<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH [24], 2000
FILE NO. 333-30132
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ICICI BANK LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE
(Translation of Registrant's name into English)
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<S> <C> <C>
THE REPUBLIC OF INDIA 6029 NONE
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
ICICI TOWERS, BANDRA-KURLA COMPLEX, MUMBAI 400 051, INDIA 011-91-22-653-1414
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
CT CORPORATION SYSTEM, 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011 212-894-8940
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
MARGARET E. TAHYAR STUART K. FLEISCHMANN
DAVIS POLK & WARDWELL SHEARMAN & STERLING
99 GRESHAM STREET 599 LEXINGTON AVENUE
LONDON EC2V 7NG NEW YORK, NEW YORK 10022
ENGLAND 212-848-4000
011-44-171-418-1300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED(1) REGISTERED() PER ADS OFFERING PRICE REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
Equity shares, par value Rs. 10 per
share, each represented by 0.5
American Depositary Shares(3) $175,000,000 $46,200
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</TABLE>
(1) Assumes that all the equity shares sold in the offering are sold in the
United States.
(2) Calculated on the basis of the maximum aggregate offering price pursuant to
Rule 457(o) under the Securities Act of 1933.
(3) American Depositary Shares evidenced by American Depositary Receipts
issuable upon deposit of these Equity Shares are being registered under a
separate registration statement on Form F-6. Each American Depositary Share
will represent two equity shares.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and we are not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 17, 2000
PROSPECTUS
-- AMERICAN DEPOSITARY SHARES
LOGO
LOGO
LOGO
REPRESENTING -- EQUITY SHARES
------------------------
We are offering up to -- American Depositary Shares or ADSs of
ICICI Bank Limited outside India, including in the United States. Each American
Depositary Share represents two equity shares.
In India, our equity shares are listed on several Indian stock
exchanges, including the Stock Exchange, Mumbai, known as the BSE, and the
National Stock Exchange of India Limited, known as the NSE, the principal stock
exchanges in India.
We have applied to list our American Depositary Shares on the New York
Stock Exchange, subject to official notice of issuance, under the symbol "IBN".
It is anticipated that the price to the public per ADS will be
determined by reference to the prevailing market prices of our equity shares in
India after taking in account market conditions and certain other factors. The
last reported sale price of our equity shares on the BSE on March 16, 2000 was
Rs. 204.90 per equity share and the last reported sale price of our equity
shares on the NSE on March 16, 2000 was Rs. 203.95 per equity share.
PRICE $ -- PER AMERICAN DEPOSITARY SHARE
------------------------
INVESTING IN THE AMERICAN DEPOSITARY SHARES INVOLVES CERTAIN RISKS WHICH ARE
DESCRIBED IN THE RISK FACTORS BEGINNING ON PAGE 11.
------------------------
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UNDERWRITING
DISCOUNT AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS US
--------------- ------------ -----------
<S> <C> <C> <C>
Per ADS.......................................... $ $ $
Total............................................ $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have granted the underwriters the right to purchase up to an
additional -- American Depositary Shares at the public offering price, less
underwriting discount and commissions, within 30 days from the date of this
prospectus to cover over-allotments.
------------------------
JOINT GLOBAL COORDINATORS AND JOINT BOOK RUNNERS
(listed alphabetically)
MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER
, 2000
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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INFORMATION ABOUT THE OFFERING
Prospectus Summary..................... 3
The Offering........................... 5
Summary Financial and Operating Data... 7
Risk Factors........................... 11
Use of Proceeds........................ 24
Capitalization......................... 25
Exchange Rates......................... 26
INFORMATION ABOUT OUR BUSINESS
Overview of the Indian Banking
Sector............................... 27
Relationship with the ICICI Group...... 30
Business............................... 34
Overview............................. 34
History.............................. 34
Our Strategy......................... 35
Our Principal Business Activities.... 37
Corporate Banking.................... 38
Retail Banking....................... 48
Treasury............................. 57
Funding.............................. 61
Loan Portfolio....................... 62
Non-Performing Loans................. 65
Risk Management...................... 74
Technology........................... 85
Competition.......................... 87
Employees............................ 88
Properties........................... 89
Legal and Regulatory Proceedings..... 90
Selected Financial and Operating
Data................................. 91
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 98
Management............................. 124
Related Party Transactions............. 132
</TABLE>
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PAGE
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INFORMATION ABOUT INDIA
The Republic of India.................. 134
Reforms in Some Key Sectors of the
Indian Economy....................... 146
Overview of the Indian Financial
Sector............................... 149
Supervision and Regulation............. 158
Exchange Controls...................... 168
Nature of the Indian Securities Trading
Market............................... 169
Restriction on Foreign Ownership of
Indian Securities.................... 178
OTHER INFORMATION
Principal Shareholders................. 180
Dividends.............................. 181
Dilution............................... 182
Description of Equity Shares........... 183
Description of the American Depositary
Shares............................... 188
Taxation............................... 194
Underwriting........................... 198
Legal Matters.......................... 202
Experts................................ 202
Presentation of Financial
Information.......................... 202
Forward-Looking Statements............. 203
Where You Can Find Additional
Information.......................... 204
Enforcement of Civil Liabilities
Against Foreign Persons.............. 205
Selected Financial Information for
ICICI Bank under Indian GAAP......... 206
Significant Differences between Indian
GAAP and US GAAP..................... 208
FINANCIAL INFORMATION
Index to US GAAP Financial
Statements........................... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE OR JURISDICTION WHERE THE OFFER
IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
2
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary with the more detailed financial
information about us and our financial statements, including the notes to the
financial statements, included at the end of this prospectus. In this
prospectus, all references to "we", "our", "us" and "ICICI Bank" are to ICICI
Bank Limited. References to "ICICI" are to ICICI Limited on an unconsolidated
basis and references to the "ICICI group" and "the group" are to ICICI Limited
and its consolidated subsidiaries including us.
OVERVIEW
We are a private sector commercial bank organized under the laws of India
in 1994. We offer a wide range of banking products and services to corporate and
retail customers through a variety of delivery channels. We believe our emphasis
on providing value-added products and quality service which are responsive to
the financial needs of our customers will allow us to continue to gain market
share in our target customer markets. We are a subsidiary of ICICI Limited, one
of the largest of all Indian financial institutions, banks and finance companies
in terms of assets, a well-recognized brand in the Indian financial sector and
the first Indian company to list its securities on the New York Stock Exchange
(symbol: IC and IC.d). At December 31, 1999, we had the largest deposit base of
all of the new private sector banks in India. In fiscal 1999, our net income was
Rs. 503 million (US$ 12 million). At December 31, 1999, we had assets of Rs.
102.2 billion (US$ 2.3 billion) and stockholders' equity of Rs. 3.7 billion (US$
85 million). Our net income for the nine months ended December 31, 1999 was Rs.
1.0 billion (US$ 24 million).
Our organization has three key activities: corporate banking, retail
banking and treasury operations. In corporate banking, our primary goal is
building a strong asset portfolio consisting mainly of working capital and term
loans to large, well-established Indian corporations as well as to select middle
market companies in growth industries. We also seek to provide a wide variety of
fee-based corporate products and services, like documentary credits, cash
management services, standby letters of credit and treasury-based derivative
products that help us increase our non-interest income. In building our
corporate banking activities, we have capitalized on the strong relationships
that our parent company, ICICI, enjoys with many of India's leading
corporations. We intend to generate significant growth in revenues based on
increased synergies with ICICI and its group of companies.
The retail products and services we offer include payroll accounts and
other retail deposit products, online bill payment and remittance facilities,
credit cards, depositary share accounts, retail loans against time deposits and
loans against shares for subscriptions to initial public offerings. We have
built a base of demand and time deposits with 494,480 retail customer accounts
at December 31, 1999. We offer our customers a choice of delivery channels
including physical branches, automated teller machines or ATMs, telephone
banking call centers and the Internet. In recent years, we have expanded our
physical delivery channels, including bank branches and ATMs, to cover a total
of 121 locations in 40 cities throughout India at December 31, 1999.
Our treasury engages in domestic and foreign exchange operations. It seeks
to manage our balance sheet, including by maintaining required regulatory
reserves. In addition, our treasury seeks to optimize profits from our trading
portfolio by taking advantage of market opportunities using funds acquired from
the inter-bank markets and corporate deposits. Our trading portfolio includes
our regulatory portfolio as there is no restriction on active management of our
regulatory portfolio.
Since our inception in 1994, we have consistently used technology to
differentiate our products and services from those of our competitors. For
example, we were the first bank in India to offer Internet banking. Our
technology-driven products also include electronic commerce-based
business-to-business and business-to-consumer banking solutions, cash management
services and mobile phone banking services. To support our technology
initiatives, we have set up online real time transaction processing systems. We
remain focused on changes in customer needs and technological advances and seek
to remain at the forefront of electronic banking in India.
3
<PAGE> 5
OUR STRATEGY
Our objective is to be the leading provider of banking products through
technology-driven distribution channels servicing a targeted group of corporate
and retail customers.
To achieve our objective, the key elements of our strategy are to:
- Increase our market share in corporate banking;
- Build a profitable retail franchise;
- Apply Internet-related technologies to existing product offerings and
create new business opportunities on the Internet;
- Use technology to provide a multi-channel distribution network;
- Enhance our recurring fee income; and
- Emphasize conservative risk management practices to enhance our asset
quality.
We are also pursuing selective strategic initiatives and alliances to
further our business goals.
We believe the "ICICI" brand name is well established and one of the most
respected names in the financial services business in India. We believe that
this strength in brand identity, together with the ICICI group's strong
corporate relationships and existing retail investor base, provides us with a
unique opportunity to build a profitable retail franchise in India. Within
India, we have a target market of 34 million households, consisting principally
of professionals and high net worth individuals as well as selected wage and
salary earners.
RELATIONSHIP WITH THE ICICI GROUP
ICICI owns 74.2% of our equity shares. After giving effect to the offering,
ICICI will own -- % of our equity shares (assuming the underwriters'
over-allotment option is exercised in full). Under Indian law, no person holding
shares in a banking company can vote more than 10.0% of such company's
outstanding equity shares. This means that while ICICI owns 122,505,800 of our
equity shares, it can only vote 10.0% of our outstanding equity shares. Due to
this voting restriction and the fact that no other shareholder owns 10.0% or
more of our outstanding equity shares, ICICI effectively controls 28.0% of the
voting power of our outstanding equity shares. After the completion of the
offering, ICICI's effective voting power may decrease.
Traditionally, regulation in the banking and financial services sector in
India segregated the offering of various products and services between
commercial banks like us and financial institutions like ICICI. In recent years,
some of these restrictions have been relaxed, and there is some overlap between
the product offerings of ICICI and us. However, we believe our product range and
that of ICICI remain largely complementary and enable the ICICI group to attract
and retain customers by providing a complete range of financial products and
services.
KEY RISKS
You should consider carefully the information set forth in "Risk Factors"
as well as the other information contained in this prospectus in evaluating us
and our business before purchasing the ADSs offered in this prospectus. As more
fully described in the risk factors, investors in us should consider risks
relating to India, our business (especially interest rate risk, non-performing
loans and our relationship with ICICI) and the ADSs (especially the non-voting
nature of the ADSs).
Our principal corporate office is located at ICICI Towers, Bandra Kurla
Complex, Mumbai 400 051, India, our telephone number is 011-91-22-653-1414 and
our website address is www.icicibank.com.
4
<PAGE> 6
THE OFFERING
OFFERING................... -- ADSs being offered outside India which
would be approximately -- % of our issued and
outstanding equity shares after the offering,
assuming no exercise of the underwriters'
over-allotment option, and -- %, assuming the
underwriters exercise their over-allotment option
described below. The offering consists of the US
offering and the international offering.
US OFFERING............ -- ADSs being offered in the United States and
Canada.
INTERNATIONAL
OFFERING................... -- ADSs being offered outside the United
States, Canada and India to institutional investors
in Europe and the rest of the world.
OFFERING PRICE............. The offering price is $ -- per ADS.
UNDERWRITERS'
OVER-ALLOTMENT OPTION...... We have granted the underwriters in the offering an
option, exercisable for up to 30 days after the
date of this prospectus, to purchase up to --
additional ADSs to cover over-allotments, if any.
LISTING.................... We have applied to list our ADSs on the New York
Stock Exchange, subject to official notice of
issuance, under the symbol "IBN".
AMERICAN DEPOSITARY
SHARES..................... Each ADS represents two equity shares, par value
Rs. 10 per share. The ADSs will be evidenced by
American Depositary Receipts.
EQUITY SHARES TO BE
OUTSTANDING AFTER THE
OFFERING................. -- equity shares (including any equity shares
to be issued in the event the underwriters'
over-allotment option is exercised in full in the
offering).
USE OF PROCEEDS............ The net proceeds from the offering will be used for
funding future growth and for other general
corporate purposes. The net proceeds from the
offering will also allow us to strengthen our
capital adequacy so as to be more in line with the
capitalization of leading international banks and
to be in compliance with capital adequacy
requirements in India.
DIVIDENDS.................. We have declared and paid dividends since fiscal
1996. The declaration, amount and payment of
dividends are subject to the recommendation of our
board of directors and the approval of our
shareholders. Holders of equity shares and ADSs
will be entitled to dividends paid, if any. Holders
of ADSs will be entitled to full dividends in
fiscal 2001 and will not be entitled to any
dividends in fiscal 2000.
VOTING RIGHTS.............. The ADSs will have no voting rights. Under the
deposit agreement, the depositary will vote the
equity shares deposited with it as directed by our
board of directors. See "Description of the
American Depositary Shares -- Voting Rights".
INDIAN TAXATION............ Any transfer of ADSs or equity shares outside India
by a non-resident investor to another non-resident
investor does not give rise to Indian capital gains
tax. Subject to any relief under any relevant
double taxation treaty, a gain arising on the sale
of an equity share to a resident of India or where
the sale is made inside India will generally give
rise to a liability for Indian capital gains tax.
During the period the underlying equity shares are
held by non-resident investors on a transfer from
the depositary upon redemption of ADSs, the
provisions of the avoidance of double taxation
agreement entered into by the government of India
with the country of
5
<PAGE> 7
residence of the non-resident investors will be
applicable in the matter of taxation of any capital
gain arising on transfer of the equity shares. The
double taxation treaty between the United States
and India does not provide US residents with any
relief from Indian tax on capital gains. The exact
procedures for the computation and collection of
Indian capital gains tax are not settled. See
"Taxation -- Indian Tax -- Taxation on Sale of
Equity Shares or ADSs".
6
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SUMMARY FINANCIAL AND OPERATING DATA
Our summary financial and other data at year-end fiscal 1998 and 1999 and
for fiscal 1997, 1998 and 1999 and at and for the nine months ended December 31,
1999 have been derived from our financial statements prepared in accordance with
US GAAP and included in this prospectus. These financial statements have been
audited by KPMG, independent accountants. The summary financial and other data
at year-end fiscal 1997 and at nine months ended December 31, 1998 have been
derived from our financial statements that are not included in this prospectus.
The summary financial and other data for the nine months ended December 31, 1998
have been derived from our unaudited interim financial statements prepared in
accordance with US GAAP. Capital adequacy ratios have been calculated both from
the financial statements prepared in accordance with Indian GAAP and the
financial statements prepared in accordance with US GAAP. Five years of selected
Indian GAAP financial information is given in "Selected Financial Information
for ICICI Bank under Indian GAAP".
You should read the following data with the more detailed information
contained in "Selected Financial and Operating Data", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements, included in this prospectus. Historical results do not necessarily
predict the results in the future. The results for the nine months ended
December 31, 1999 are not necessarily indicative of the results to be expected
for the full fiscal 2000.
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<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------- --------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
--------- --------- --------- -------- --------- --------- --------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME
STATEMENT DATA:
Interest revenue....... Rs. 1,843 Rs. 2,579 Rs. 5,390 US$ 124 Rs. 3,758 Rs. 5,837 US$ 134
Interest expense....... (1,170) (1,854) (4,244) (98) (2,962) (4,783) (110)
--------- --------- --------- -------- --------- --------- --------
Net interest revenue... 673 725 1,146 26 796 1,054 24
Provisions for credit
losses............... (187) (360) (540) (12) (398) (218) (5)
--------- --------- --------- -------- --------- --------- --------
Net interest revenue
after provisions for
credit losses........ 486 365 606 14 398 836 19
Non-interest revenue,
net.................. 317 591 866 20 551 1,343 31
Net revenue............ 803 956 1,472 34 949 2,179 50
Non-interest expense... (406) (554) (799) (18) (517) (850) (19)
--------- --------- --------- -------- --------- --------- --------
Income before taxes.... 397 402 673 16 432 1,329 31
Income tax expense..... (155) (104) (170) (4) (112) (303) (7)
--------- --------- --------- -------- --------- --------- --------
Net income............. Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 320 Rs. 1,026 US$ 24
========= ========= ========= ======== ========= ========= ========
PER COMMON SHARE DATA:
Net income(2).......... Rs. 1.61 Rs. 1.84 Rs. 3.05 US$ 0.07 Rs. 1.94 Rs. 6.22 US$ 0.15
Dividends.............. 1.00 1.00 1.20 0.03 -- -- --
Book value............. 11.67 14.98 17.15 0.39 16.02 22.24 0.51
Common shares
outstanding at end of
period (in millions
of common shares).... 150 165 165 165 165
Weighted average common
shares outstanding
(in millions of
common shares)....... 150 162 165 165 165
</TABLE>
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<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------------------------------ ------------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
---------- ---------- ---------- --------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE
SHEET DATA:
Total assets......... Rs. 19,766 Rs. 35,278 Rs. 74,825 US$ 1,720 Rs. 59,346 Rs. 102,205 US$ 2,349
Loans, net(3)........ 8,374 12,765 27,597 634 20,880 37,749 868
Securities........... 3,816 1,476 3,963 91 2,912 4,402 101
Non-performing loans,
net................ -- 179 733 17 594 882 20
Total liabilities.... 18,016 32,807 71,995 1,655 56,703 98,536 2,264
Long-term debt....... 89 129 1,764 41 1,110 1,734 40
Deposits............. 13,476 26,290 60,729 1,396 46,424 85,002 1,953
Stockholders'
equity............. 1,750 2,471 2,830 65 2,643 3,669 85
PERIOD AVERAGE(4):
Total assets......... 15,958 26,661 52,605 1,209 48,715 82,044 1,886
Interest-earning
assets............. 11,730 19,467 42,521 977 38,599 62,349 1,433
Loans, net(3)........ 7,224 9,498 18,546 426 16,623 28,469 654
Total liabilities.... 14,270 24,351 49,937 1,148 46,142 78,779 1,811
Interest-bearing
liabilities........ 9,484 17,185 41,212 947 37,837 63,202 1,453
Long-term debt....... 76 109 1,127 26 958 1,763 41
Total deposits....... 9,923 18,539 39,455 907 36,977 62,234 1,430
Of which:
Interest-bearing
deposits........ 7,753 15,140 35,916 825 33,533 56,608 1,301
Stockholders'
equity............. 1,688 2,310 2,668 61 2,573 3,265 75
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS
AT OR FOR THE YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------ --------------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- -----------
(IN PERCENTAGES)
<S> <C> <C> <C> <C> <C>
PROFITABILITY(5):
Net income as a percentage of:
Average total assets.................... 1.52% 1.12% 0.96% 0.88% 1.67%
Average stockholders' equity............ 14.34 12.90 18.85 16.58 41.90
Dividend payout ratio(6).................. 61.98 59.89 43.30 -- --
Spread(7)................................. 3.37 2.46 2.38 2.54 2.39
Net interest margin(8).................... 5.74 3.72 2.70 2.75 2.25
Cost-to-income ratio(9)................... 41.01 42.10 39.71 38.38 35.47
Cost-to-average assets ratio(10).......... 2.54 2.08 1.52 1.42 1.38
CAPITAL:
Total capital adequacy ratio(11).......... 13.04 13.48 11.06 11.60 9.41
Tier 1 capital adequacy ratio(11)......... 12.71 13.38 7.32 9.12 6.60
Tier 2 capital adequacy ratio(11)......... 0.33 0.10 3.74 2.48 2.81
Average stockholders' equity as a
percentage of average total assets...... 10.58 8.66 5.07 5.28 3.98
ASSET QUALITY:
Gross non-performing loans as a percentage
of gross loans.......................... 2.18 4.58 5.66 6.53 5.06
Net non-performing loans as a percentage
of net loans............................ -- 1.40 2.66 2.84 2.34
Net non-performing loans as a percentage
of total assets......................... -- 0.51 0.98 1.00 0.86
Allowance for credit losses as a
percentage of gross non-performing
loans................................... 100.00 70.36 54.56 58.08 55.11
Allowance for credit losses as a
percentage of gross total loans......... 2.18 3.22 3.09 3.79 2.79
</TABLE>
- ---------------
(1) Rupee amounts for fiscal 1999 and for the nine months ended December 31,
1999 have been translated into US dollars using the noon buying rate in
effect on December 31, 1999 of Rs. 43.51 = US$ 1.00.
