounts recognised in the Balance Sheet for the gratuity plan. Statement of profit and loss Net employees benefit expense (recognised in personnel expenses): Particulars Current service cost Interest cost on benefit obligation Expected return on plan assets Net actuarial (gain)/ loss recognised in the year Past service cost Net employee benefit expense Actual return on plan assets Balance Sheet Details of provision for gratuity: Particulars Defined benefit obligation Fair value of plan assets Unrecognised past service cost Plan liability Changes in the present value of the defined benefit obligation are as follows: Particulars Opening defined benefit obligation Interest cost Past service cost Current service cost Benefits paid Actuarial (gains)/ losses on obligation Closing defined benefit obligation Gratuity March 31, 2012 68,883,615 5,717,340 26,256,016 (4,088,452) (17,347,115) 79,421,404 March 31, 2011 36,483,997 4,728,753 2,960,364 20,840,971 (778,684) 4,648,214 68,883,615 Gratuity March 31, 2012 79,421,404 (37,575,021) 41,846,383 March 31, 2011 68,883,615 (39,825,147) (1,434,381) 27,624,087 For the year ended March 31, 2012 26,256,016 5,717,340 (2,986,886) (16,198,555) 1,434,381 14,222,296 1,838,326 For the year ended March 31, 2011 20,840,971 4,728,753 (3,452,663) 6,692,887 1,525,983 30,335,931 1,407,990 For the year ended March 31, 2012 4,613,546 92,311,868 96,925,414 96,925,414 As at March 31, 2012 342,766,257 (157,395,971) 185,370,286 For the year ended March 31, 2011 3,278,688 67,089,753 70,368,441 70,368,441 As at March 31, 2011 178,832,237 (87,727,806) 91,104,431

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Changes in the fair value of plan assets are as follows: Particulars Opening fair value of plan assets Expected return Contributions by employer Benefits paid Actuarial gains/ (losses) Closing fair value of plan assets The Company expects to contribute Rs.2,500,000 to gratuity in the next year. The major categories of plan assets as a percentage of the fair value of total plan assets are as follows: Particulars Investment with insurer Gratuity March 31, 2012 100% March 31, 2011 100% Gratuity March 31, 2012 39,825,147 2,986,886 (4,088,452) (1,148,560) 37,575,021 March 31, 2011 34,887,552 3,452,663 4,308,289 (778,684) (2,044,673) 39,825,147

The overall expected rate of return on assets is determined based on the average long term rate of return expected on investment of the fund during the estimated term of the obligations. The principal assumptions used in determining gratuity: Particulars Discount rate Expected rate of return on assets Salary escalation rate per annum Gratuity March 31, 2012 8.50% 8.50% 10% for the first two years and 7% there after 15% March 31, 2011 8.30% 7.50% 10% for the first two years and 7% there after Age (Yrs) 21-30 31-40 41-59 Rates 5% 3% 2%

Rates of leaving service

The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors. Amounts for the current and previous three years are as follows: Particulars 31-Mar-12 Defined benefit obligation Plan assets Surplus/ (deficit) Experience adjustments on plan liabilities Experience adjustments on plan assets 79,421,404 37,575,021 (41,846,383) (17,347,115) (1,148,560) 31-Mar-11 68,883,615 39,825,147 (29,058,468) 4,648,214 (2,044,673) Gratuity 31-Mar-10 36,483,997 34,887,552 (1,596,445) 4,582,747 (1,549,280) 31-Mar-09 19,642,037 17,822,480 (1,819,557) 5,137,920 431,324 31-Mar-08 5,480,291 5,398,173 (82,118) 2,213,180 (93,594)

34. Expenditure in foreign currency (on accrual basis) Particulars Professional fees Travelling expenses* Membership and subscriptions Staff Training Software Development Total For the year ended March 31, 2012 419,741 1,839,316 191,642 2,450,519 For the year ended March 31, 2011 3,049,215 723,350 206,194 161,984 183,174 4,323,917

*Expense for the year ended March 31, 2011 includes an amount of Rs.365,796 incurred in connection with the public offer of equity shares included in miscellaneous expenditure which was adjusted against the securities premium account in accordance with section 78 of the Companies Act, 1956.

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35. Loan portfolio and provision for standard and non performing assets as at March 31, 2012: Provision for standard and non performing assets As at March 31, 2011 241,748,305 405,486,263 647,234,568 208,321,693 438,912,875 12,283,881 393,202,382 2,454,547,590 7,208,738,028 196,037,812 45,710,493 4,754,190,438 Provision made during the year Provision written back during the year As at March 31, 2012 As at March 31, 2012 Portfolio loans outstanding (Net) As at March 31, 2011 33,704,327,467 437,433,830 34,141,761,297

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Provision for standard and non performing assets As at March 31, 2010 73,220,710 48,028,811 121,249,521 525,985,047 357,457,452 168,527,595 Provision made during the year Provision written back during the year As at March 31, 2011 241,748,305 405,486,263 647,234,568 Portfolio loans outstanding (Net) As at March 31, 2011 33,704,327,467 437,433,830 34,141,761,297 As at March 31, 2010 29,197,926,190 48,028,810 29,245,955,000

Asset classification

Portfolio loans outstanding (Gross)

As at March 31, 2012

As at March 31, 2011

Standard assets

4,799,900,931

33,946,075,772

Sub-standard assets

2,847,749,972

842,920,093

Total

7,647,650,903

34,788,995,865

Note: The above table does not include loans placed as collateral towards asset assignment / securitisation transaction amounting to Rs.1,374,051,292, as the provisioning thereof is done collectively alongwith the loan asset assigned/ securitised.