(2) During these periods, we have not issued any securities convertible into
equity shares that could dilute our equity shares.
(3) Net of allowance for credit losses in respect of non-performing loans.
(4) Average balances are the daily average outstanding amounts.
(5) Profitability data for the nine months ended December 31, 1998 and 1999 is
annualized.
(6) Represents the ratio of total dividends payable on common stock, including
the dividend distribution tax, as a percentage of net income.
(7) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(8) Represents the ratio of net interest revenue to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(9) Represents the ratio of non-interest expense to the sum of net interest
revenue and non-interest revenue.
(10) Represents the ratio of non-interest expense to average total assets.
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(11) Our capital adequacy is computed in accordance with the Reserve Bank of
India guidelines. The computation is based on our financial statements
prepared in accordance with Indian GAAP. Selected financial information
under Indian GAAP and a comparison between Indian GAAP and US GAAP are
included in this prospectus. Our total capital adequacy ratio computed
under the applicable Reserve Bank of India guidelines and based on our
financial statements prepared in accordance with US GAAP was 9.08% at
December 31, 1999. Using the same basis of computation, our Tier 1 capital
adequacy ratio was 6.69% and our Tier 2 capital adequacy ratio was 2.39% at
December 31, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Capital".
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RISK FACTORS
You should carefully consider the following risk factors as well as the
other information contained in this prospectus in evaluating us and our business
before purchasing the ADSs offered by this prospectus.
RISKS RELATING TO INDIA
A SLOWDOWN IN ECONOMIC GROWTH IN INDIA COULD CAUSE OUR BUSINESS TO SUFFER.
Our performance and the quality and growth of our assets are necessarily
dependent on the health of the overall Indian economy. The Indian economy has
grown significantly over the past few years with real GDP increasing from Rs.
7,990.8 billion (US$ 183.7 billion) in fiscal 1994 to Rs. 11,122.1 billion (US$
255.6 billion) in fiscal 1999. However, there was a slowdown in industrial
growth in fiscal 1997 and fiscal 1999. Industrial production in India suffered
during these years as a result of the global downturn in commodity prices,
particularly in the man-made fibers, iron and steel and textile sectors. This
slowdown in industrial growth also had an adverse impact on manufacturing
industries, including the light manufacturing industry. Although industrial
growth has recovered significantly in fiscal 2000, any future slowdown in the
Indian economy or future volatility of global commodity prices could adversely
affect our borrowers and contractual counterparties. This in turn could
adversely affect our business, including our ability to grow our asset
portfolio, the quality of our assets, and our ability to implement our strategy.
A SIGNIFICANT CHANGE IN THE INDIAN GOVERNMENT'S ECONOMIC LIBERALIZATION AND
DEREGULATION POLICIES COULD DISRUPT OUR BUSINESS AND CAUSE THE PRICE OF OUR
EQUITY SHARES AND OUR ADSS TO GO DOWN.
We are an Indian company and all our operations are conducted, and almost
all of our assets and customers are located, in India. The Indian government has
traditionally exercised and continues to exercise a dominant influence over many
aspects of the economy. Its economic policies have had and could continue to
have a significant effect on private-sector entities, including us, and on
market conditions and prices of Indian securities, including our equity shares
and our ADSs. However, since 1991, the Indian government has adopted a policy of
deregulating the domestic economy, has been opening the economy to foreign trade
and has been reforming the framework for foreign investment.
Since 1996, the government of India has changed four times. The most recent
parliamentary elections were completed in October 1999. A coalition government
led by the Bhartiya Janata Party was formed with A. B. Vajpayee as the Prime
Minister of India. Although the Vajpayee government has continued India's
current economic liberalization and deregulation policies, a significant change
in these policies could adversely affect business and economic conditions in
India in general as well as our business, our future financial performance and
the price of our equity shares and our ADSs.
FINANCIAL INSTABILITY IN OTHER COUNTRIES, PARTICULARLY EMERGING MARKET
COUNTRIES IN ASIA, COULD DISRUPT OUR BUSINESS AND CAUSE THE PRICE OF OUR
EQUITY SHARES AND OUR ADSS TO GO DOWN.
The Indian market and the Indian economy are influenced by economic and
market conditions in other countries, particularly emerging market countries in
Asia. Financial turmoil in Asia, Russia and elsewhere in the world in recent
years had affected different sectors of the Indian economy in varying degrees.
Although economic conditions are different in each country, investors' reactions
to developments in one country can have adverse effects on the securities of
companies in other countries, including India. A loss of investor confidence in
the financial systems of other emerging markets may cause increased volatility
in Indian financial markets and, indirectly, in the Indian economy in general.
Any worldwide financial instability could also have a negative impact on the
Indian economy. Financial disruptions may happen again and could have an adverse
effect on our business, our future financial performance and the price of our
equity shares and our ADSs.
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DETERIORATING TRADE DEFICITS AND ECONOMIC SANCTIONS COULD CAUSE OUR
BUSINESS TO SUFFER AND THE PRICE OF OUR EQUITY SHARES AND OUR ADSS TO GO
DOWN.
India's trade relationships with other countries can also influence Indian
economic conditions. In fiscal 1999, India experienced a trade deficit of Rs.
554.8 billion (US$ 12.8 billion). If trade deficits increase or are no longer
manageable, the Indian economy, our business and the price of our equity shares
and our ADSs, could be adversely affected. In May 1998, the United States
imposed economic sanctions against India in response to India's continued
testing of nuclear devices. These sanctions have now been partly lifted.
However, we cannot be sure that these sanctions would not be reactivated or that
additional economic sanctions of this nature will not be imposed by the United
States or any other country, or that such sanctions will not have a material
adverse effect on our business, our future financial performance or the price of
our equity shares and our ADSs.
A SIGNIFICANT CHANGE IN THE COMPOSITION OF THE INDIAN ECONOMY MAY AFFECT
OUR BUSINESS.
The Indian economy is in a state of transition. The share of the services
sector of total GDP is rising while that of the industrial and agricultural
sector is declining. It is difficult to gauge the impact of such fundamental
economic changes on our business. We cannot be certain that these changes will
not have a material adverse effect on our business.
IF REGIONAL HOSTILITIES INCREASE, OUR BUSINESS COULD SUFFER AND THE PRICE
OF OUR EQUITY SHARES AND OUR ADSS COULD GO DOWN.
India has from time to time experienced social and civil unrest and
hostilities with neighboring countries. During May-July 1999, there were armed
conflicts over parts of Kashmir involving the Indian army and infiltrators from
Pakistan into Indian territory. India and Pakistan were in a heightened state of
hostilities with significant loss of life and troop conflicts. The hostilities
have since substantially abated. The hostilities between India and Pakistan are
particularly threatening because both India and Pakistan are nuclear powers.
Additionally, Pakistan experienced a military coup in October 1999 and has been
under military rule since that time, resulting in further tensions between India
and Pakistan. Although these recent hostilities and the change of government in
Pakistan did not have an adverse impact on our business, hostilities and
tensions may occur in the future and on a wider scale. These hostilities and
tensions could lead to political or economic instability in India and a possible
adverse effect on our business, our future financial performance and the price
of our equity shares and our ADSs.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS IS PARTICULARLY VULNERABLE TO VOLATILITY IN INTEREST RATES.
Our results of operations are substantially dependent upon the level of our
net interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
Interest rates are highly sensitive to many factors beyond our control,
including deregulation of the financial sector in India, the Reserve Bank of
India's monetary policies, domestic and international economic and political
conditions and other factors. Changes in market interest rates could affect the
interest rates charged on the interest-earning assets differently than the
interest rates paid on interest-bearing liabilities. This difference could
result in an increase in interest expense relative to interest income leading to
a reduction in our net interest income. Our asset-liability gap position at
March 31, 1999 was such that, if interest rates increased by 100 basis points,
we believe that our net interest revenue for fiscal 2000 would fall by
approximately Rs. 35 million (US$ 804,000) which would have been 6.9% of our net
income for fiscal 1999. Income from treasury operations is particularly
vulnerable to interest rate volatility. If interest rates increased by 100 basis
points, we believe that the value of our fixed income trading portfolio would
fall, on a tax adjusted basis, by approximately Rs. 260 million (US$ 6 million)
which would have been 51.7% of our net income for fiscal 1999. The volatility in
interest rates could adversely affect our business, our future financial
performance and the price of our equity shares and our ADSs.
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OUR LIMITED CAPITAL BASE COULD EXPOSE US TO HIGHER RISK IN THE EVENT OF
SUDDEN CHANGES IN THE INDIAN FINANCIAL MARKETS AND COULD RESTRICT OUR
ABILITY TO GROW OUR BUSINESS AS ANTICIPATED.
We are a relatively small participant in the Indian banking industry. Our
limited capital base severely restricts our ability to absorb sudden changes in
the financial markets such as tightening of monetary policy, increases in
interest rates and significant reductions in deposits. The Indian economy is
prone to these sudden changes as a result of its political and economic
situation. Therefore, any sudden change in the Indian economy could have a
material adverse effect on our business and our future financial performance and
may restrict our ability to grow our business as anticipated.
OUR FUNDING IS PRIMARILY SHORT-TERM AND IF DEPOSITORS DO NOT ROLL OVER
DEPOSITED FUNDS UPON MATURITY OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Most of our funding requirements are met through short-term funding
sources, primarily in the form of deposits including inter-bank deposits.
However, a portion of our assets have medium or long-term maturities, creating a
potential for funding mismatches. At December 31, 1999, savings deposits and
non-interest-bearing demand deposits together constituted 14.5% of our total
deposits and 12.5% of our total liabilities. In addition, time deposits with a
residual maturity of one year or less constituted 79.4% of our total deposits
and 68.5% of our total liabilities. At December 31, 1999, loans having residual
maturity of one year or more constituted 23.6% of our net assets. In our
experience, a substantial portion of our customer deposits has been rolled over
upon maturity and has been, over time, a stable source of funding. However, no
assurance can be given that this experience will continue. If a substantial
number of our depositors do not roll over deposited funds upon maturity, our
liquidity position could be adversely affected. This could have a material
adverse effect on our business, our future financial performance and the price
of our equity shares and our ADSs.
WE COULD BE SUBJECT TO VOLATILITY IN INCOME FROM OUR TREASURY OPERATIONS.
Non-interest revenue from trading account assets (primarily government of
India securities), securities and foreign exchange transactions represented
33.7% of our net revenue for fiscal 1999 and 42.9% of our net revenue for the
nine month period ended December 31, 1999. This treasury revenue is vulnerable
to volatility in the market caused by, among other things, changes in interest
rates, foreign currency exchange rates and equity prices. Any increase in
interest rates would have an adverse effect on the value of our fixed income
trading portfolio and our net interest revenue. For a fuller description of the
effect of an increasing interest rate environment, see "-- Our business is
particularly vulnerable to volatility in interest rates". Any decrease in our
income due to volatility in income from treasury operations could have a
material adverse effect on the price of our equity shares and our ADSs.
WE HAVE HIGH CONCENTRATIONS OF LOANS TO CERTAIN CUSTOMERS AND TO CERTAIN
SECTORS AND IF ANY OF THESE LOANS WERE TO BECOME NON-PERFORMING, THE
QUALITY OF OUR LOAN PORTFOLIO COULD BE ADVERSELY AFFECTED.
At December 31, 1999, our 10 largest loans, based on outstanding balances,
totaled approximately Rs. 4.3 billion (US$ 100 million), which represented
approximately 11.2% of our total loans and 118.4% of our stockholders' equity.
Our largest single loan exposure, based on outstanding balances at that date,
was Rs. 800 million (US$ 18 million), which represented approximately 2.1% of
our total loans and approximately 21.8% of our stockholders' equity. At December
31, 1999, the largest group of companies under the same management control
accounted for approximately 2.1% of our total loans and approximately 21.8% of
our stockholders' equity. At December 31, 1999, none of our 10 largest loans
based on outstanding balances was classified as non-performing and our largest
non-performing loan was our 40th largest loan overall based on outstanding
principal balance. However, if any of our ten largest loans was to become
non-performing, the quality of our loan portfolio and the price of our equity
shares and our ADSs could be adversely affected.
At December 31, 1999, we had extended loans to nearly every industrial
sector in India. At that date, approximately 58.7% of our gross non-performing
loan portfolio was concentrated in three sectors: light manufacturing, textiles
and iron and steel with 17.0% of our total loan portfolio being concentrated in
these three sectors. Recently, these sectors have been adversely affected in
varying degrees by declining commodity prices
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of man-made fibers, iron and steel and textiles, the revaluation of south-east
Asian currencies and the slowdown in industrial growth in India.
Industry-specific difficulties in other sectors could increase our level of non-
performing loans and adversely affect our business, our future financial
performance and the price of our equity shares and our ADSs.
BECAUSE THE REGULATIONS FOR THE CLASSIFICATION AND TREATMENT OF
NON-PERFORMING LOANS IN INDIA ARE NOT AS STRINGENT AS REGULATIONS IN THE US
AND OTHER DEVELOPED ECONOMIES, WE MAY CLASSIFY AND RESERVE AGAINST
NON-PERFORMING LOANS SIGNIFICANTLY LATER THAN OUR COUNTERPARTS IN OTHER
DEVELOPED COUNTRIES AND WE MAY NOT SET ASIDE COMPARABLE AMOUNTS OF
ALLOWANCE FOR CREDIT LOSSES.
The Indian financial system is primarily regulated by the Reserve Bank of
India. Rules and regulations relating to banks and financial institutions in
India are less restrictive than in the United States and other developed
countries.
The most significant area is the treatment of non-performing loans in
India. We treat loans as non-performing and place them on a non-accrual basis
(that is, we no longer recognize payments of interest unless and until payments
are actually received) when we determine that interest or principal is past due
beyond specified periods or that the payment of interest or principal is
doubtful. Under Indian practice, loans are classified as non-performing when
interest or principal is past due for 180 days (typically two payments).
Payments on most loans are on quarterly basis. This time period is much longer
than in the United States and other developed countries where loans are
generally placed on a non-accrual basis when any payment, including any periodic
principal payment, is not paid for a 90-day period. In addition, under US GAAP,
we provide for loan losses based on our internal subjective assessment of the
possibility of recovery of such loans based principally on the extent to which
we are able to capture sufficient cash flows from the borrower and secondarily
on the realizable value of collateral. We may classify and reserve against
non-performing loans significantly later than they would be in other developed
countries. As a result, we may not set aside comparable amounts of allowance for
credit losses as would financial institutions in the United States or other
developed countries.
IF WE ARE UNABLE TO CONTROL AND REDUCE THE LEVEL OF NON-PERFORMING LOANS IN
OUR PORTFOLIO, OUR BUSINESS WILL SUFFER.
Our gross non-performing loans represented 5.7% of our gross loan portfolio
at March 31, 1999 and 5.1% at December 31, 1999. Our net non-performing loans
represented 2.7% of our net loans at March 31, 1999 and 2.3% at December 31,
1999. Although we believe that our allowance for loan losses is adequate to
cover all known losses in our portfolio of assets, the level of our
non-performing loans is higher than the average percentage of non-performing
loans in the portfolios of banks in more developed countries. In addition, in
absolute terms, our gross non-performing loans grew by Rs. 1.0 billion (US$ 23
million) or 167.1% in fiscal 1999 and by Rs. 417 million (US$ 10 million) or
223.0% in fiscal 1998. As a percentage of net loans, net non-performing loans
increased to 2.7% at year-end fiscal 1999 from 1.4% at year-end fiscal 1998 and
none at year-end fiscal 1997. The growth in non-performing loans in fiscal 1999
can be attributed to several factors, including a sharp decline in commodity
prices, which reduced profitability for certain of our borrowers, a slowdown in
industrial growth, increased competition arising from economic liberalization in
India and the restructuring of certain Indian companies in the iron and steel
and textiles sectors. Also, at December 31, 1999, 4.9% of our gross directed
lending loan portfolio was non-performing compared to 4.7% at March 31, 1999,
4.4% at March 31, 1998 and 1.7% at March 31, 1997. Under directed lending
regulations in India, we are required to lend 40.0% of our net bank credit to
priority sectors, including, among others, small-scale industries, the
agriculture sector and small businesses, and lend 12.0% of our net bank credit
in the form of export credit. We may experience a significant increase in
non-performing loans in our directed lending portfolio because economic
difficulties are likely to affect these borrowers more severely and we are less
able to control the quality of this portfolio.
A number of factors which are not in our control will likely affect our
ability to control and reduce non-performing loans, including developments in
the Indian economy, movements in global commodity markets, global competition,
interest rates and exchange rates. Although we are increasing our efforts to
improve collections and to foreclose on existing non-performing loans, as
discussed below, we may not be successful in our efforts and the overall quality
of our loan portfolio may deteriorate in the future. Our recent entry into the
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credit card business and our upcoming entry in the auto loan and home mortgage
loan business during fiscal 2001 may cause our non-performing loans to increase
and the overall quality of our loan portfolio to further deteriorate. If we are
unable to control and reduce our non-performing loans, we may be unable to
execute our business plan as expected and that could adversely affect the price
of our equity shares and our ADSs. Further, our growth-oriented strategy has
involved a significant increase in our loan portfolio in recent years which
could result in additional non-performing loans.
IF WE ARE UNABLE TO IMPROVE OUR ALLOWANCE FOR CREDIT LOSSES AS A PERCENTAGE
OF NON-PERFORMING LOANS, THE PRICE OF THE EQUITY SHARES AND THE ADS COULD
GO DOWN.
Our allowance for credit losses represented 55.1% of our gross
non-performing loans at December 31, 1999 compared to 54.6% at March 31, 1999.
Although we believe that our allowance for credit losses is adequate to cover
all known losses in our asset portfolio and is in accordance with US GAAP, we
cannot assure you that our allowance will be adequate to cover any further
deterioration in our non-performing loan portfolio. In the event of any further
deterioration in our non-performing loan portfolio, there will be an adverse
impact on our net income.
WE MAY BE UNABLE TO FORECLOSE ON OUR COLLATERAL WHEN BORROWERS DEFAULT ON
THEIR OBLIGATIONS TO US WHICH MAY RESULT IN FAILURE TO RECOVER THE EXPECTED
VALUE OF COLLATERAL SECURITY EXPOSING US TO A POTENTIAL LOSS.
Our loan portfolio consists primarily of working capital loans that are
typically secured by a first lien on inventory, receivables and other current
assets. In some cases, we may take further security of a first or second lien on
fixed assets, a pledge of financial assets like marketable securities, corporate
guarantees and personal guarantees.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result in, or be accompanied by, a decrease
in the value of the collateral. These delays can last for up to several years
leading to deterioration in the physical condition and market value of the
collateral. Collateral, consisting of inventory and receivables, is particularly
likely to decrease in value due to any delay in enforcement. In the event a
borrower makes an application for relief to a specialized quasi-judicial
authority called the Board for Industrial and Financial Reconstruction,
foreclosure and enforceability of collateral is normally stayed.
We cannot guarantee that we will be able to realize the full value on our
collateral, due to, among other things, delays on our part in taking immediate
action, delays in bankruptcy foreclosure proceedings, defects in the perfection
of collateral and fraudulent transfers by borrowers. We may also face problems
in realizing the full value of any fixed assets in which we have only a
subordinated or second lien security interest if the party having the first lien
security interest has already partly or fully realized the value of this
collateral.
Additionally, we are a member of a consortium of banks for which we are not
the lead lender for 12, or 26.1% of our non-performing loans, including, four of
our top ten non-performing loans. Accordingly, we do not control the
negotiation, restructuring or settlement of these loans and may not be able to
enforce these obligations on the most advantageous terms to us. A failure to
recover the expected value of collateral security could expose us to a potential
loss, which could reduce the value of our stockholders' equity and adversely
affect our business.
WE FACE GREATER CREDIT RISKS THAN BANKS IN MORE DEVELOPED COUNTRIES.
Our principal business is providing financing to our clients, virtually all
of whom are based in India. Our loans to middle market companies can be expected
to be more severely affected than loans to large corporations by adverse
developments in the Indian economy due to their generally weaker financial
position. In all of these cases, we are subject to the credit risk that our
borrowers may not pay us in a timely fashion or at all. The credit risk of all
our borrowers is higher than in other developed countries due to the higher
uncertainty in our regulatory, political and economic environment and
difficulties that many of our borrowers face in adapting to instability in world
markets and rapid technological advances taking place across the world. Unlike
in most other
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developed countries, we are required to do directed lending to certain sectors
specified by the Reserve Bank of India. For a further discussion of the Reserve
Bank of India regulations applicable to Indian commercial banks see,
"Supervision and Regulation". These sectors generally have greater credit risks
than our normal lending business. Higher credit risk may expose us to potential
losses which would adversely affect our business, our future financial
performance and the price of our equity shares and our ADSs.
WE ARE SUBJECT TO THE CONTROL OF ICICI AND COULD BE SUBJECT TO THE CONTROL
OF OTHER SHAREHOLDERS.
Although ICICI will own -- % of our outstanding equity shares after the
completion of the offering, its voting power is limited due to Indian
regulations that require that holders of 10.0% or more of a bank's outstanding
equity shares may only vote 10.0% of the outstanding equity shares. Due to this
voting restriction, and the fact that no other shareholder owns 10.0% or more of
our outstanding equity shares, ICICI currently effectively controls 28.0% of the
voting power of our outstanding equity shares. For a more complete description
of this voting restriction, see "Relationship with the ICICI Group -- Capital,
Dividend and Voting Limitations". After the completion of the offering, ICICI's
effective voting power may decrease. The shares issued in this offering will be
-- % of the outstanding equity shares and will be voted by the depositary as
directed by our board. The remainder of our outstanding equity shares is widely
dispersed among other institutional investors and corporate bodies and
individual domestic investors.
Under the terms of our organizational documents, ICICI is entitled to
appoint one third of the members of our board of directors, including the
Executive Chairman and Managing Director of our board. ICICI is also permitted
to vote on the appointment of the remaining members of our board. ICICI has
appointed two directors to our current eight member board. Accordingly, ICICI
may be able to exercise effective control over our board and over matters
subject to a shareholder vote.
Additionally, because of the limited voting power of ICICI, it is possible
that a consortium of shareholders that acquires a portion of our outstanding
equity shares could effectively control us. If such shareholders decide to
significantly alter our business plan and change or terminate our relationship
with the ICICI group, it could have an adverse effect on the price of our equity
shares and our ADSs. Under the current regulations, the approval of the Reserve
Bank of India is required before we can register the transfer of shares for an
individual or group which acquires 5.0% or more of our total paid up capital.
WE WORK CLOSELY WITH ICICI AND CONFLICTS OF INTEREST WITH ICICI OR THE
DETERIORATION OF OUR RELATIONSHIP WITH ICICI COULD ADVERSELY AFFECT OUR
BUSINESS.
We offer products and services which largely complement the product and
services offered by ICICI and other ICICI group members. We seek to take
advantage of the customer relationships of the ICICI group. Because both ICICI
and we are offering some similar financial products and services, there may be
conflicts of interest between ICICI and us that could adversely affect our
business and the price of our equity shares and our ADSs. There is a risk that
ICICI may make business decisions which are to its advantage or the advantage of
other group companies at our expense. For example, ICICI may choose to enter or
increase its presence in certain markets in which we operate.
Additionally, in the future, there is a risk that the Reserve Bank of India
may direct ICICI to divest some of its holdings in us. Under current guidelines,
ICICI is required by the Reserve Bank of India to reduce its ownership interest
in us to no more than 40.0% at some point in the future. Any such reduction in
ownership interest could result in our inability to continue to capitalize on
the corporate and retail relationships of the ICICI group, including reducing or
eliminating access to ICICI clients, the ICICI group's joint marketing teams and
the services of other ICICI group entities. This would adversely affect our
business, our future financial performance and the price of our equity shares
and our ADSs. However, a discussion paper issued by the Reserve Bank of India in
January 1999 states that if a financial institution chooses to provide
commercial banking services directly, permission to create a 100.0% owned
banking subsidiary would be considered. ICICI is presently in discussion with
the Reserve Bank of India to determine whether and to what extent it may still
be required to sell or reduce its interest in us.
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ANY DETERIORATION IN THE FINANCIAL CONDITION OF OUR PARENT COMPANY, ICICI,
COULD ADVERSELY IMPACT OUR BUSINESS.
We fund our business operations independently of ICICI and our business
strategy and the execution of that strategy is independent from the business and
strategy of ICICI. However, any deterioration in ICICI's financial condition may
adversely impact the ICICI brand name and, indirectly, our reputation and affect
the confidence of our customers in us. A reduction in consumer confidence could
affect our ability to raise deposits from and make loans to customers and
adversely impact our business and our future financial performance.
IF WE ARE UNABLE TO MANAGE OUR RAPID GROWTH, OUR BUSINESS COULD BE
DISRUPTED AND THE PRICE OF THE EQUITY SHARES AND THE ADSS COULD GO DOWN.
Since our inception in 1994, we have experienced rapid growth. Our asset
growth rate has been significantly higher than the Indian GDP growth rate over
the last five fiscal years. Our balance sheet growth was 78.5% in fiscal 1998,
112.1% in fiscal 1999 and 36.6% in the nine months ended December 31, 1999
compared to March 31, 1999. We expect to continue to implement a strategy of
aggressive growth in our loans and deposits. Our growth is expected to place
significant demands on our management and other resources and will require us to
continue to develop and improve our operational, credit, financial and other
internal risk controls. This growth will also provide challenges in our effort
to maintain and improve the quality of our assets. Our inability to manage our
growth effectively could have a material adverse effect on our business, our
future financial performance and the price of our equity shares and our ADSs.
THE SUCCESS OF OUR INTERNET BANKING STRATEGY WILL DEPEND, IN PART, ON THE
DEVELOPMENT OF THE NEW AND EVOLVING MARKET FOR INTERNET BANKING IN INDIA.
We have offered Internet banking services to our customers since October
1997, although there are currently low volumes of such transactions being
conducted in India. At February 29, 2000, we had approximately 52,000
subscribers to our Infinity Internet banking service. The demand and market
acceptance for Internet banking are subject to a high level of uncertainty and
are substantially dependent upon the adoption of the Internet for general
commerce and financial services transactions in India. In 1999, there were
approximately 0.8 million Internet users in India and approximately 175 Internet
service providers, 30 of which had commenced operations. The International Data
Corporation estimated in 1999 that the number of Internet users will increase to
4.5 million by 2002 and 12.3 million by 2005.
Many of our existing customers and potential customers have only a very
limited experience with the Internet as a communications medium. In order to
realize significant revenue from our Infinity services, we will have to persuade
our customers to conduct banking and financial transactions through the
Internet. In addition, the cost to Indian consumers of obtaining the hardware,
software and communications links necessary to connect to the Internet is too
high to enable many people in India to afford to use these services at this
time. Although relevant legislation has been proposed by the government of
India, critical issues concerning the commercial use of the Internet, such as
security, legal recognition of electronic records, validity of contracts entered
into online and the validity of digital signatures, remain unresolved and may
inhibit growth. If Internet banking does not continue to grow or grows slower
than expected, we will not be able to meet our projected earnings and growth
strategy related to our Internet banking business.
THE SUCCESS OF OUR INTERNET BANKING STRATEGY WILL DEPEND, IN PART, ON THE
DEVELOPMENT OF ADEQUATE INFRASTRUCTURE FOR THE INTERNET IN INDIA.
The Internet may not be accepted as a viable commercial marketplace in
India for a number of reasons, including inadequate development of the necessary
network infrastructure. There can be no assurance that the Internet
infrastructure in India will be able to support the demands of its anticipated
growth. Inadequate infrastructure could result in slower response times and
adversely affect usage of the Internet generally. If the infrastructure for the
Internet does not effectively support growth that may occur, we will not be able
to execute our growth strategy related to our Internet banking business.
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IF WE ARE UNABLE TO SUCCEED IN OUR NEW BUSINESS AREAS, WE MAY NOT BE ABLE
TO EXECUTE OUR GROWTH STRATEGY.
We have recently launched several Internet banking products for our retail
and corporate customers including online bill payments and online account
opening. We have also recently entered the Indian credit card market and started
offering mobile phone banking services. ICICI group also intends to provide
online brokering services. We expect to provide online integration between the
customer's depositary share account and bank account with us and securities
brokerage account with ICICI Web Trade. We also expect to offer auto loans and
home mortgage loans that qualify as priority sector lending and distribute life
insurance products proposed to be offered by the ICICI group to our customers.
We intend to continue to explore new business opportunities in both retail and
corporate banking. We cannot assure you that we have accurately estimated the
relevant demand for these new banking products or that we will be able to master
the skills and management information systems necessary to successfully manage
our new products and services. Our inability to grow in new business areas could
adversely affect our future financial performance and the price of our equity
shares and our ADSs.
MATERIAL CHANGES IN THE REGULATIONS WHICH GOVERN US COULD CAUSE OUR
BUSINESS TO SUFFER AND THE PRICE OF OUR EQUITY SHARES AND OUR ADSS TO GO
DOWN.
Banks in India operate in a highly regulated environment in which the
Reserve Bank of India extensively supervises and regulates banks. Our business
could be directly affected by any changes in policies for banks in respect of
directed lending and reserve requirements. In addition, banks are generally
subject to changes in Indian law, as well as to changes in regulation and
governmental policies, income tax laws and accounting principles. We cannot
assure you that laws and regulations governing the banking sector will not
change in the future or that any changes will not adversely affect our business,
our future financial performance and the price of our equity shares and our
ADSs.
OUR BUSINESS IS VERY COMPETITIVE AND OUR GROWTH STRATEGY DEPENDS ON OUR
ABILITY TO COMPETE EFFECTIVELY.
Interest rate deregulation and other liberalization measures affecting the
Indian banking sector have increased competition. This liberalization process
has led to increased access for our customers to alternative sources of funds,
such as domestic and foreign commercial banks and the domestic and international
capital markets. Our corporate and retail lending business will continue to face
competition from Indian and foreign commercial banks and non-banking finance
companies. In addition, we will face increasing competition for deposits from
other banks, non-banking entities like mutual funds and non-banking finance
companies. Our future success will also depend upon our ability to compete
effectively with these entities, including the public sector banks, which may
have significantly greater resources than us. Our business could also be
affected by the increasing use of technology by our competitors. Competition may
also increase significantly with greater deregulation of the Indian banking
industry. Due to competitive pressures, we may be unable to successfully execute
our growth strategy and offer products and services at reasonable returns and
this may adversely impact our business and our future financial performance.
WE FACE RISKS ASSOCIATED WITH POTENTIAL STRATEGIC PARTNERSHIPS OR OTHER
VENTURES, INCLUDING WHETHER ANY SUCH TRANSACTIONS CAN BE COMPLETED AND
WHETHER THE OTHER PARTY CAN BE INTEGRATED WITH OUR BUSINESS ON FAVORABLE
TERMS.
We may seek opportunities for growth through future acquisitions,
investments, strategic partnerships or ventures. Any such future transactions
may involve a number of risks, including increased costs, diversion of our
management's attention required to integrate the acquired business and the
failure to retain key acquired personnel and clients, some or all of which could
have an adverse effect on our business.
IF WE ARE UNABLE TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGES, OUR BUSINESS
COULD SUFFER.
Our success will depend, in part, on our ability to respond to
technological advances and emerging banking industry standards and practices on
a cost-effective and timely basis. The development and implementation of such
technology entails significant technical and business risks. There can be no
assurance that we will
18
<PAGE> 20
successfully implement new technologies effectively or adapt our
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or customer
requirements, our business and our future financial performance could be
materially adversely affected.
SIGNIFICANT SECURITY BREACHES AND FRAUD COULD ADVERSELY IMPACT OUR
BUSINESS.
We seek to protect our computer systems and network infrastructure from
physical break-ins as well as security breaches and other disruptive problems
caused by our increased use of the Internet. Computer break-ins and power
disruptions could affect the security of information stored in and transmitted
through such computer systems and network infrastructure. We employ security
systems, including firewalls and password encryption, designed to minimize the
risk of security breaches. Though, we intend to continue to implement security
technology and establish operational procedures to prevent break-ins, damage and
failures, there can be no assurance that these security measures will be
successful. A significant failure of security measures could have a material
adverse effect on our business and our future financial performance.
Our business operations are highly transaction-oriented. Although we take
adequate measures to safeguard against fraud, there can be no assurance that we
would be able to prevent fraud. Our reputation could be adversely affected by
significant fraud committed by employees or outsiders.
RISKS RELATING TO THE ADSS AND EQUITY SHARES
YOU WILL NOT BE ABLE TO VOTE YOUR ADSS.
Investors in ADSs will have no voting rights unlike holders of the equity
shares who have voting rights. The depositary will exercise its right to vote
the equity shares represented by the ADSs as directed by our board of directors.
If you wish, you may withdraw the equity shares underlying the ADSs and seek to
vote the equity shares you obtain upon withdrawal. However, for foreign
investors, this withdrawal process may be subject to delays. For a discussion of
the legal restrictions triggered by a withdrawal of the equity shares from the
depositary facility upon surrender of ADSs, see "Restriction on Foreign
Ownership of Indian Securities."
YOUR ABILITY TO WITHDRAW EQUITY SHARES FROM THE DEPOSITARY FACILITY IS
UNCERTAIN AND MAY BE SUBJECT TO DELAYS.
India's restrictions on foreign ownership of Indian companies limit the
number of shares that may be owned by foreign investors and generally require
government approval for foreign ownership. Although we have sought all necessary
government approvals for the offering, investors who withdraw equity shares from
the depositary facility will be subject to Indian regulatory restrictions on
foreign ownership upon withdrawal. It is possible that this withdrawal process
may be subject to delays. For a discussion of the legal restrictions triggered
by a withdrawal of equity shares from the depositary facility upon surrender of
ADSs, see "Restriction on Foreign Ownership of Indian Securities".
YOUR ABILITY TO SELL IN INDIA ANY EQUITY SHARES WITHDRAWN FROM THE
DEPOSITARY FACILITY MAY BE SUBJECT TO DELAYS IF SPECIFIC GOVERNMENT
APPROVAL IS REQUIRED.
Investors seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require Reserve Bank of India approval for each such
transaction unless the sale of such equity shares is made on a stock exchange or
in connection with an offer made under the regulations regarding takeovers. If
approval is required, we cannot guarantee that any approval will be obtained in
a timely manner or at all. Because of possible delays in obtaining requisite
approvals, investors in equity shares may be prevented from realizing gains
during periods of price increases or limiting losses during periods of price
declines.
YOU ARE UNABLE TO WITHDRAW AND REDEPOSIT SHARES IN THE DEPOSITARY FACILITY.
Because of certain Indian legal restrictions, the supply of ADSs may be
limited. The only way to add to the supply of ADSs will be through a primary
issuance because the depositary will not be permitted to accept
19
<PAGE> 21
deposits of outstanding equity shares and issue ADSs representing such shares.
Therefore, an investor in ADSs who surrenders an ADS and withdraws equity shares
will not be permitted to redeposit his equity shares in the depositary facility.
In addition, an investor who has purchased equity shares on the Indian market
will not be able to deposit them in the ADS program. The inability of investors
to withdraw from and re-enter the depositary facility may adversely affect the
market price of our ADSs.
US INVESTORS MAY BE SUBJECT TO MATERIALLY ADVERSE TAX CONSEQUENCES IF WE
ARE A PASSIVE FOREIGN INVESTMENT COMPANY.
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, we do not expect to be
considered a passive foreign investment company. In general, a foreign
corporation is a passive foreign investment company for any taxable year in
which (i) 75.0% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties) or (ii) 50.0% or more of the average
quarterly value of its assets consists of assets that produce, or are held for
the production of passive income. We have based our expectation that we are not
a passive foreign investment company on, among other things, provisions in the
proposed regulations that provide that certain restricted reserves (including
cash and securities) of banks are assets used in connection with banking
activities and are not passive assets, as well as the composition of our income
and our assets from time to time. Since there can be no assurance that the
proposed regulations will be finalized in their current form and the composition
of our income and assets will vary over time, there can be no assurance that we
will not be considered a passive foreign investment company for any fiscal year.
If we are a passive foreign investment company at any time that you own ADSs and
you are a US person, you may be subject to materially adverse US tax
consequences. See "Taxation -- US Taxation -- Passive Foreign Investment Company
Rules".
CONDITIONS IN THE INDIAN SECURITIES MARKET MAY AFFECT THE PRICE OR
LIQUIDITY OF THE EQUITY SHARES AND THE ADSS.
The Indian securities markets are smaller and more volatile than securities
markets in more developed economies. The Indian stock exchanges have in the past
experienced substantial fluctuations in the prices of listed securities and the
price of our stock has been especially volatile. In 1999, our stock price on the
NSE ranged from a high of Rs. 75.00 (US$ 1.72) in December 1999 to a low of Rs.
20.75 (US$ 0.48) in February 1999. From January 1, 2000 to March 15, 2000, our
stock price on the NSE, reached a peak of Rs. 250.00 (US$ 5.75) and a low of Rs.
66.00 (US$ 1.52). At March 16, 2000 our stock price on the NSE was Rs. 203.95
(US$ 4.69).
Indian stock exchanges have also experienced problems that have affected
the market price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, broker defaults, settlement
delays and strikes by brokers. The Stock Exchange, Mumbai, formerly known as the
Bombay Stock Exchange or the BSE, was closed for three days in March 1995
following a default by a brokerage house. In addition, the governing bodies of
the Indian stock exchanges have from time to time imposed restrictions on
trading in certain securities, limitations on price movements and margin
requirements. Further, from time to time, disputes have occurred between listed
companies and stock exchanges and other regulatory bodies, which in some cases
may have had a negative effect on market sentiment. Similar problems could
happen in the future and, if they did, they could affect the market price and
liquidity of our equity shares and our ADSs.
Because of our close relationship with ICICI, volatility in the price of
ICICI shares could effect the price of our equity shares and our ADSs.
THERE IS A LIMITED MARKET FOR THE ADSS.
Before the offering, there has been no market for our ADSs in the United
States. Even though we have applied to list our ADSs on the New York Stock
Exchange, we cannot be certain that any trading market for our ADSs will develop
or be sustained after the offering, or that the public offering price will
correspond to the price at which our ADSs will trade in the public market after
the offering. We cannot guarantee that a market for the ADSs will develop or
continue.
20
<PAGE> 22
SETTLEMENT OF TRADES OF EQUITY SHARES ON INDIAN STOCK EXCHANGES MAY BE
SUBJECT TO DELAYS.
The equity shares represented by our ADSs are expected to be listed on the
Calcutta, Delhi, Madras and Vadodara Stock Exchanges, the BSE and the NSE.
Settlement on these stock exchanges may be subject to delays and an investor in
equity shares withdrawn from the depositary facility upon surrender of ADSs may
not be able to settle trades on such stock exchanges in a timely manner.
AS A RESULT OF INDIAN GOVERNMENT REGULATION OF FOREIGN OWNERSHIP, THE PRICE
OF THE ADSS
COULD GO DOWN.