Loan portfolio and provision for standard and non performing assets as at March 31, 2011:

Asset classification

Portfolio loans outstanding (Gross)

As at March 31, 2011

As at March 31, 2010

Standard assets

33,946,075,772

29,271,146,900

Sub-standard assets

842,920,093

96,057,621

Total

34,788,995,865

29,367,204,521

Note: The above table does not include loans placed as collateral towards asset assignment/ securitisation transaction amounting to Rs.1,239,837,922, as the provisioning thereof is done collectively alongwith the loan asset assigned/ securitised.

36. Leases Finance Lease: The Company has obtained computers on finance lease. The lease term is for three years, there is no escalation clause in the lease agreement. There are no restrictions imposed by lease arrangements. There are no subleases. Description Total minimum lease payments at the year end Less : amount representing finance charges Present value of minimum lease payments (Rate of interest: 13% p.a.) Contingent rent recognised in the statement of profit and loss Minimum Lease Obligations Not later than one year [Present value of Rs. 6,799,311 as on March 31, 2012 (Rs. 7,729,847 as on March 31, 2011)] Later than one year but not later than five years year [Present value of Rs.1,567,868 as on March 31, 2012 (Rs. 8,367,179 as on March 31, 2011)] Later than five years Operating Lease Office Premises: Head office and the branch office premises are obtained on operating lease. The branch office premises are generally rented on cancellable term for less than twelve months with no escalation clause and renewable at the option of the both the parties. However, the head office premise was obtained on a non-cancelable lease term of twenty four months with an escalation clause of five percent after every twelve months. There are no restrictions imposed by lease arrangements. There are no subleases. Lease payments during the year are charged to statement of profit and loss. Description Operating lease expenses recognised in the statement of profit and loss on a straight line basis Minimum lease obligations Not later than one year Later than one year but not later than five years Later than five years Vehicles: The Company has taken certain vehicles on cancellable operating lease. Total lease expense under cancellable operating lease during the year was Rs. 10,439,969 (Previous year: Rs.8,276,680). 37. The Company has given interest free collateral free loan to an employee benefit trust under the Employee Stock Purchase Scheme to provide financial assistance to its employees to purchase equity shares of the Company under such scheme. The loan is repayable by the Trust under a back to back arrangement by the Trust with the employees of the Company. The year-end balance for the total loan granted is Rs.54,168,606 (March 31, 2011: Rs. 60,906,186). 38. Dues to micro, small and medium enterprises There are no amounts that need to be disclosed in accordance with the Micro Small and Medium Enterprise Development Act, 2006 (the MSMED) pertaining to micro or small enterprises. For the year ended March 31, 2012, no supplier has intimated the Company about its status as micro or small enterprises or its registration with the appropriate authority under MSMED. 32,130,036 March 31, 2012 203,480,583 March 31, 2011 199,879,997 8,924,031 2,231,008 8,924,031 11,155,038 March 31, 2012 11,155,038 1,114,602 (4,088,452) 10,040,436 March 31, 2011 20,079,069 3,089,769 (778,684) 16,989,300 -

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39. Additional disclosures required by the RBI a. Capital Risk Adequacy Ratio (CRAR): March 31, 2012 35.39% 34.42% 0.97% March 31, 2011 45.39% 44.85% 0.54%

Item CRAR (%) CRAR Tier I Capital (%) CRAR Tier II Capital (%) b. c. d.

The Company has no exposure to the real estate sector directly or indirectly in the current and previous year. Outstanding of loans against security of gold as a percentage to total assets is 1.58% (March 31, 2011: 0.01%). Information on instances of fraud: No. of cases 580 234 Amount of fraud 25,091,317 133,313,975 Recovery 10,859,714 7,397,648 Amount written-off 14,231,603 125,916,327

Nature of fraud Cash embezzlement Loans given against fictitious documents e. Asset Liability Management

Maturity pattern of assets and liabilities as on March 31, 2012 (Rs. in Crores) Particulars Liabilities Borrowings from banks Market borrowings Assets Advances Investments 117.8 109.3 61.1 129.3 229.9 17.4 284.8 0.0 0.2 949.5 0.2 167.6 12.4 54.6 17.7 63.5 12.4 139.4 36.3 207.4 24.7 216.3 67.9 0.0 0.1 0.0 0.0 848.8 171.5 Upto 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 months to 1 year 1 to 3 years 3 to 5 years Over 5 years Total

Maturity pattern of assets and liabilities as on March 31, 2011: (Rs. in Crores) Particulars Liabilities Borrowings from banks Market borrowings Assets Advances* Investments 575.6 3.6 570.5 439.7 1041.8 732.7 287.3 6.9 0.4 0.2 3,654.9 3.8 282.8 17.6 162.0 19.7 179.5 86.1 234.7 93.4 420.8 99.8 505.4 110.8 12.2 10.6 1,797.4 438.1 Upto 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 months to 1 year 1 to 3 years 3 to 5 years Over 5 years Total

* Monthly recovery of 5% had been estimated on the overdue loan portfolio in the State of Andhra Pradesh. 40. Till the year ended March 31, 2011, the Company was using pre-revised Schedule VI to the Companies Act 1956, for preparation and presentation of its financial statements. During the year ended March 31, 2012, the revised Schedule VI notified under the Companies Act 1956, has become applicable to the Company. The Company has reclassified previous year figures to conform to this years classification. For and on behalf of the Board of Directors of SKS Microfinance Limited SD/- P .H. Ravikumar Non-Executive Chairman SD/- M.R.Rao Managing Director and Chief Executive Officer SD/- S.Dilli Raj Chief Financial Officer SD/Sudershan Pallap Company Secretary

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Notes
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