Foreign ownership of Indian securities is heavily regulated and is
generally restricted. ADSs issued by companies in certain emerging markets,
including India, may trade at a discount or premium to the underlying equity
shares, in part because of the restrictions on foreign ownership of the
underlying equity shares.
YOUR HOLDINGS MAY BE DILUTED BY ADDITIONAL ISSUANCES OF EQUITY BY US AND
ANY DILUTION MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR ADSS.
Any future issuances of equity by us will dilute the positions of investors
in our ADSs and could adversely affect the market price of our ADSs. Although we
do not anticipate issuing additional equity in the immediate future, there is a
risk that our continued rapid growth could require us to fund this growth
through additional equity offerings. Our recently approved employee stock option
plan could lead to the issuance of up to 5.0% of our shares.
YOU MAY BE UNABLE TO EXERCISE PREEMPTIVE RIGHTS AVAILABLE TO OTHER
SHAREHOLDERS.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75% of the
company's shareholders present and voting at a shareholders' general meeting. US
investors in our ADSs may be unable to exercise preemptive rights for our equity
shares underlying our ADSs unless a registration statement under the Securities
Act is effective with respect to such rights or an exemption from the
registration requirements of the Securities Act is available. Our decision to
file a registration statement will depend on the costs and potential liabilities
associated with any such registration statement as well as the perceived
benefits of enabling US investors in our ADSs to exercise their preemptive
rights and any other factors we consider appropriate at the time. We do not
commit that we would file a registration statement under these circumstances. If
we issue any such securities in the future, such securities may be issued to the
depositary, which may sell such securities in the securities markets in India
for the benefit of the investors in our ADSs. There can be no assurance as to
the value, if any, the depositary would receive upon the sale of these
securities. To the extent that investors in our ADSs are unable to exercise
preemptive rights, their proportional interests in us would be reduced.
BECAUSE THE EQUITY SHARES UNDERLYING OUR ADSS ARE QUOTED IN RUPEES IN
INDIA, YOU MAY BE SUBJECT TO POTENTIAL LOSSES ARISING OUT OF EXCHANGE RATE
RISK ON THE INDIAN RUPEE AND RISKS ASSOCIATED WITH THE CONVERSION OF RUPEE
PROCEEDS INTO FOREIGN CURRENCY.
Investors that purchase our ADSs will be required to pay for the ADSs in US
dollars. Investors will be subject to currency fluctuation risks and
convertibility risks since the equity shares are quoted in rupees on the Indian
stock exchanges on which they are listed. Dividends on the equity shares will
also be paid in rupees, and then converted into US dollars for distribution to
ADS investors. Investors that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into foreign currency and export
the foreign currency will need to obtain the approval of the Reserve Bank of
India for each such transaction. In addition, investors that seek to sell equity
shares withdrawn from the depositary facility will have to obtain approval from
the Reserve Bank of India, unless the sale is made on a stock exchange or in
connection with an offer made under the regulations regarding takeovers. Holders
of rupees in India may also generally not purchase foreign currency without
general or special approval from the Reserve Bank of India.
21
<PAGE> 23
On an average annual basis, the rupee has declined against the US dollar
since 1980. As measured by the Reserve Bank of India's reference rate, the rupee
lost approximately 21.7% of its value against the US dollar in the last three
years, depreciating from Rs. 35.75 per US$ 1.00 at December 31, 1996 to Rs.
43.51 per US$ 1.00 at December 31, 1999. At March 15, 2000, the Reserve Bank of
India's reference rate was Rs. 43.59 per US$ 1.00. In addition, in the past, the
Indian economy has experienced severe foreign exchange shortages, creating
future potential decline in the value of the rupee. In 1991, the government of
India obtained substantial foreign financial assistance, including a US$ 2.3
billion standby arrangement with the International Monetary Fund, in order to
avert difficulties in servicing India's external debt. The government of India
repaid US$ 1.1 billion of this amount in April 1994. India's foreign exchange
reserves have since increased and were US$ 35.2 billion at January 21, 2000.
YOU MAY BE SUBJECT TO INDIAN TAXES ARISING OUT OF CAPITAL GAINS.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For the purpose of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares will
be deemed to be the share price prevailing on the BSE or the NSE on the date the
depositary advises the custodian to redeem receipts in exchange for underlying
equity shares. The period of holding of such equity shares, for determining
whether the gain is long-term or short-term, commences on the date of the giving
of such notice by the depositary to the custodian. Investors are advised to
consult their own tax advisers and to consider carefully the potential tax
consequences of an investment in our ADSs.
YOU MAY NOT BE ABLE TO ENFORCE A JUDGMENT OF A FOREIGN COURT AGAINST US.
We are a limited liability company incorporated under the laws of India.
All our directors and executive officers and some of the experts named in this
prospectus are residents of India and almost all of our assets and the assets of
such persons are located in India.
India is not a party to any international treaty in relation to the
recognition or enforcement of foreign judgments. We have been advised by our
Indian legal advisors that recognition and enforcement of foreign judgments is
provided for under Section 13 of The Code of Civil Procedure, 1908 of India on a
statutory basis and that foreign judgments shall be conclusive regarding any
matter directly adjudicated upon except:
- where the judgment has not been pronounced by a court of competent
jurisdiction;
- where the judgment has not been given on the merits of the case;
- where it appears on the face of the proceedings that the judgment is
founded on an incorrect view of international law or a refusal to
recognize the law of India in cases in which such law is applicable;
- where the proceedings in which the judgment was obtained were opposed to
natural justice;
- where the judgment has been obtained by fraud; or
- where the judgment sustains a claim founded on a breach of any law in
force in India.
It may not be possible for investors in our ADSs to effect service of
process upon us or our directors and executive officers and experts named in the
prospectus that are residents of India outside India or to enforce judgments
obtained against us or such persons in foreign courts predicated upon the
liability provisions of foreign countries, including the civil liability
provisions of the federal securities laws of the United States. Moreover, it is
unlikely that a court in India would award damages on the same basis as a
foreign court if an action is brought in India. Furthermore, it is unlikely that
an Indian court would enforce foreign judgments if it viewed the amount of
damages as excessive or inconsistent with Indian practice.
22
<PAGE> 24
THERE MAY BE LESS COMPANY INFORMATION AVAILABLE IN INDIAN SECURITIES
MARKETS THAN SECURITIES MARKETS IN DEVELOPED COUNTRIES.
There is a difference between the level of regulation and monitoring of the
Indian securities markets and the activities of investors, brokers and other
participants and that of markets in the United States and other developed
economies. The Securities and Exchange Board of India is responsible for
improving disclosure and other regulatory standards for the Indian securities
markets. The Securities and Exchange Board of India has issued regulations and
guidelines on disclosure requirements, insider trading and other matters. There
may, however, be less publicly available information about Indian companies than
is regularly made available by public companies in developed economies.
23
<PAGE> 25
USE OF PROCEEDS
The net proceeds to us from the sale of the -- ADSs to be sold in the
offering are estimated to be US$ -- (US$ -- if the underwriters'
over-allotment option is exercised in full), at the public offering price of US$
-- per ADS and after deducting the underwriting discount and estimated
offering expenses. The net proceeds from the offering will be used for funding
future growth and for other general corporate purposes. The net proceeds from
the offering will also allow us to strengthen our capital adequacy so as to be
more in line with the capitalization of leading international banks and to be in
compliance with capital adequacy requirements in India.
24
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999 and
our capitalization adjusted to give effect to the sale of ADSs (including the
ADSs to be issued in the event the underwriters' over-allotment option is
exercised in full) pursuant to the offering.
There have been no material changes to our capitalization since December
31, 1999. However, we have raised funds through borrowings in the ordinary
course of business subsequent to December 31, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------
ACTUAL ADJUSTED
----------------------- -----------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Liabilities:
Short-term liabilities(1):
Deposits............................ Rs. 79,850 US$ 1,835 Rs. 79,850 US$ 1,835
Short-term borrowings............... 1,797 41 1,797 41
Long-term debt maturing within one
year.............................. -- -- -- --
---------- --------- ---------- ---------
Total short-term liabilities........... 81,647 1,876 81,647 1,876
---------- --------- ---------- ---------
Long-term liabilities(1):
Deposits............................ 5,152 118 5,152 118
Long-term debt, net of current
maturities........................ 1,734 40 1,734 40
---------- --------- ---------- ---------
Total long-term liabilities............ 6,886 158 6,886 158
---------- --------- ---------- ---------
Total liabilities........................ 88,533 2,034 88,533 2,034
---------- --------- ---------- ---------
Stockholders' equity:
Common stock........................... 1,650 38 -- --
Additional paid-in capital............. 375 9 -- --
Retained earnings...................... 1,564 36 1,564 36
Other comprehensive income(2).......... 80 2 80 2
---------- --------- ---------- ---------
Total stockholders' equity............... 3,669 85 -- --
---------- --------- ---------- ---------
TOTAL CAPITALIZATION..................... Rs. 92,202 US$ 2,119 -- --
========== ========= ========== =========
</TABLE>
- ---------------
(1) Short-term liabilities have residual maturity of less than one year while
long-term liabilities have residual maturity of one year and more.
(2) Represents unrealized gains and losses on marketable equity securities and
debt securities available for sale, net of applicable income taxes.
25
<PAGE> 27
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of the
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of the ADSs in the United States. These fluctuations will also
affect the conversion into US dollars by the depositary of any cash dividends
paid in Indian rupees on the equity shares represented by ADSs.
On an average annual basis, the rupee has consistently declined against the
dollar since 1980. In early July 1991, the government of India adjusted the
rupee downward by an aggregate of approximately 20.0% against the dollar as part
of an economic package designed to overcome an external payments crisis.
The following table sets forth, for the periods indicated, certain
information concerning the exchange rates between Indian rupees and US dollars
based on the noon buying rate:
<TABLE>
<CAPTION>
FISCAL YEAR PERIOD END(1) AVERAGE(1)(2) HIGH LOW
- ----------- ------------- ------------- ----- -----
<S> <C> <C> <C> <C>
1995.......................................... 31.43 31.38 31.90 31.37
1996.......................................... 34.35 33.47 38.05 31.36
1997.......................................... 35.88 35.70 36.85 34.15
1998.......................................... 39.53 37.37 40.40 35.71
1999.......................................... 42.50 42.27 43.60 39.55
2000 (through March 16, 2000)................. 43.58 43.63 43.65 43.55
</TABLE>
- ---------------
(1) The noon buying rate at each period end and the average rate for each
period differed from the exchange rates used in the preparation of our
financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although we have translated certain rupee amounts in this prospectus into
dollars for convenience, this does not mean that the rupee amounts referred to
could have been, or could be, converted into dollars at any particular rate, the
rates stated below, or at all. Except in the sections on "The Republic of
India", and "Reforms in Some Key Sectors of the Indian Economy" which are based
on publicly available data, all translations from rupees to dollars are based on
the noon buying rate in the City of New York for cable transfers in rupees at
December 31, 1999. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate on
December 31, 1999 was Rs. 43.51 per US$ 1.00 and on March 16, 2000 was Rs. 43.58
per US$ 1.00. The exchange rates used for convenience translations differ from
the actual rates used in the preparation of our financial statements.
26
<PAGE> 28
OVERVIEW OF THE INDIAN BANKING SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from the
government of India and its various ministries and the Reserve Bank of India,
and has not been prepared or independently verified by us or the underwriters,
or any of their respective affiliates or advisors. This is the latest available
information to our knowledge.
GENERAL
The Indian banking sector primarily consists of commercial and cooperative
banks. The commercial banks include public sector banks, new and old private
sector banks, foreign banks and regional rural banks. Commercial banks provide
all the traditional services provided by banks such as taking deposits, making
loans, and providing payment and money transmission services as well as domestic
and foreign treasury activities, settlement and clearing services, advisory
services and auxiliary financial services. Commercial banks in India have
traditionally focused on meeting the short-term financial needs of industry,
trade and agriculture. At September 30, 1999, there were 298 commercial banks in
India, with a network of 65,294 branches serving approximately Rs. 7.4 trillion
in deposit accounts. The cooperative banks serve the agricultural industry and
small businesses in urban and semi-urban areas.
The following table sets forth the number of Indian commercial banks by
category.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Public sector banks......................................... 27 27 27
Old private sector banks.................................... 25 25 25
New private sector banks(1)................................. 9 9 9
Foreign banks............................................... 38 42 44
Regional rural banks........................................ 196 196 196
--- --- ---
Total commercial banks...................................... 295 299 301
=== === ===
</TABLE>
- ---------------
(1) Comprises private sector commercial banks formed after July 1993 when the
Reserve Bank of India permitted the establishment of new private sector
banks.
Sources: Reserve Bank of India Report on Trends and Progress of Banking in
India, 1998-1999 and 1997-1998; Reserve Bank of India Quarterly
Handout, September 1999 and June 1997.
The geographic spread and reach of commercial banks is vast, with nearly
70.0% of their branches located in rural or semi-urban areas of the country. A
large number of these branches belong to the public sector banks.
PUBLIC SECTOR BANKS
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India (a government-controlled bank and
today the largest bank in India) and its associates (other government-
controlled banks with a regional presence), 19 other nationalized banks and 196
regional rural banks. Excluding the regional rural banks, the remaining public
sector banks had 45,761 branches and accounted for 77.8% of the outstanding
loans and 79.5% of the aggregate deposits of all commercial banks at September
30, 1999. Public sector banks compete on the basis of providing products and
services through their vast branch networks and their relatively low cost of
funds due to their relatively higher proportion of retail deposits.
PRIVATE SECTOR BANKS
At March 31, 1999 the Indian private sector banks consisted of 25 old
private sector banks which existed before the July 1993 banking reforms and nine
new private sector banks, including us, which began operations after July 1993.
In response to the need to introduce greater competition and achieve higher
productivity and efficiency in the Indian banking industry, the Reserve Bank of
India issued guidelines in 1993 which permitted the entry of new private sector
banks into the industry. At September 30, 1999, the private sector banks had a
27
<PAGE> 29
network of 4,883 branches which accounted for 7.5% of the total branch network
of commercial banks. At September 30, 1999, private sector banks accounted for
approximately 10.2% of aggregate deposits and 11.3% of outstanding loans of all
commercial banks. New private sector banks, though small in number, hold over
35.0% of the total assets of all private sector banks and compete by providing
efficient service, quick responses to loan applications, technology-based, cost
effective solutions and innovative products and services using multiple channels
of delivery.
FOREIGN BANKS
There were 44 foreign banks with 192 branches operating in India at March
31, 1999. The major foreign banks include Citibank, Bank of America, American
Express Bank, Hong Kong and Shanghai Banking Corporation, Standard Chartered
Bank, Deutsche Bank and ANZ Grindlays Bank. At March 31, 1999, foreign banks
accounted for 5.9% of aggregate deposits and 8.4% of outstanding loans of
commercial banks. The primary activity of most foreign banks in India has been
serving corporate customers in the wholesale segment, including meeting the
banking needs of their global customers who have operations in India. Some of
the larger foreign banks have a significant presence in consumer finance
products such as automobile finance, home loans, credit cards and household
consumer finance.
DEPOSIT AND LOAN DATA
The following table sets forth, for the periods indicated, the profile of
loans and the aggregate deposit distribution in the Indian banking industry and
the market share among commercial banks at March 31, 1999.
<TABLE>
<CAPTION>
MARKET
AT MARCH 31, SHARE
-------------------------- AT MARCH 31,
1998 1999 1999
----------- ----------- ------------
(IN BILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Deposits:
Public sector banks............................... Rs. 5,317.2 Rs. 6,386.6 79.8%
Old private sector banks.......................... 477.8 560.2 7.0
New private sector banks.......................... 217.4 308.1 3.9
Foreign banks..................................... 428.3 474.5 5.9
Regional rural banks.............................. 221.9 270.1 3.4
----------- ----------- -----
Total............................................... Rs. 6,662.6 Rs. 7,999.5 100.0%
=========== =========== =====
Loans(1):
Public sector banks............................... Rs. 3,039.1 Rs. 3,576.1 77.3%
Old private sector banks.......................... 288.8 343.4 7.4
New private sector banks.......................... 141.8 211.1 4.6
Foreign banks..................................... 336.8 386.6 8.4
Regional rural banks.............................. 90.1 105.6 2.3
----------- ----------- -----
Total............................................... Rs. 3,896.6 Rs. 4,622.8 100.0%
=========== =========== =====
</TABLE>
- ---------------
(1) Loans include advances and investments in non-statutory liquidity ratio
securities.
Source: Reserve Bank of India publications, 1998-1999.
New private sector banks have increased their assets and deposits
aggressively since commencing their operations in 1993 and, at March 31, 1999,
accounted for approximately 3.9% of aggregate deposits and 4.6% of loans
outstanding of all commercial banks. At March 31, 1999, we were the largest new
private sector bank and accounted for 18.1% of the total assets of new private
sector banks. HDFC Bank and Times Bank, two new private sector banks, merged
effective February 26, 2000. At December 31, 1999, our assets were less than the
combined assets of these two entities. However, we were still the largest among
new private sector banks in terms of deposits. For a comparison of the relative
levels of deposits and loans of leading foreign banks and new private sector
banks in India, see "Business -- Competition -- General".
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<PAGE> 30
In addition to commercial banks, a variety of financial intermediaries in
the public and private sector participate in India's financial sector, including
financial institutions, like ICICI, non-bank finance companies, other
specialized financial institutions and state-level financial institutions. See
"Overview of the Indian Financial Sector" for a more in-depth discussion of
these different types of financial intermediaries in the Indian banking sector.
The traditional boundaries between different types of financial intermediaries
are becoming more blurred, and these financial intermediaries also compete with
us and other commercial banks.
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<PAGE> 31
RELATIONSHIP WITH THE ICICI GROUP
GENERAL
The ICICI group is a diversified financial services group organized under
the laws of India. The ICICI group includes ICICI, the parent company and its
subsidiaries. These companies conduct commercial banking, investment banking,
venture capital, information technology, Internet-based stock trading and retail
banking activities. ICICI is one of the largest of all Indian financial
institutions, banks and finance companies in terms of assets. ICICI has close
relationships with a client base of over 1,000 Indian companies, a growing base
of three million retail bond customers and a strong pool of experienced and
talented professionals. The ICICI group's retail products include retail
deposits, retail bonds, home and automobile loans and other consumer finance
products and services. In fiscal 1999, the ICICI group had consolidated net
income of Rs. 7.5 billion (US$ 173 million). At December 31, 1999 the ICICI
group had consolidated assets of Rs. 742.3 billion (US$ 17.1 billion) and
consolidated stockholders' equity of Rs. 67.4 billion (US$ 1.5 billion), and in
the nine months ended December 31, 1999, the ICICI group had consolidated net
income of Rs 6.9 billion (US$ 160 million).
Most of the activities of the ICICI group are carried out through the
parent company, ICICI, which is listed on the New York Stock Exchange (symbol:
IC and IC.d). ICICI accounted for over 87.5% of the consolidated assets at
year-end fiscal 1999 and 91.6% of the consolidated net income for fiscal 1999.
We are the largest subsidiary in the ICICI group, accounting for 11.4% of the
consolidated assets at year-end fiscal 1999 and 7.7% of the consolidated net
income for fiscal 1999.
The following chart sets forth the organizational structure of the group.
[FLOWCHART]
CAPITAL, DIVIDEND AND VOTING LIMITATIONS
Under the conditions of the commercial banking license granted to ICICI in
1994 to establish us, there must be an arms length relationship organizationally
and operationally between ICICI and us. We are also prohibited from extending
any credit to ICICI. We have no agreement with ICICI and no plans to enter into
an agreement regarding any future contribution of capital by ICICI to us for
maintenance of our minimum capital adequacy ratio or with respect to any future
issuance of equity shares by us to ICICI. Any declaration and payment of a
dividend by us to any shareholder, including ICICI, must be recommended by our
board of directors and approved by our shareholders in accordance with
applicable Indian law, and if the dividend is in excess of 25.0% of the par
value of our shares (or Rs. 413 million (US$ 9 million) before the completion of
the offering), we must obtain prior approval from the Reserve Bank of India.
ICICI has no preemptive or registration rights with respect to our shares
and we have no agreement to issue any equity or debt securities to ICICI.
Prior to the offering ICICI owned 74.2% of our equity shares. After giving
effect to the offering, ICICI will own -- % of our equity shares (assuming the
underwriters' over-allotment option is exercised in full). Under Indian law, no
person holding shares in a banking company can vote more than 10.0% of such
bank's
30
<PAGE> 32
outstanding equity shares. This means that while ICICI owns 74.2% of our equity
shares, it can only vote 10.0% of our equity shares. Due to this voting
restriction and the fact that no other shareholder owns 10.0% or more of our
outstanding equity shares, ICICI effectively controls 28.0% of the voting power
of our outstanding equity shares. After the completion of the offering, ICICI's
effective voting power may decrease.
Our organizational documents permit ICICI to appoint up to one third of the
members of our board, including the Executive Chairman and Managing Director of
our board. Pursuant to this authority, ICICI has appointed two directors to our
eight-member board of directors. ICICI may also vote for the remaining members
of our board of directors. Pursuant to our organizational documents, to convene
a board meeting, one of the two ICICI directors on our board of directors must
be present unless they waive this requirement in writing.
OWNERSHIP CONSIDERATIONS
As we describe in "Group Operating Strategy" below, we work closely with
ICICI and, given its large equity interest in us (currently 74.2% and -- %
after the offering if the underwriters' over-allotment option is exercised in
full), we believe that ICICI has an incentive to help us perform well. There is
a possibility that ICICI may make business decisions which are to its advantage
or the advantage of other group companies at our expense.
Additionally, in the future, there is a possibility that the Reserve Bank
of India may direct ICICI to divest some of its holdings in us. Under current
guidelines, ICICI is required to reduce its ownership interest in us to no more
than 40.0% at some point in the future. Any such reduction in ownership interest
could result in our inability to continue to capitalize on the corporate and
retail relationships of the ICICI group, including reducing or eliminating
access to ICICI clients, the ICICI group's joint marketing teams and the
services of other ICICI group entities. This would adversely affect our business
and our future financial performance. However, a discussion paper issued by the
Reserve Bank of India in January 1999 states that if a financial institution
chooses to provide commercial banking services directly, permission to have a
100.0% banking subsidiary would be considered. ICICI is presently in discussion
with the Reserve Bank of India to determine whether and to what extent it may
still be required to sell or reduce its interest in us. See also "Related Party
Transactions".
COMPLEMENTARY PRODUCT RANGES
Traditionally, regulation in the banking and financial services sector in
India segregated the offering of various products and services between
commercial banks like us and financial institutions like ICICI. In recent years,
some of these restrictions have been relaxed, and there is some overlap between
the product offerings of ICICI and us, as described below. However, we believe
that both of our product ranges remain largely complementary and enable the
ICICI group to attract and retain customers by providing a complete range of
financial products and services.
CORPORATE LENDING
Both we and ICICI offer term loans and guarantees although we generally do
not compete with each other to provide these services. Because ICICI has a
significantly larger balance sheet than us and our funding sources are of a
shorter term than those of ICICI, ICICI typically offers larger loans on a fixed
rate basis with longer maturities, while we offer smaller loans on a floating
rate basis with shorter maturities. We can offer documentary credits for all
purposes while, under current authorization, ICICI can offer documentary credits
only to customers having an available line of foreign currency credit with them,
and only for import of capital goods. ICICI is not permitted to offer these
products for the import of raw materials, which we can do.
RETAIL LENDING
While ICICI does not offer credit cards, it does, together with its
subsidiary, ICICI Home Finance Company Limited, offer retail asset products
including auto loans and home mortgage loans which are marketed through its
subsidiary, ICICI Personal Financial Services Limited. We offer credit cards,
loans against time deposits and loans against shares for subscriptions to
initial public offerings of Indian companies. We plan to offer auto loans and
home mortgage loans in fiscal 2001 which will be marketed through ICICI Personal
Financial Services.
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<PAGE> 33
Pursuant to an understanding between ICICI and us, we will offer auto loans and
home mortgage loans that qualify as priority sector lending and ICICI, together
with ICICI Home Finance, will offer all other auto loans and home mortgage
loans. Home mortgage loans of up to Rs. 1 million and auto loans to
professionals qualify as priority sector lending. For a description of our
priority sector lending requirements, see "Business -- Corporate Banking --
Directed Lending".
FUNDING
ICICI is not permitted to offer banking products involving checking
facilities including savings accounts, checking accounts, cash management
services and time deposits of a maturity of less than one year. These products
form our core funding base.
TREASURY
Our foreign exchange treasury is a full-fledged authorized dealer while
ICICI is permitted to deal only with regard to its underlying transactions. Our
domestic treasury desk serves its customers independent of the ICICI desk.
GROUP OPERATING STRATEGY
In fiscal 1999, in an effort to enhance the delivery of products and
services to clients, the ICICI group decided to reorganize its structure. It
formed three client relationship groups, the Major Clients Group, the Growth
Clients Group and the Personal Financial Services Group, for this purpose.
The relationship managers in the Major Clients Group and the Growth Clients
Group are drawn from companies across the ICICI group, including from us. These
relationship managers are responsible for offering the full range of the ICICI
group's corporate banking products and services with an emphasis on
cross-selling products and services offered by ICICI group companies and the
generation of fee-based income. These groups are client-driven, so they cater to
the needs of the ICICI group's customers regardless of which relationship
manager is servicing a particular customer and whether the product is one
offered by us or other ICICI group companies. The salary and other expenses of a
relationship manager that is working for one of these client relationship groups
are borne by the company that has seconded the relationship manager to one of
these client relationship groups.
The ICICI group restructuring has enabled us to take advantage of ICICI's
strong relationships with over 1,000 corporations in India to sell our products
and services. These relationships have been particularly effective in helping us
gain access to the larger corporations, as our balance sheet on a stand-alone
basis would not have permitted us to take the large exposures that may be
undertaken by ICICI given its large balance sheet capabilities. As described in
greater detail below, in cases where ICICI and we both provide credit to the
same customer, we appraise the customers' credit requirements separately and
independently. On the basis of our credit analysis, pricing, portfolio exposure
and other factors, we determine whether and to what extent we take an exposure.
Our decision is independent of ICICI's credit approval and appraisal processes.
There have been instances where ICICI has extended credit to a particular
borrower and we have not.
We also seek to benefit from ICICI's corporate relationships in growing our
retail business. We sell retail products to the employees of the ICICI group's
corporate customers, including offering corporate customers our payroll deposit
scheme for their employees.
The Personal Financial Services Group manages ICICI's retail business.
ICICI's three million retail bond customers also present us with an opportunity
for cross-selling a variety of products, including bank accounts, credit cards,
depositary share accounts and, to a limited extent, retail loans.
Both our and the ICICI group's retail strategy is based on the offering of
multiple products through multiple delivery channels to provide choice and
convenience to customers. Offering the entire range of products and services
through multiple channels also results in greater economies of scale. The
channels are owned by different ICICI group companies. We own the bank branch
channel and Infinity, the Internet banking channel, and ICICI Personal Financial
Services owns the telephone banking call centers. We use the services of ICICI
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<PAGE> 34
Personal Financial Services to offer telephone banking to our customers. For
this purpose, we pay them on the basis of actual call volume. A substantial
portion of the ATMs are leased from ICICI pursuant to an arms-length agreement.
The ICICI centers, which are low-cost standalone offices acting as marketing and
service centers, are owned by ICICI. Our credit card back-end processing
operations are managed by ICICI Personal Financial Services. We pay ICICI
Personal Financial Services on a cost plus 10.0% markup basis. See "Business --
Retail Banking -- Credit Cards" and "Related Party Transactions".
To enable the pooling of talent and a compensation structure aligned to
those of other information technology companies, the group decided to
consolidate the technology teams from all group companies into one information
technology company, ICICI Infotech Services Limited. ICICI Infotech now offers
technology solutions to the entire ICICI group. We outsource our information
technology requirements from ICICI Infotech and 33 of their employees have been
seconded to us. These officers are dedicated to meet our requirements and we pay
ICICI Infotech the salary expenses of these ICICI Infotech employees. While the
personnel are outsourced from ICICI Infotech, the existing hardware and software
continue to be owned by us.
33
<PAGE> 35
BUSINESS
OVERVIEW
We are a private sector commercial bank organized under the laws of India
in 1994. We offer a wide range of banking products and services to corporate and
retail customers through a variety of delivery channels. We believe our emphasis
on providing value-added products and quality service which are responsive to
the financial needs of our customers will allow us to continue to gain market
share in our target customer markets. We are a subsidiary of ICICI Limited, one
of the largest of all Indian financial institutions, banks and finance companies
in terms of assets, a well-recognized brand in the Indian financial sector and
the first Indian company to list its securities on the New York Stock Exchange.
At December 31, 1999, we had the largest deposit base of all of the new private
sector banks in India. In fiscal 1999, our net income was Rs. 503 million (US$
12 million). At December 31, 1999, we had assets of Rs. 102.2 billion (US$ 2.3
billion) and stockholders' equity of Rs. 3.7 billion (US$ 85 million). Our net
income for the nine months ended December 31, 1999 was Rs. 1.0 billion (US$ 24
million).
Our organization has three key activities: corporate banking, retail
banking and treasury operations. In corporate banking, our primary goal is to
build a strong asset portfolio consisting mainly of working capital and term
loans to large, well-established Indian corporations as well as to select middle
market companies in growth industries. We also seek to provide a wide variety of
fee-based corporate products and services, like documentary credits, cash
management services, standby letters of credit and treasury-based derivative
products that help us increase our non-interest income. In building our
corporate banking activities, we have capitalized on the strong relationships
that our parent company, ICICI, enjoys with many of India's leading
corporations. We intend to generate significant growth in revenues based on
increased synergies with ICICI and its group of companies.
Our retail products and services include payroll accounts and other retail
deposit products, online bill payment and remittance facilities, credit cards,
depositary share accounts, retail loans against time deposits and loans against
shares for subscriptions to initial public offerings. We have built a base of
demand and time deposits with 494,480 retail customer accounts at December 31,
1999. We offer our customers a choice of delivery channels including physical
branches, ATMs, telephone banking call centers and the Internet. In recent
years, we have expanded our physical delivery channels, including bank branches
and ATMs, to cover a total of 121 locations in 40 cities throughout India at
December 31, 1999.
Our treasury engages in domestic and foreign exchange operations. It seeks
to manage our balance sheet, including by maintaining our required regulatory
reserves. In addition, our treasury seeks to optimize profits from our trading
portfolio by taking advantage of market opportunities using funds acquired from
the inter-bank markets and corporate deposits. Our trading portfolio includes
our regulatory portfolio as there is no restriction on active management of our
regulatory portfolio.
Since our inception in 1994, we have consistently used technology to
differentiate our products and services from those of our competitors. For
example, we were the first bank in India to offer Internet banking. Our
technology-driven products also include electronic commerce-based
business-to-business and business-to-consumer banking solutions, cash management
services and mobile phone banking services. To support our technology
initiatives, we have set up online real time transaction processing systems. We
remain focused on changes in customer needs and technological advances and seek
to remain at the forefront of electronic banking in India.
HISTORY
We were formed in 1994 as a part of the ICICI group of companies. Our
initial equity capital was contributed 75.0% by ICICI and 25.0% by SCICI
Limited, a diversified finance and shipping finance lender of which ICICI owned
19.9% at December 1996. In December 1996, SCICI was merged into ICICI, and as a
result, we became a wholly-owned subsidiary of ICICI. We have grown rapidly in
size to become a leading player among the new private sector Indian banks.
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<PAGE> 36
When ICICI obtained the commercial banking license to establish us in 1994,
the Reserve Bank of India imposed a condition that ICICI reduce its ownership
interest in us to no more than 40.0%. This condition reflected the government
policy of preventing the monopolization of economic power in one entity. In
1997, ICICI sold a 25.8% interest in us in an offering in India to the public
and to employees of the ICICI group. A discussion paper issued by the Reserve
Bank of India in January 1999 states that if a financial institution chooses to
provide commercial banking services directly, permission to create a 100.0%
owned banking subsidiary would be considered. ICICI is categorized as one such
financial institution and is presently in discussion with the Reserve Bank of
India to determine whether and to what extent it may still be required to sell
or reduce its interest in us.
OUR STRATEGY
Our objective is to be the leading provider of banking products through
technology driven distribution channels servicing a targeted group of corporate
and retail customers.
To achieve our objective, the key elements of our strategy are to:
- Increase our market share in corporate banking;
- Build a profitable retail franchise;
- Apply Internet-related technologies to existing product offerings and
create new business opportunities on the Internet;
- Use technology to provide a multi-channel distribution network;
- Enhance our recurring fee income; and
- Emphasize conservative risk management practices to enhance our asset
quality.
INCREASE OUR MARKET SHARE IN CORPORATE BANKING
Our corporate lending products and services, consisting principally of
working capital finance and term lending, have grown at a compound annual growth
rate of 56.9% over the past three fiscal years. We expect that short-term
finance will continue to represent a significant growth opportunity as the
economy in India develops. Over the past year, we have shifted our focus in
favor of financing large, highly rated corporations, although we continue to
seek to identify and gain market share in the new growth sectors of the Indian
economy. Further, in all of our activities, we seek to be flexible and
responsive to our clients needs, while at the same time seeking to maintain
safeguards through conservative risk management practices.
We believe we can continue to expand our market presence by leveraging
strong corporate relationships of the ICICI group, the effective use of
technology, speedy response times, quality service and the provision of products
and services designed to meet specific customer needs. The ICICI group enjoys
strong financial ties with over 1,000 of India's leading corporations, mainly
through long-term funding relationships. Together with other members of the
ICICI group, we participate in joint marketing teams to provide a comprehensive
range of long and short-term financial products to these corporate customers. As
a result, ICICI group relationships have enabled us to significantly enhance our
market share in short-term funding. We expect to continue to work closely with
the ICICI group to harness synergies in the marketing of our complementary range
of products and rapidly expand our asset base.
BUILD A PROFITABLE RETAIL FRANCHISE
We believe the "ICICI" brand name is well established and one of the most
respected names in the financial services business in India. We believe that
this strength in brand identity, together with the ICICI group's strong
corporate relationships and existing retail investor base, provides us with a
unique opportunity to build a profitable retail franchise in India. At December
31, 1999, we had 494,480 retail customer accounts. Within India, we have a
target market of 34 million households, consisting principally of professionals
and high net worth individuals as well as select wage and salary earners. This
market is supplemented by 22 million non-
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<PAGE> 37
resident Indians, a significant portion of whom are well educated and affluent
and have strong links to family members in India. We believe our range of retail
products will facilitate further penetration of the Indian retail consumer
market.
We plan to attract customers through innovative products such as "Power
Pay", our direct deposit product that allows our corporate customers' employee
salaries to be directly credited to special savings accounts, to significantly
drive the growth in the number of savings accounts maintained with us.
We will continue to seek to provide our target market with a growing range
of deposit, funds transfer, and retail bank products to meet their growing
financial needs. We will continue to expand our range of retail savings products
tailored to meet the needs of our customer base, such as foreign currency
denominated accounts for non-resident Indians, as well as premium checking
accounts for small businesses.
We believe the lack of strong mass market players in retail assets in India
creates a significant growth opportunity for us. Our retail asset products at
present are limited to credit cards, loans against time deposits and loans
against shares for subscriptions for initial public offerings in India. We
intend to increase our retail asset base during fiscal 2001 by offering auto
loans and home mortgage loans. Pursuant to an understanding between ICICI, and
us, we will offer auto loans and home mortgage loans that qualify for priority
sector lending. These loans would be marketed through ICICI Personal Financial
Services which currently markets the retail assets of ICICI and its subsidiary,
ICICI Home Finance. We will continue to broaden our range of retail products and
services in an effort to gain market share among our target customer base.
We are using the Retail Customer Data Mart, a database that consolidates
retail customer and product data across all ICICI group companies including
ICICI's three million retail bond customers. This data is analyzed for customer
segmentation and is used in our targeted marketing campaigns. For example, we
use this database to determine which high net worth individuals we should grant
our credit cards with pre-approved credit limits. We plan to continue our use of
this and similar information systems to enhance customer loyalty through
increased cross selling.
APPLY INTERNET-RELATED TECHNOLOGIES TO EXISTING PRODUCT OFFERINGS AND
CREATE NEW BUSINESS OPPORTUNITIES ON THE INTERNET
We believe that by developing Internet applications for our services, we
can gain significant marketing and distribution advantages over our competitors.
We also believe that through the Internet we can vertically integrate our
product offerings, allowing customers, retailers, distributors, manufacturers
and their suppliers access to our banking system. Lower costs from effective use
of technology coupled with increased scale of operations should allow us to
deliver greater value to our customers.
Accordingly, we were the first bank in India to introduce an Internet
banking service and an Internet-based bills payment system, and even today are
one among very few banks offering this service in India. We pioneered online
business-to-business solutions in India by launching "i-payments", a payments
tool connecting our customers with their suppliers and dealers. We offer online
electronic payment facilities to our corporate customers and their suppliers and
dealers as a closed user group using the Internet as the delivery platform.
These product offerings have resulted in significant cost savings to our
clients, allowing us to develop client loyalty while at the same time better
understanding the needs of our clients. In all of our endeavors, we intend to
use the Internet as a means of enhancing our accessibility and overall customer
convenience and satisfaction.
USE TECHNOLOGY TO PROVIDE A MULTI-CHANNEL DISTRIBUTION NETWORK
As we have recently entered the banking sector, we have been able to use
current technology to develop all our systems. We believe that product
differentiation through multiple delivery channels has improved our ability to
attract and retain customers, enabling us to achieve gains in market share.
Accordingly, we have tried to provide products and services, using the Internet,
ATMs and other technology to increase our service and attract and satisfy
customers. Our use of online delivery channels offers added convenience for our
customers while markedly reducing the cost of financial transactions and the
need to have an extensive branch network. Our technology is expected to allow
the customer access to any product through any delivery channel and thereby give
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<PAGE> 38
the customer the option of choosing the most convenient channel. To further
expand our ATM network, we have entered into alliances with petroleum companies,
department stores and cyber cafes to provide ATMs at select high traffic
locations. Our proposed strategic alliance with a leading Indian Internet portal
is intended to help us further distribute our banking products over the
Internet. Our goal is to develop a cost efficient, highly effective distribution
network, which ensures quality customer service.
ENHANCE OUR RECURRING FEE INCOME
We will continue to seek to develop value-added products and services in an
effort to enhance our market share and to increase our recurring fee income. Our
fee and commission income has grown at an average rate of 57.6% per annum since
fiscal 1997, principally from issuing guarantees, documentary credits and
similar instruments. We believe we were the third largest provider of cash
management services in India and were among the market leaders in providing
trust, retention and escrow account services at December 31, 1999. We have
developed countrywide collection and payment mechanisms for rural and
cooperative banks with limited geographic presence. We continue to seek to
provide funds collection and transfer services to our clients and clients of the
ICICI group. We also offer our customers depositary share accounts and direct
sales of third party mutual funds and propose to distribute insurance products
to be offered by the ICICI group in the future. Through Infinity, our Internet
banking service, we offer Money2India, our online remittance facility for non-
resident Indians, which is already generating fee income. We also offer
"i-payments", our business-to-business electronic commerce solution for
corporate customers, and electronic payment of utility bills for retail
customers, which are presently free to increase customer acquisition. We believe
these and other initiatives will enhance our recurring fee income in ways that
are responsive to the needs of our customers.
EMPHASIZE CONSERVATIVE RISK MANAGEMENT PRACTICES TO ENHANCE OUR ASSET
QUALITY
We believe conservative risk management policies, processes and controls
are critical for our long-term success. While we will continue to extend credit
to growth oriented companies with strong financial positions, we expect that our
emphasis on lending primarily to higher rated credits and active management of
older less creditworthy assets should help improve the risk profile of our loan
portfolio. In connection with our new credit card business, we have devised an
internal credit scoring model and maintain strict monitoring of repayment
patterns to minimize the risks associated with this business. Once we enter the
auto loan and home mortgage loan market, we intend to apply the same rigor to
credit evaluation standards for these products as we have applied to the credit
evaluation standards for our current loan products.
We expect to build on our established credit risk management procedures,
credit evaluation and rating methodology, credit risk pricing models,
proprietary analytics and monitoring and control mechanisms.
Finally, we believe that our adoption of U.S. GAAP accounting including its
higher provisioning requirements embodies a more conservative approach to
quantifying credit losses.
POSSIBLE ALLIANCES
The banking sector in India is changing rapidly and we are considering a
number of selective strategic options on an ongoing basis. These include
alliances and other initiatives with Internet portal and other Internet service
providers, telecommunications companies and banks for online financial products
and services, alliances for installation of ATMs at gas station outlets, cyber
cafes, outlets of consumer durable companies and retail chain stores and third
party bank locations. After careful assessment, we may also consider selective
acquisitions to further these or other strategic options. The goal of any such
initiative would be to further our overall strategy of broadening our customer
base, increasing market share and providing superior services through low cost
distribution channels and thus increasing shareholder value.
OUR PRINCIPAL BUSINESS ACTIVITIES
Our principal business activities include corporate banking, retail banking
and treasury operations. In our corporate banking, we make working capital loans
and term loans to our corporate borrowers, take deposits from corporate
customers and provide a range of fee-based products and services. In retail
banking, we take
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<PAGE> 39
deposits from retail customers through multiple products and delivery channels
and have recently begun to offer credit cards in addition to other retail loan
products.
The following table sets forth, for the periods indicated, the share of our
corporate and retail banking deposits and loans in our total business:
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1999
--------------------------- ---------------------------
CORPORATE RETAIL CORPORATE RETAIL
BANKING BANKING TOTAL BANKING BANKING TOTAL
--------- ------- ----- --------- ------- -----
(IN RS. BILLION, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Gross loans............................ 27.4 1.1 28.5 38.0 0.8 38.8
% of total........................... 96.1% 3.9% 100.0% 98.0% 2.0% 100.0%
Deposits............................... 45.6 15.1 60.7 59.6 25.4 85.0
% of total........................... 75.1% 24.9% 100.0% 70.1% 29.9% 100.0%
</TABLE>
Our treasury manages our balance sheet, including by maintaining required
regulatory reserves. In addition, our treasury seeks to optimize profits from
our trading portfolio by taking advantage of market opportunities.
CORPORATE BANKING
GENERAL
Our largest activity in terms of deposits and gross loans is our corporate
banking operations. At December 31, 1999, corporate banking represented 70.1% of
our deposits and 98.0% of our gross loans.
Our key corporate banking products include loan products and fee and
commission-based products and services. Our principal loan products consist of
working capital loans, including cash credit facilities (a revolving floating
rate asset-backed overdraft facility) and bill discounting (a type of
receivables financing), and term loans. Fee and commission-based products and
services include documentary credit and standby letters of credit, forward
contracts, interest and currency swaps, cash management services, trust and
retention accounts and payment services. Most of these fee and commission-based
products and services provide recurring fees from each customer. We also take
rupee or foreign currency deposits with fixed or floating interest bases from
our corporate customers. Our deposit taking products include certificates of
deposit, checking accounts and time deposits. We deliver our corporate banking
products and services through a combination of physical branches, correspondent
banking networks and the Internet.
We seek to differentiate ourselves from our competitors primarily by
capitalizing on the relationships of the ICICI group and through speedy and
efficient client servicing. We seek to achieve this through the effective use of
technology, high quality staff, speedy decision-making and the provision of
structured financial products meeting specific customer needs.
We provide our products and services to a wide range of private sector and
public sector commercial and industrial corporations, including some of India's
leading companies as well as growth-oriented, middle market commercial
enterprises, traders and service providers and to the agricultural sector. In
the first few years of our operations, due to our small balance sheet size,
small to medium-sized middle market companies were our target customers. Over
the past year as our balance sheet has grown, we have, consistent with our
strategy of focusing on quality growth opportunities, concentrated on financing
large, highly-rated corporations by taking advantage of the corporate
relationships of the ICICI group. Of our 800 corporate customers at December 31,
1999, 171 were also ICICI customers representing 24.3% of our loan portfolio.
CORPORATE LOAN PRODUCTS
Our corporate loan products are working capital finance and term loans. We
offer a substantial portion of our corporate loans on a floating rate basis. For
more details on our loan portfolio, see "-- Loan Portfolio".
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<PAGE> 40
Working Capital Finance
Under working capital finance, we offer our corporate customers cash credit
facilities and bill discounting. At December 31, 1999, gross working capital
loans outstanding were Rs. 26.0 billion (US$ 598 million), constituting 67.0% of
our gross loan portfolio.
Cash Credit Facilities. Cash credit facilities are the most common form of
working capital financing in India. Cash credit facilities are given to
borrowers to finance the cash flow gap arising out of the time difference
between the purchase of raw materials and the realization of sale proceeds. A
cash credit facility is a revolving overdraft line of credit for meeting the
working capital needs of companies and is generally backed by current assets
like inventories and receivables. Under the cash credit facility, we provide a
line of credit up to a pre-established amount based on the borrower's projected
level of inventories, receivables and cash deficits. Within this limit,
disbursals are made based on the actual level of inventories and receivables. A
portion of the cash credit facility can also be made in the form of a demand
loan. A cash credit facility is typically given to companies in the
manufacturing, trading and service sectors on a floating interest rate basis. We
earn interest on this facility on a quarterly basis, based on the daily
outstanding amounts. The facility is generally given for a period of up to 18
months, with a review after 12 months. Our cash credit facility is generally
fully secured with full recourse to the borrower. In most cases, we have a first
lien on the borrower's current assets, which normally are inventory and
receivables. Additionally, in some cases, we may take further security of a
first or second lien on fixed assets including real estate, a pledge of
financial assets like marketable securities, corporate guarantees or personal
guarantees.
Cash credit facilities are extended to borrowers by either a single bank,
multiple banks or a consortium of banks with a lead bank. The nature of the
arrangement depends upon the amount of working capital financing required by the
borrower, the risk profile of the borrower and the amount of loan exposure a
single bank can take on the borrower. Though in the past we have extended cash
credit facilities on our own, with our increased focus on more highly rated
large corporations, we are increasingly participating in multiple bank and
consortium arrangements. For a description of these arrangements, see "-- Loan
Portfolio -- Collateral -- Completion, Perfection and Enforcement". Regardless
of the arrangement, we undertake our own due diligence and follow our credit
risk policy to determine whether we should lend money to the borrower and, if
so, the amount to be lent to the borrower. For more details on our credit risk
procedures, see "-- Risk Management -- Credit Risk".
In cases where ICICI provides long-term loans for financing projects of
corporations, we seek to provide, or participate in the consortium providing,
working capital loans or the short-term portion of their working requirements.
We appraise the customers' credit requirement separately and independently from
ICICI.
Bill Discounting. Bill discounting involves the financing of short-term
trade receivables through negotiable instruments. These negotiable instruments
can then be discounted with other banks if required, providing us liquidity. In
addition to traditional bill discounting, we also provide customized solutions
to our corporate customers having large dealer networks. Loans are approved to
dealers in the form of working capital lines of credit, based on analysis of
dealer credit risk profiles. These dealer financing facilities help us to
strengthen our relationships with our corporate customers and may be expanded
into Internet-based corporate banking services.
Term Loans
Term loans are amortizing loans given typically for a period of between
three and seven years for financing core working capital requirements and normal
capital expenditures of small and medium-sized companies. Our term credits
include rupee loans, foreign currency loans, lease financing and subscription to
preferred stock. These products also include marketable instruments such as
fixed rate and floating rate debentures. In the case of rupee and foreign
currency loans and debentures, we generally have a security interest and first
lien on all the fixed assets of the borrower. The security interest typically
includes property, plant and equipment and other tangible assets of the
borrower. We typically provide term loans of smaller size, generally up to Rs.
200 million, (US$ 5 million), considering our liability profile, and refer
larger loans to ICICI.
39
<PAGE> 41
At December 31, 1999, gross term loans outstanding were Rs. 12.0 billion
(US$ 277 million), constituting 31.0% of our gross loan portfolio.
FEE AND COMMISSION-BASED ACTIVITIES
Our fee and commission-based products and services include documentary
credits, standby letters of credit, forward contracts, interest and currency
swaps, cash management services, trust and retention accounts and payment
services.
Documentary Credits
We provide documentary credit facilities to our working capital loan
customers both for meeting their working capital needs as well as for capital
equipment purchases. For working capital purposes, we issue documentary credits
on behalf of our customers for the sourcing of their raw materials and stock
inputs. Lines of credit for documentary credits and standby letters of credit
are approved as part of a working capital loan package provided to a borrower.
These facilities, like cash credit facilities, are generally given for a period
up to 18 months, with review after 12 months. Typically, the line is drawn down
on a revolving basis over the term of the facility, resulting in a fee payable
to us at the time of each drawdown, based on the amount and term of the
drawdown. A significant proportion of our documentary credits for capital
equipment are issued on behalf of borrowers who also had taken term loans from
ICICI.
We issue documentary credits on behalf of borrowers both for domestic and
foreign purchases. Borrowers pay a fee to us based on the amount drawn down from
the facility and the term of the facility. This facility is generally secured by
the same collateral available for cash credit facilities. We generally also take
collateral in the form of cash deposits from our borrowers before each drawdown
of the facility.
At December 31, 1999, we had a portfolio of documentary credits of Rs. 7.8
billion (US$ 179 million).
Standby Letters of Credit
We provide standby letter of credit facilities, called guarantees in India,
that can be drawn down any number of times up to the committed amount of the
facility. We issue standby letters of credit on behalf of our borrowers in favor
of corporations and government authorities inviting bids for projects,
guaranteeing the performance of our borrowers. We also issue standby letters of
credit as security for advance payments made to our borrowers by project
authorities and for deferral of and exemption from the payment of import duties
granted to our borrowers by the government against fulfillment of certain export
obligations by our borrowers. The term of these standby letters of credit is
generally up to 18 months. This facility is generally secured by collateral
similar to that of documentary credits.
At December 31, 1999, we had a portfolio of standby letters of credit of
Rs. 6.7 billion (US$ 154 million).
Forward Contracts and Interest and Currency Swaps
We provide forward contracts to our customers for hedging their short-term
exchange rate risk on foreign currency denominated receivables and payables. We
generally provide this facility for a term of up to six months and occasionally
up to 12 months. We also offer interest rate and currency swaps to our customers
for hedging their medium and long-term risks due to interest rate and currency
exchange rate movements. We offer these swaps for a period ranging from three to
ten years. Our customers pay a commission to us for this product that is
included in the price of the product and is dependent upon market conditions. We
also hedge our own exchange rate risk related to our foreign currency trading
portfolio with products from banking counterparties.
At December 31, 1999, we had a portfolio of outstanding forward contracts
of Rs. 49.6 billion (US$ 1.1 billion) and a portfolio of interest and currency
swaps of Rs. 8.6 billion (US$ 198 million).
40
<PAGE> 42
Cash Management Services
Under cash management services, we offer our corporate clients custom-made
payment and remittance services allowing them to reduce the time period between
collections and remittances, thereby streamlining their cash flows. Our cash
management products include physical check-based clearing in locations where
settlement systems are not uniform, electronic clearing services, central
pooling of country-wide collections, dividend and interest remittance services
and Internet-based payment products. We believe we were the third largest
provider of cash management services in India at December 31, 1999. We also
provide cash management services to our parent, ICICI. Our customers including
ICICI pay a fee to us for these services based on the volume of the transaction,
the location of the check collection center and speed of delivery.
The total amount handled under cash management services was Rs. 441.3
billion (US$ 10.1 billion) for the nine month period ended December 31, 1999,
resulting in fee income of Rs. 74 million (US$ 1.7 million). At December 31,
1999, we had 231 cash management service customers. ICICI paid us Rs. 14 million
(US$ 322,000) for the nine months ended December 31, 1999 for these services
provided to it by us.
Trust and Retention Accounts
We offer trust and retention account facilities to lenders in limited and
non-recourse project finance transactions who typically require the setting up
of trust and retention accounts as part of the project financing structure and
our customers include power and telecommunications companies. This service
enables us to capture the receivables of the project on behalf of the lenders
and channel the cash flows in a pre-determined manner. We also offer escrow
account facilities for securitization and merger and acquisition transactions.
Our customers pay a negotiated fee to us for this product based on the
complexity of the structure and the level of monitoring involved in the
transaction.
We actively provide these services and use the strengths of our parent as a
leading project financier in the country to obtain customers for these services.
We believe that we are the market leader in providing these services in India,
with about 90 accounts. The cash flows managed under this product during the
nine months ended December 31, 1999 were about Rs. 228.3 billion (US$ 5.2
billion).
Payment Services
We offer online electronic payment facilities to our corporate customers
and their suppliers and dealers as a closed user group, where the entire group
is required to maintain bank accounts with us. We use the Internet as the
delivery platform for this business-to-business electronic commerce product,
which we call "i-payments". Under this service, all payments from our corporate
customers to their suppliers and payments from the dealers to our corporate
customers are made electronically. This service offers a high level of
convenience since no physical instruments are required, all transactions are
done online and the information may be viewed on the Internet. This product can
be customized to meet the specific requirements of individual customers. We do
not charge a fee for this service, as it results in large low cost funds for
short durations in checking accounts of customers, that we invest profitably.
We have already entered into memoranda of understanding with over 100 large
Indian corporations relating to "i-payments". Many of these corporations have
come to us as a result of our relationship with members of the ICICI group. Most
of these corporations intend to include approximately 10-20 dealers and
suppliers in their electronic commerce closed user group. Based on these
statistics, we believe that, based on ICICI's corporate relationship base of
over 1,000 customers, we have the potential to grow to service 15,000 small,
medium and large corporate users over the next few years.
OTHER CORPORATE BANKING ACTIVITIES
International Banking Business
We provide a wide range of cross-border banking services from 25 of our
branches spread across the country. Our international business services include
foreign currency loans for imports and exports, documentary credits, standby
letters of credit and collection and funds transfer services. All these branches
are connected
41
<PAGE> 43
directly to the Society for Worldwide Inter-Bank Financial Telecommunication
network (SWIFT), to quickly facilitate transactions. We also have correspondent
arrangements with over 105 international banks covering all major countries with
which India has trade relationships. These arrangements facilitate the execution
of cross border transactions including letters of credit and funds transfers. We
also provide travel-related services to our corporate customers including money
changing, sale and cashing of travelers' checks and foreign currency remittances
to international travel destinations. Our customers pay fees to us for
substantially all of these products and services.
Treasury Products
We provide liquidity management services to our corporate customers to
enable them to invest their short-term cash surpluses in a variety of short-term
treasury and deposit-based instruments, including treasury bills, commercial
paper and certificates of deposit. These products allow our customers to earn
income on their short-term cash surpluses since deposits for periods of less
than 15 days are non-interest-bearing pursuant to Reserve Bank of India
regulations. We also facilitate the holding of foreign currency accounts. Our
target customers for these products are large public and private sector
companies, provident funds and high net worth individuals.
Products for Other Banks
Various cooperative banks and rural banks in India are limited to specific
regions or states of India. These banks need relationships with banks present in
most of the large cities in India to be able to service the needs of their
customers for country-wide collection and payment. We have developed customized
products and solutions for cooperative banks. Although we do not charge a fee
for these products, they result in large amounts being maintained with us in
non-interest-bearing checking accounts that we can invest profitably.
CORPORATE LOAN PRICING
We price our corporate loans over our prime lending rate based on four
factors:
- our internal credit rating of the company;
- the nature of the banking arrangement (either a single bank, multiple
bank or consortium arrangement);
- the collateral available; and
- market conditions.
Our current credit approval process generally requires a minimum credit
rating of A-. For a description of our credit rating system, see "-- Risk
Management -- Credit Risk".
Our Asset-Liability Management Committee fixes prime lending rates based on
yield curve factors, such as interest rate and inflation rate expectations, as
well as the market demand for loans of a certain term and our cost of funds.
Working capital financing is usually contracted at rates linked to the prime
lending rate for maturities over 365 days. The prime lending rates relevant to
other maturities are used for short-term bill discounting products.
We have four prime lending rates linked to the term of the loan. At
December 31, 1999, our prime lending rates per annum were as follows:
<TABLE>
<CAPTION>
TERM PRIME LENDING RATE
- ---- ------------------
<S> <C>
Up to 90 days............................................... 11.75%
91 days to 180 days......................................... 12.50
181 days to 364 days........................................ 13.00
365 days and over........................................... 13.50
</TABLE>
Under the existing Reserve Bank of India regulations, loan exposures
through corporate debt instruments and bill discounting are not subject to the
prime lending rate regulations. Banks can lend at an interest rate below their
prime lending rates when delivery is through these products.
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<PAGE> 44
One of our competitive advantages in the corporate banking industry is our
speed of delivery. We are generally able to preliminarily approve credit
requests within two business days since we study the borrower and its credit
rating well in advance of our marketing efforts. The formal credit approval
process, including due diligence, generally takes about three to four weeks to
complete. We believe this is a key factor in giving us a substantive competitive
advantage and enabling us to charge a premium in pricing over many of our
competitors.
DIRECTED LENDING
The Reserve Bank of India requires banks to lend to certain sectors of the
economy. Such directed lending is comprised of priority sector lending, export
credit and housing finance.
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend 40.0% of their net bank credit (total domestic loans less marketable debt
instruments and certain exemptions permitted by the Reserve Bank of India from
time to time) to certain specified sectors called priority sectors. Priority
sectors include small-scale industries, the agricultural sector, food and
agro-based industries and small businesses. Out of the 40.0%, we are required to
lend a minimum of 18.0% to the agriculture sector and the balance to certain
specified sectors, including small scale industries (defined as manufacturing,
processing and services businesses with a limit on investment in plant and
machinery of Rs. 10 million), small businesses, including retail merchants,
professional and other self employed persons and road and water transport
operators and to specified state financial corporations and state industrial
development corporations.
The following table sets forth, for the periods indicated, our priority
sector loans broken down by type of borrower.
<TABLE>
<CAPTION>
% OF NET
AT MARCH 31, AT DECEMBER 31, BANK CREDIT
------------------------------------------- ------------------------------- AT DECEMBER 31,
1997 1998 1999 1998 1999 1999
--------- --------- ------------------- --------- ------------------- ---------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Small scale
industries......... Rs. 1,860 Rs. 2,753 Rs. 3,510 US$ 81 Rs. 3,180 Rs. 3,717 US$ 85 13.2%
Others including
small businesses... 231 513 1,959 45 392 1,022 24 3.6
Agricultural
sector............. 252 501 675 16 491 1,912 44 6.8
--------- --------- --------- ------- --------- --------- ------- ----
Total................ Rs. 2,343 Rs. 3,767 Rs. 6,144 US$ 142 Rs. 4,063 Rs. 6,651 US$ 153 23.6%
========= ========= ========= ======= ========= ========= ======= ====
</TABLE>
We are required to comply with the priority sector lending requirements at
the end of each fiscal year. Any shortfall in the amount required to be lent to
the priority sectors may be required to be deposited with Indian development
banks like the National Bank for Agriculture and Rural Development and the Small
Industries Development Bank of India. These deposits have a maturity of up to
five years and carry interest rates lower than market rates. These deposits also
satisfy part of our priority sector requirement.
At March 31, 1999, our priority sector loans were Rs. 6.1 billion,
constituting 30.2% of net bank credit. This led to a shortfall of Rs. 1.9
billion (US$ 44 million) in our priority sector lending. The Reserve Bank of
India required us to deposit the shortfall in the National Bank for Agriculture
and Rural Development when it makes a demand on us. At the present time, this
bank has taken deposits of only Rs. 19 million (US$ 437,000) from us. We believe
that a large number of Indian commercial banks have had a shortfall in meeting
their priority sector lending requirements.
In fiscal 2001, as part of our retail banking activities, we plan to offer
auto loans and home mortgage loans. These loans will be marketed through ICICI
Personal Financial Services. ICICI, together with its subsidiary, ICICI Home
Finance, offers these retail loans. These loans are also marketed through ICICI
Personal Financial Services. Pursuant to an understanding between ICICI and us,
we will offer auto loans and home mortgages loans that qualify as priority
sector lending to our customers and ICICI together with its subsidiary, ICICI
Home
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<PAGE> 45
Finance will offer all other auto loans and home mortgage loans to its
customers. Home mortgages of up to Rs. one million and auto loans to
professionals qualify as priority sector lending and we believe that they offer
us an appropriate opportunity to meet our directed lending requirements without
sacrificing our standards for credit quality.
For a discussion of the asset quality of our priority sector loan
portfolio, see "-- Non-Performing Loans -- Analysis of Non-Performing Loans by
Directed Lending Sector".
Export Credit
As part of directed lending, the Reserve Bank of India also requires us to
make loans to exporters at concessional rates of interest. We provide export
credit for pre-shipment and post-shipment requirements of exporter borrowers in
rupees and foreign currencies. At the end of our fiscal year, 12.0% of our net
bank credit is required to be in the form of export credit. This requirement is
in addition to the priority sector lending requirement but credit extended to
exporters that are small scale industries or small businesses may also meet part
of our priority sector lending requirement. We have complied with these
requirements since inception. The Reserve Bank of India provides export
refinancing for an eligible portion of total outstanding export loans at a
concessional rate that is 2.0% lower than the concessional rate of interest on
export credit. The interest income earned on export credits is supplemented
through fees and commissions earned from these exporter customers from other
fee-based products and services taken by them from us, such as foreign exchange
products and bill handling. At December 31, 1999, our export credit was Rs. 3.4
billion (US$ 78 million), constituting 11.9% of our net bank credit. At December
31, 1999, the weighted average interest rate on our export credit was 10.61%.
Housing Finance
The Reserve Bank of India requires us to lend up to 3.0% of our incremental
deposits in the previous fiscal year for housing finance. This can be in the
form of home loans to individuals or investments in the debentures and bonds of
the National Housing Bank and housing development institutions recognized by the
government of India.
CORPORATE DEPOSITS
We take deposits from our corporate clients with terms ranging from 15 days
to seven years but predominantly from 15 days to one year. We routinely provide
interest quotes for deposits in excess of Rs. 10 million on a daily basis
(uncommon in India), based on rates in the inter-bank term money market and
other money market instruments such as treasury bills and commercial paper. The
Reserve Bank of India regulates the term of deposits in India but not the
interest rates with some minor exceptions. We are not permitted to pay interest
for periods less than 15 days. Also, pursuant to the current regulations, we are
permitted to vary the interest rates on our corporate deposits based upon the
size range of the deposit so long as the rates offered are the same for every
customer of a deposit of a certain size range on a given day. Corporate deposits
include funds taken by us from large public sector corporations, government
organizations, other banks and large private sector companies. Corporate
deposits totaled Rs. 59.6 billion (US$ 1.4 billion) at December 31, 1999,
constituting 70.1% of our total deposits and 60.5% of total liabilities at
December 31, 1999.
We offer a variety of deposit services to our corporate customers. We take
rupee or foreign currency denominated deposits with fixed or floating interest.
Our deposit products for corporations include:
- current accounts -- non-interest-bearing demand deposits;
- time deposits -- fixed term deposits that accrue interest at a fixed
rate and may be withdrawn before maturity by paying penalties; and
- certificates of deposit -- a higher cost type of time deposit.
We have also introduced "Quantum Corporate", a value-added checking
account, which provides automatic transfer of idle balances from current
accounts to time deposits. Whenever there is a shortfall in the current
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<PAGE> 46
accounts, deposits are transferred back from the fixed deposit accounts. This
offers our corporate customer liquidity as well as high returns.
The following table sets forth, for the periods indicated, our corporate
deposits by product.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31, % OF TOTAL
----------------------------------------------- ---------------------- AT DECEMBER 31,
1997 1998 1999 1999 1999 1999 1999
--------- ---------- ---------- --------- ---------- --------- ---------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Current accounts --
banks............... Rs. 34 Rs. 37 Rs. 74 US$ 2 Rs. 267 US$ 6 0.4%
Current accounts --
others.............. 2,990 3,345 5,162 118 6,873 158 11.6
Time deposits-banks... 945 2,586 13,140 302 9,200 211 15.4
Time
deposits-others..... 4,036 9,917 25,883 595 42,910 986 72.0
Certificates of
deposits............ 1,335 3,169 1,330 31 330 8 0.6
--------- ---------- ---------- --------- ---------- --------- -----
Total................. Rs. 9,340 Rs. 19,054 Rs. 45,589 US$ 1,048 Rs. 59,580 US$ 1,369 100.0%
========= ========== ========== ========= ========== ========= =====
</TABLE>
Certificates of deposit decreased 75.2% at December 31, 1999 compared to at
March 31, 1999 primarily due to our decreased emphasis on the marketing of this
product due to its high cost and limited demand.
The following table sets forth, for the periods indicated, our corporate
deposits by type of customer.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31, % OF TOTAL
----------------------------------------------- ---------------------- AT DECEMBER 31,
1997 1998 1999 1999 1999 1999 1999
--------- ---------- ---------- --------- ---------- --------- ---------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Banks................. Rs. 978 Rs. 2,623 Rs. 13,214 US$ 304 Rs. 9,467 US$ 218 15.9%
Corporations.......... 8,063 14,384 28,297 650 45,952 1,055 77.1
Others(1)............. 299 2,047 4,078 94 4,161 96 7.0
--------- ---------- ---------- --------- ---------- --------- -----
Total................. Rs. 9,340 Rs. 19,054 Rs. 45,589 US$ 1,048 Rs. 59,580 US$ 1,369 100.0%
========= ========== ========== ========= ========== ========= =====
</TABLE>
- ---------------
(1) Others include government agencies, charitable trusts, cooperatives,
non-profit organizations and universities.
The following table sets forth, for the period indicated, the maturity
profile of our corporate deposits (including deposits of banks) of Rs. 10
million (US$ 230,000) or more:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-------------------------------------
% OF TOTAL
DEPOSITS
----------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Less than three months................................. Rs. 31,320 US$ 720 36.9%
Above three months and less than six months............ 3,720 86 4.4
Above six months and less than twelve months........... 7,850 180 9.2
More than twelve months................................ 630 14 0.7
---------- --------- ----
Total deposits of Rs. 10 million and more.............. Rs. 43,520 US$ 1,000 51.2%
========== ========= ====
</TABLE>
ICICI is one of our deposit customers. At December 31, 1999, we had Rs. 930
million (US$ 21 million) of current deposits and Rs. 737 million (US$ 17
million) of time deposits from ICICI. We do not pay interest on these current
deposits and we pay interest on these time deposits at rates which we pay all
other time deposit customers.
We market corporate deposits from all our 25 corporate branches, some of
our retail branches and directly from our corporate office. With the increase in
the number of initial public offerings in the Indian equity markets,
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<PAGE> 47
we have been actively participating as commercial bankers to the offerings of
select companies. These companies are required to maintain the subscription
funds from the investors with the bankers to the offering until the allotment of
shares and the refund of excess subscription is completed. This process
generally takes about 30 days, resulting in short-term deposits with us. This
has resulted in significant growth in our corporate deposits. We also act as
commercial banker to companies with oversubscribed initial public offerings when
they need to refund subscription funds to investors, also resulting in
short-term deposits with us. We believe our management of our corporate deposit
customers as well as our ability to offer competitive rates on large deposits
significantly reduces the volatility in our corporate deposit base.
The growth in corporate deposits has been supplemented by our "anywhere
banking service", which allows multi-locational corporations in India to receive
cash inflows and make payments in various cities by maintaining one central
pooling account.
Our other corporate deposit products are:
- inter-bank call rate-linked floating rate deposits; and
- payout of interest and dividend checks issued to investors and
bondholders by corporations.
CLIENT COVERAGE
We believe that the Indian market for working capital products is
approximately Rs. 1.9 trillion (US$ 43.7 billion). We are focusing our corporate
marketing efforts on increasing our market share in this segment. We believe
that the ICICI group's existing corporate relationships provides us with an
opportunity to provide working capital products to large companies and high
growth middle market customers and increase our fee income.
In fiscal 1999, in an effort to improve corporate client service and
profitability, the ICICI group reorganized its corporate structure and created
two corporate client relationship groups, the Major Clients Group and the Growth
Clients Group. These groups are responsible for offering the full range of the
ICICI group's products and services to its clients with an emphasis on
cross-selling and the generation of fee income.
We work with the Major Clients Group to offer various corporate banking
products and services to the top 150 Indian corporations to further the ICICI
group's objective to function as a universal bank. The Major Clients Group is
made up of a team of client bankers, taken from ICICI, ICICI Securities and us.
The Major Clients Group seeks to build on existing relationships and also
focuses on bringing into the ICICI group portfolio new multinational
corporations and large profitable public sector corporations. We currently have
four of our employees working as part of the Major Clients Group.
The Growth Clients Group focuses on middle market companies. The Growth
Clients Group is made up of a team of client bankers, from ICICI and us and
geographically dispersed among ICICI's offices across India. Over the past
several years, the middle market segment has grown rapidly, particularly in the
areas of information technology, automobile components, consumer goods and
pharmaceuticals, and traditionally has had less access to financing compared to
our major clients. We expect that continued growth among middle market companies
will result in greater demand in the volume and type of financial products and
services. We believe that rapid growth in the middle market segment offers us a
significant opportunity to provide a wide variety of lending and fee-based
banking products, including a substantial number of working capital lines of
credit. Our internal estimates indicate that there are over 7,000 middle market
companies in India, of which approximately 1,300 are believed to meet our
benchmark credit risk rating of A- or above. The Growth Clients Group seeks to
identify and build relationships with these middle market clients and build upon
existing client relationships to facilitate a broader distribution of our
products. The Growth Clients Group expects to initially target approximately 800
of these companies, mainly for our loan and deposit products. This group also
seeks to provide other products and services, including our cash management
services. We currently have 17 of our employees working as a part of the Growth
Clients Group at their various locations.
Relationship managers, who represent the entire ICICI group and include
members of our staff who participate in these client relationship groups, are
responsible for marketing our products and services as well as
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<PAGE> 48
the products and services of the ICICI group to corporate customers. The basic
principles of coverage followed by relationship managers include:
- further enhancing the ICICI group's strong customer relationships;
- focusing on a well-defined list of high priority clients;
- responding to clients' needs by marketing those products best suited to
their specific circumstances;
- increasing the ICICI group's share of clients' total banking
requirements;
- serving the client needs effectively and proactively;
- cross-selling the ICICI group's products to improve client
profitability; and
- facilitating a quick roll-out of new products for the ICICI group.
The group has structured the cross-selling process as follows:
- the relationship managers from our company and ICICI make joint
marketing calls to targeted corporations to offer the entire range of
the group's products and services;
- products and services accepted by the targeted customer are then
independently processed and delivered to the customer by the appropriate
ICICI group company; and
- fee and interest income accrue to the company that processes and
delivers the products or services. These amounts are collected directly
from the customer.
Cross-selling is also initiated by our branch managers and operating
officers, who interact with the corporate customer on a regular basis for
operating and maintaining its various cash credit accounts. They also visit the
customer's offices, factories or warehouses periodically. Business opportunities
identified are conveyed to our representatives, ICICI group relationship
managers and to other ICICI group companies.
We believe that we have benefited significantly from this joint marketing
relationship. While we had eight common customers with ICICI at March 31, 1998,
we had 171 common customers at December 31, 1999, representing 24.3% of our loan
portfolio at December 31, 1999. These customers have largely been top tier
Indian corporations and improved the credit quality while significantly
increasing the size of our loan portfolio. We have also been able to increase
fee income from providing cash management services and trust and retention
account services to many of these clients.
While marketing and relationship functions are undertaken along with ICICI,
the processes of credit appraisal, approval and monitoring are independent
activities done by us. Exposures are governed by the policy framework prescribed
by our board of directors. For a discussion of our credit approval process, see
"-- Risk Management -- Credit Risk".
DELIVERY CHANNELS
Branch Network
We deliver our corporate banking services primarily through our corporate
banking network which at December 31, 1999 consisted of 25 branches out of our
total 71 branches spread across India. All of our corporate branches are located
in cities among the top 55 cities throughout all of India's states in terms of
gross bank credit. The corporate banking unit at our head office in Mumbai
assists and supervises these branches in the offering of new products, marketing
initiatives and credit administration. In order to provide quality service to
clients, our corporate branches work in close coordination with the ICICI
group's relationship managers.
Correspondent Banking Networks
We have correspondent banking relationships with commercial and cooperative
banks in India with large physical branch networks to offer a broader coverage
for our funds transfers and remittance related products. As a
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<PAGE> 49
result of our correspondent banking associations, we provide remittance and cash
management services at over 750 locations in India.
Internet
In August 1999, we launched an Internet banking service called "Corporate
Infinity" to deliver a full range of high quality financial services to
corporate customers at their offices and raise our profile as a technologically
sophisticated commercial bank. Corporate Infinity provides multi-location,
multi-user access to the ICICI group's products on a 24-hour basis. This
integrated client interface product allows our corporate customers to have a
single point of contact for their entire relationship with the ICICI group.
Corporate Infinity offers the following:
- details of transactions with the ICICI group relating to term loans,
working capital accounts, foreign currency positions, investments,
documentary credits and standby letters of credit;
- real-time access to the foreign exchange markets, domestic treasury and
bond markets and the leading stock markets in India;
- system-generated alerts including principal and interest payment dates,
documentary credit and standby letter of credit expiry dates;
- online fund transfers;
- requests for documentary credits, documentary credit amendments,
remittances and stop payment orders;
- generation of output in formats that can be interfaced into the standard
accounting software used by our customers;
- multiple access levels within a corporation to different levels of data,
permissions and authorizations;
- a secure e-mail environment to facilitate communication between the
group's relationship managers and our customers; and
- robust and advanced security features.
We do not charge any fee to our customers for using our Corporate Infinity
product. We intend to explore charging our customers a fee for this service in
the future. Based on the response for this product among large corporations, we
believe that we will be able to attract an increasing number of large
corporations to establish banking relationships with us. As a result, we expect
to generate additional interest and fee income.
RETAIL BANKING
GENERAL
Retail banking deposit accounts represented 29.9% of our deposits and 2.0%
of our gross loans at December 31, 1999. We believe that retail loans and
deposits are growth opportunities for us. We intend to continue to grow our
retail deposits for funding purposes since retail deposits are a good source of
low cost, stable funds. We also intend to introduce new retail loan products on
a limited basis during fiscal 2001, including auto and home mortgage loans that
qualify as priority sector lending to diversify our asset base and increase the
proportion of retail loans in our gross loan portfolio.
Retail deposits constituted approximately Rs. 4.7 trillion or 77.0% of
total bank deposits in India at March 31, 1998. Traditional players in the
Indian banking sector include nationalized banks and foreign banks. While the
nationalized banks have a large branch network, we believe that the advantages
arising from this network are largely negated by over-staffing, the high cost of
physical infrastructure and poor customer service. Foreign banks have mainly
concentrated on the high net worth segment. Their expansion has been restricted
by branch licensing requirements that make it difficult for them to expand their
presence. As a recent entrant in the market, we do not have to support
unprofitable branches and can open branches in locations with growth potential
and, more importantly, use technology to enhance the accessibility of our
products and services to customers and to offer a higher level of service than
generally available in the market.
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<PAGE> 50
We have decided to target professionals, self-employed persons, select wage
earners and other members of the middle and upper income segments in India. The
National Council for Applied Economic Research, a well established research
institute in India, estimated that, in fiscal 1996, these segments (defined as
those earning an effective income of more than Rs. 50,000 per annum) totaled
approximately 34 million households in India. We have adopted a focused approach
by targeting a limited sub-segment of about six million households based on a
variety of parameters including residence in selected urban areas. We believe
that this sub-segment is underserved and represents an extremely attractive
business opportunity for us. Further, we expect our target market to experience
continued growth in line with the growth of the Indian economy. The 22 million
non-resident Indians are another important target market segment for us given
their relative affluence and strong links to family members in India.
According to a Reserve Bank of India report, the top 55 cities in India
accounted for 52.5% of total deposits in India at March 31, 1999, and constitute
our target market. We have focused our business activities extensively in the
top eight metropolitan cities which account for 37.9% of total deposits. We
already have branches in 25 out of these 55 cities and hope to have branches in
55 target locations by year-end fiscal 2002.
RETAIL DEPOSITS
Our retail deposit products include the following:
- time deposits including:
-- recurring deposits, which are periodic deposits of a fixed amount over
a fixed term that accrue interest at a fixed rate and may be withdrawn
before maturity by paying penalties; and
-- certificates of deposit;
- savings accounts, which are demand deposits that accrue interest at a
fixed rate set by the Reserve Bank of India (currently 4.5% per annum)
and upon which checks can be drawn; and
- current accounts, which are non-interest-bearing demand deposits.
In addition to deposits from Indian residents, we accept time and savings
deposits from non-resident Indians, foreign nationals of Indian origin and
foreign nationals working in India. These deposits are accepted on a repatriable
and a non-repatriable basis and are maintained in rupees and select foreign
currencies.
The following table sets forth, for the periods indicated, our retail
deposits.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------
1997 1998 1999 AT DECEMBER 31, 1999
--------- --------- -------------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Retail deposits............ Rs. 4,140 Rs. 7,240 Rs. 15,140 US$ 348 Rs. 25,422 US$ 584
</TABLE>
The following table sets forth, for the period indicated, the number of
retail deposit accounts and the balance outstanding by type of deposit.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------------------------------
NUMBER OF
BALANCE OUTSTANDING % OF TOTAL ACCOUNTS % OF TOTAL
-------------------- ---------- --------- ----------
(IN MILLIONS, EXCEPT PERCENTAGES AND NUMBER OF ACCOUNTS)
<S> <C> <C> <C> <C> <C>
Current accounts....................... Rs. 880 US$ 20 3.4% 6,167 1.3%
Savings accounts....................... 4,310 99 17.0 219,326 44.3
Time deposits.......................... 20,232 465 79.6 268,987 54.4
---------- ------- ----- ------- -----
Total retail deposits.................. Rs. 25,422 US$ 584 100.0% 494,480 100.0%
========== ======= ===== ======= =====
</TABLE>
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<PAGE> 51
The following table sets forth, for the periods indicated, the amount of
retail deposits outstanding by type of account holder.
<TABLE>
<CAPTION>
AT MARCH 31, % OF TOTAL
-------------------------------- AT DECEMBER 31,
1998 1999 AT DECEMBER 31, 1999 1999
--------- -------------------- -------------------- ---------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Individuals.................. Rs. 6,090 Rs. 12,590 US$ 289 Rs. 20,470 US$ 470 80.5%
Clubs and associations....... 320 610 14 1,182 28 4.7
Partnership and
proprietorship concerns.... 530 1,120 26 1,710 39 6.7
Cooperatives and trusts...... 300 820 19 2,060 47 8.1
--------- ---------- ------- ---------- ------- -----
Total retail deposits........ Rs. 7,240 Rs. 15,140 US$ 348 Rs. 25,422 US$ 584 100.0%
========= ========== ======= ========== ======= =====
</TABLE>
The following table sets forth, the amount of retail deposits outstanding
by type of product.
<TABLE>
<CAPTION>
AT MARCH 31, % OF TOTAL
-------------------------------- AT DECEMBER 31,
1998 1999 AT DECEMBER 31, 1999 1999
--------- -------------------- -------------------- ---------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Non-resident Indian
deposits................... Rs. 1,766 Rs. 2,805 US$ 64 Rs. 4,282 US$ 98 16.8%
Quantum Optima............... 450 2,240 52 4,600 106 18.1
Power Pay.................... 250 780 18 2,140 49 8.4
Others(1).................... 4,774 9,315 214 14,400 331 56.7
--------- ---------- ------- ---------- ------- -----
Total retail deposits........ Rs. 7,240 Rs. 15,140 US$ 348 Rs. 25,422 US$ 584 100.0%
========= ========== ======= ========== ======= =====
</TABLE>
- ---------------
(1) Includes all other time deposits and current and savings accounts.
For a description of the Reserve Bank of India regulations applicable to
deposits in India and required deposit insurance, see "Supervision and
Regulation -- Regulations Relating to Deposits" and "-- Insurance of Deposits".
In addition to our conventional deposit products, we offer a variety of
special value-added products and services which enable the customer to maximize
returns as well as convenience.
Power Pay
In September 1996, we introduced "Power Pay", a direct deposit product for
a select group of our corporate customers, to help them streamline their salary
payment systems. At December 31, 1999, over 850 corporate clients were using
Power Pay, which allows their employees' salaries to be directly credited to a
special savings account established for this purpose. Direct deposit of
paychecks is unusual in India and provides us with a competitive advantage as
these new payroll account holders often open other accounts with us, including
time deposits and subscribe to our credit card services.
To enhance the attractiveness of Power Pay, we have added several features
to the savings accounts maintained by these employees including:
- automatic overdraft up to 50.0% of monthly salary;
- free remittance facility up to Rs. 25,000;
- depositary share accounts; and
- relaxing the requirement to maintain a quarterly average balance of
Rs. 5,000.
We intend to leverage on ICICI's relationships with over 1,000 corporates
to sell our payroll account "Power Pay" to their employees. On December 31,
1999, the number of "Power Pay" accounts stood at over 106,000,
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<PAGE> 52
constituting 21.4% of our total account base. The share of new "Power Pay"
accounts among all new savings accounts opened during the nine-month period
ended December 31, 1999 was 42.0%.
Quantum Optima
We have introduced a savings account product that offers the customer
liquidity as well as high returns. This product provides automatic transfer of
idle balances from savings accounts to time deposits in units of Rs. 5,000,
resulting in higher yields. Whenever there is a shortfall in the customer's
savings accounts, deposits are transferred back from the fixed deposit account,
automatically in units of Rs. 1,000 to meet the shortfall.
Premium Current Account
We launched our premium current account product in August 1999 to meet the
needs of the small business segment. In addition to conventional banking
facilities, this account offers a free cash transfer remittance facility, free
cash pick-up and delivery, pick-up of checks and documents and a sweep facility
to automatically transfer any excess balance in their current account to a time
deposit.
INTERNET BANKING SERVICES
Infinity
In October 1997, we launched Infinity, India's first Internet banking
service. In September 1999, we introduced an online account opening facility for
non-resident Indians. We believe that the increasing number of Internet users,
the demographic characteristics of those users and the relative flexibility and
convenience of Internet banking provides an opportunity for us to capitalize on
our experience in this area and gain market share in the retail banking sector.
The number of our Internet banking customers has increased from 4,000 at
March 31, 1999 to approximately 52,000 at February 29, 2000. We believe that the
expected increase in Internet usage will accelerate business-to-business and
business-to-consumer transactions, which will ensure our deposit growth through
this channel.
We currently offer the following services to our customers:
- access to account information;
- transaction tracking;
- transfer of funds between accounts of the customer and to any other
account in our bank;
- placement of fixed deposits;
- secure e-mail facility for communications with an accounts manager; and
- check book and stop payment requests.
We expect Internet banking services to be a value differentiator and
attract new customers from our target segment.
Online Bill Payment
On August 15, 1999, we became the first Indian company to introduce utility
bill payments through the Internet. We now have tie-ups with leading
telecommunications companies like Mahanagar Telephone Nigam Limited or MTNL and
Tata Teleservices, Internet service providers like Videsh Sanchar Nigam Limited
or VSNL and cellular operators like BPL Mobile and Usha Martin. We are currently
offering this service free to our customers with the intention of building a
base of users, based on cost sharing arrangements with most of these utility
companies where we either charge the utility company a fixed fee per bill or the
utility company maintains a balance with us before the funds are used by the
utility company resulting in short-term deposits with us. In the future, we
expect this facility to be a source of fee income from the utility companies and
the
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<PAGE> 53
customers who use the service. We have also introduced a bill receipt module,
which allows the customer to receive the utility bill online.
Money2India Remittance Facility
For easy transfer of funds to India, we have introduced Money2India, a
web-based remittance facility. Non-resident Indians can send money to over 173
locations in India. Neither the customer nor the beneficiary needs to have an
account with us, and the remittance can be tracked on the web from origin to
destination. This facility was launched in October 1999. We charge a fee for
this service except where the customer sends funds to his accounts with us.
Sawal Jawab -- An Online Information Service
In order to invest in India, non-resident Indians often require information
relating to financial and tax matters. To meet this need, we have introduced a
free information service called "Sawal Jawab". This service allows non-resident
Indians to post any query related to investment opportunities in India, Indian
tax laws, banking and other related issues on the Internet. Our consultant, who
is an expert in the field, replies to these queries and the reply is posted on
our website.
Web Brokering
ICICI has recently started a wholly owned subsidiary, ICICI Web Trade
Limited, which will facilitate the online integration of a customers' various
accounts with the ICICI group, including depositary share and bank accounts with
us and securities brokerage accounts with ICICI Web Trade. Guidelines for
e-broking have been announced by the Securities and Exchange Board of India. In
line with these guidelines, ICICI Web Trade must obtain various statutory
approvals, for which it has applied. It expects to obtain these approvals by
April 2000 and to make this service operational after that. For a description of
these guidelines, see "Nature of Indian Securities Trading Market -- The Indian
Securities Market -- Internet Based Securities Trading and Services". We expect
this service to significantly aid us in our efforts to acquire new customers and
low cost savings deposits as we will provide each e-broking customer with a bank
account and a depositary share account. We also expect web broking to enhance
customer retention and provide opportunities to earn fee income by cross-
selling other products like loans against subscriptions for initial public
offerings and mutual fund units.
CREDIT CARDS
In January 2000, we launched our credit cards by offering a VISA branded
credit card to select retail customers in Mumbai and we expect to introduce this
product in 12 other cities by March 2001. We believe that:
- our credit card, business will be one of our core retail products and
will help us attract and retain customers and generate interest and fee
income;
- the low penetration of credit cards in India presents us with a
significant business opportunity;
- while foreign banks today dominate the Indian credit card market, a
significant segment of the Indian population prefers to deal with an
Indian financial services provider; and
- our credit cards will facilitate the expansion of our retail banking
activities and the ongoing development of our retail customer database
with information on spending patterns, repayment patterns and credit
histories.
The management of our credit card issuance, billing and other operations
have been outsourced to ICICI Personal Financial Services, a subsidiary of
ICICI, on a cost plus 10% basis. ICICI Personal Financial Services manages these
operations on the basis of guidelines approved by us. A comprehensive credit and
operations policy has been laid down for processing card applications and
transactions. Credit approval is done by ICICI Personal Financial Services
employees seconded to us, on the basis of a variety of factors determined by us
including the demographic profile of the applicant, stability of earnings and
the nature of employment. Physical verification of the applicant's details, such
as residence, office location and the documents submitted by the
52
<PAGE> 54
applicant, is carried out to ensure that only genuine applications are accepted.
Card issue, transaction processing and customer servicing are also carried out
by ICICI Personal Financial Services.
We have devised an internal credit scoring model and maintain strict
monitoring of repayment patterns to minimize the risks associated with this
business. There are no credit bureaus in India, but we are working closely with
Visa International to develop our fraud and risk management policies. An
in-house fraud unit has been set up to detect, control and manage frauds. We
have also set up a 24 hours by seven days authorization unit which enables us to
track spending patterns of card holders and trigger alerts. Our Vision Plus
software system has an elaborate delinquency management functionality, which we
believe will enable us to actively follow up on delinquent customers. Portfolio
quality will be maintained with the help of advanced technology to deliver
timely information and analytics.
We are the first Indian company to provide credit card account information
through the Internet. Our card holders have the convenience of applying for
their card, accessing card-related information, viewing their statement,
checking their balance and making payments online. Another innovation of our
credit cards is the flexibility of the cardholder to set different spending
limits on supplementary cards. This enables customers to control the spending of
their supplementary card holders.
We offer three credit card products targeted at different customer
segments.
True Blue. Positioned as an entry level offering, the True Blue card is a
value for money card. Targeted at the mass market, the card is competitively
priced with an application fee of Rs. 100 and an annual fee of Rs. 300. Interest
is charged on the amount rolled-over to the next month at 2.95% per month. The
credit limit is a function of the monthly income of the cardholder and is
subject to a maximum limit.
Sterling Silver. This credit card is a family offering with a free
supplementary card, along with comprehensive insurance benefits for both primary
as well as supplementary card members. Targeted at the upwardly mobile customer,
this card is available at an application fee of Rs. 150 and an annual fee of Rs.
600. Interest is charged on the amount rolled-over to the next month at 2.5% per
month. The credit limit is subject to a maximum limit.
Solid Gold. The Solid Gold credit card is presently offered at a special
invitation price comprising an application fee of Rs. 300 and an annual fee of
Rs. 1,200. This credit card is the only one we offer that can be used outside
India. Interest is charged on the amount rolled-over to the next month at 2.5%
per month. The credit limit is subject to a maximum limit based on the
cardholder's income. This globally accepted card offers additional comprehensive
travel insurance, as well as a Global One Calling Card, which enables the holder
to make telephone calls while travelling abroad.
Customers do not need to have either a bank account or collateral
securities with us to obtain a credit card. For customers with a bank account
with us, we have the right to offset any delinquencies in the credit card
account against balances in the bank account.
RETAIL LOAN PRODUCTS
Our retail loans were 2.0% of our gross loans at December 31, 1999. We
offer credit cards, loans against time deposits and loans against shares for
subscriptions to initial public offerings of Indian Companies. In fiscal 2001,
we plan to offer auto loans and home mortgage loans which will be marketed
through ICICI Personal Financial Services. Pursuant to an understanding between
ICICI and us, we will offer auto and home mortgage loans that qualify as
priority sector lending and ICICI, together with ICICI Home Finance, will offer
all other auto loans and home mortgage loans. Home mortgages of up to Rs. 1
million and auto loans to professionals qualify as priority sector lending.
Increasing the volume of retail loans will allow us to diversify our asset base
and will help us to meet the priority sector lending requirements specified by
the Reserve Bank of India. For more details on our loan portfolio, see "-- Loan
Portfolio".
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<PAGE> 55
Loans Against Time Deposits
We provide overdraft and demand loans against the security of time
deposits. The loan can be up to 85.0% of the deposit amount. The interest rate
is linked to the interest rate on the underlying deposits and our prime lending
rate.
Loans against Shares for Subscription to Initial Public Offerings
We make short-term loans to individuals to permit them to invest in initial
public offerings of select companies, whose share offerings are expected to be
significantly oversubscribed. These loans are secured by a lien on the shares to
be allotted in the offering.
Overdrafts and Personal Loans
We provide overdraft and personal loans to our Power Pay account holders.
OTHER FEE-BASED PRODUCTS AND SERVICES
Mutual Fund Sales
We have entered into arrangements with a few mutual funds, including
Prudential ICICI Mutual Fund, Templeton Mutual Fund and Kothari Pioneer Mutual
Fund, to distribute their products through our branches and our website, for
which we earn front-end and back-end commissions. We believe that due to the
growing popularity of mutual funds in India, this service has the potential to
generate increased fee income and strengthen customer relationships.
Depositary Share Accounts
Our parent ICICI, a depositary participant with the National Securities
Depository Limited, offers depositary share accounts to its customers through
its ICICI centers. We have had an arrangement with ICICI since January 1999
whereby we offer depositary share accounts to our customers through our branches
and collect fees (including account opening fees, transaction maintenance fees
and quarterly fees) from our customers for this product, allowing us to increase
our recurring fee income, attract and retain customers and increase balances in
the savings and current accounts of our customers. We are not required to pay
any fees to ICICI but pay a fee to ICICI Infotech for the processing by it of
all back office transactions relating to this business. ICICI pays the same fees
to ICICI Infotech relating to its depositary share account business. These
depositary share accounts hold the customer's equity securities that are in
book-entry form and handle purchase and sale transactions. At December 31, 1999,
ICICI had approximately 64,000 depositary share accounts with a custody value of
over Rs. 20.0 billion, approximately 44,000 of which were our customers'
depositary share accounts.
Life Insurance
The Insurance Regulatory and Development Authority Bill has been passed by
the Indian Parliament. This authority is expected to issue guidelines for new
entrants to the life insurance industry by April 2000. These new insurance
companies are expected to be operational by the end of 2000.
ICICI has signed a memorandum of understanding with Prudential Insurance
Plc, UK for entering the life insurance business. Life insurance products would
be distributed through the ICICI group's distribution channels including our
network of branches, subject to obtaining necessary approvals. We expect that we
will not underwrite any insurance and our income will be based on fees earned
from policies distributed by us.
DISTRIBUTION CHANNELS
We deliver our retail products and services through a variety of
distribution outlets, ranging from traditional bank branches to ATMs and the
Internet. We believe that India's vast geography necessitates a variety of
distribution channels to best serve our customers' needs. The key components of
our distribution network are described below.
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<PAGE> 56
Branches
At December 31, 1999, we had a fully computerized network of 71 branches
(including 25 corporate branches) and 13 extension counters in 40 cities.
Extension counters are small offices primarily within office buildings or on
factory premises, that provide commercial banking services. Before opening a
branch, we conduct a detailed study in which we assess the deposit potential of
the area. Although the top 55 cities in India constitute our target segment, by
having branches in 25 out of these 55 cities, we believe that we have achieved
the basic geographic spread for our branch network. Branch locations are largely
leased rather than owned. We are in the process of centralizing back office
operations at regional processing centers, which is expected to reduce the
number of employees required at the branch office, enabling us to create a more
efficient branch network. For a description of our regional processing centers,
see "-- Risk Management -- Quantitative and Qualitative Disclosures About Market
Risk -- Operational Controls and Procedures in Regional Process Centers".
As a part of its branch licensing conditions, the Reserve Bank of India has
stipulated that at least 25.0% of our branches must be located in semi-urban and
rural areas. A semi-urban area is defined as a center with a population of
greater than 10,000 but less than 100,000. A rural area is defined as a center
with a population of less than 10,000. The population figures relate to the 1991
census. We have adhered to this requirement as shown in the table below. The
majority of these branches are located in suburbs of large cities, and some of
these branches are located in areas where large corporations have their
manufacturing facilities.
The following table sets forth, for the period indicated, the number of
branches broken down by area.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------
% OF
NUMBER OF BRANCHES TOTAL
------------------ -----
<S> <C> <C>
Metropolitan/urban.......................................... 49 69.0
Semi-urban/rural............................................ 22 31.0
--- -----
Total....................................................... 71 100.0
=== =====
</TABLE>
We expect to reach an aggregate of 100 branches and extension counters by
the end of fiscal 2000, subject to issuance of the necessary licenses by the
Reserve Bank of India.
ATMs
We have the largest network of ATMs in the country. Of the 121 ATMs we
operated at December 31, 1999, 89 were located at our branches and extension
counters. The remaining 32 were located at the offices of select corporate
clients, large residential developments, airports and on major roads in
metropolitan cities. At December 31, 1999, we had 183,470 ATM cardholders. We
currently lease a substantial portion of our ATMs from ICICI. See "Related Party
Transactions" for a description of our ATM lease agreements with ICICI.
To increase the number of off-site ATMs, we have entered into agreements
with three major public sector petroleum companies in India. Under these
agreements, we propose to deploy ATMs at the gas station outlets of these oil
companies at strategic locations in metropolitan cities. We also propose to
install ATMs at cyber cafes and at the outlets of consumer durable companies and
retail chain stores.
By the end of fiscal 2001, we intend to expand our ATM network to 500 ATMs.
The capital expenditure required to complete this expansion project is
approximately Rs. 2 million per new ATM. We intend to lease these new ATM
facilities from ICICI.
We propose to issue electronic debit cards as an associate member of VISA.
We also plan to join "Swadhan", a Mumbai based shared payment network of ATMs
promoted by the Indian Banks Association.
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<PAGE> 57
Internet
We believe that many of our corporate and retail customers demand Internet
banking services as a convenient and cost effective means of conducting
financial transactions. We offer online banking services through our website.
Market Potential of the Internet in India. In India, the delivery of
banking products has traditionally been through large physical branch networks.
Rapid developments in telecommunications and the Internet are reducing the
importance of physical channels. Internet banking is relatively new in India and
we believe that the market for Internet banking services is underdeveloped.
The growth of the Internet in India was inhibited by high costs of Internet
access and an inadequate telecommunications infrastructure. With the
liberalization of the telecommunications sector and the entry of private
Internet service providers, the quality of infrastructure has improved. The
International Data Corporation predicted in 1999 that the number of Internet
users in India will grow from approximately 0.8 million in 1999 to 4.5 million
in 2002 and 12.3 million by 2005. Approximately 22 million persons of Indian
origin live overseas and many of these persons are Internet users. India has
about 175 licensed Internet service providers, 30 of which have commenced
operations. At present, there are 450,000 Internet subscribers in India.
At March 31, 1999, there were 3.2 million personal computers in India, most
of which were in the corporate segment. High telecommunications charges and high
Internet access fees charged by service providers make Internet access from
homes expensive. Although the penetration of personal computers is not
widespread in India, other means of Internet access are gradually being
developed. Cyber cafes providing Internet access to the public are opening up in
many parts of the country and have the potential to be an important distribution
channel in the future since customers can access the Internet by paying only for
actual Internet usage. Also, India has about 37 million homes having access to
cable television. The introduction of set-top boxes, which enable Internet
access through cable television, is expected to increase the number of people
having access to the Internet and to promote its reach in India. We expect that
in India the increase in Internet usage will be driven by cyber-cafes and cable
television.
Strategic Alliances. We believe that we can expand our Internet
distribution channel by entering into strategic alliances with various parties.
We have recently signed a memorandum of understanding with a leading portal and
private Internet service provider in India for online distribution of our retail
banking products and services.
We use online banner advertising with other Internet service providers and
leading Indian Internet sites like samachar.com, rediff.com, and indiatimes.com.
See "Technology -- Market Trends in India" for a discussion of the Internet
market in India.
Telephone Banking Call Centers
We provide telephone banking services to our customers through our call
centers located in Mumbai and Pune, which have an interactive voice response
system as well as call agents. Both call centers work for 24 hours a day, 7 days
a week and are managed by ICICI Personal Financial Services. We pay ICICI
Personal Financial Services on the basis of the call volume. For a further
discussion of our relation with ICICI Personal Financial Services, see "Related
Party Transactions". We launched the Mumbai call center in September 1999 and
the Pune call center in January 2000. At December 31, 1999, about 2,790 of our
customers had registered for the telephone banking service. The Mumbai call
center currently handles about 1,000 calls a day, which includes service calls,
and other inbound and outbound marketing calls. We expect that four more call
centers will be operational by the end of the first quarter of fiscal 2001.
Currently, long distance telecommunications tariffs and regulations do not make
a centralized call center attractive. We expect that with continued
liberalization and convergence taking place in the telecommunications sector, we
will then consolidate the call centers into two or three regional centers.
Our customer information file is extensively used at the telephone banking
call centers. This database issues a unique relationship number to each customer
relationship that enables the call agent to cross-sell other
56
<PAGE> 58
products to the customer. For example, if a customer calls to pay his last auto
loan installment, this database will signal the call agent to sell him either a
loan to upgrade the car, a mortgage, a tax saving investment product or a
recurring deposit. Software is being tested that, when operational, will display
on the call agent's screen the product to be cross-sold to the customer.
Franchisee Network
Our parent ICICI has an unaffiliated franchisee network to sell the retail
products of the ICICI group. This network consisted of 31 agents in 15 cities at
December 31, 1999. These agents market the ICICI group's products exclusively
and are not expected to market or act on behalf of any of our competitors.
Agents are dedicated to a particular line of products and receive a fee based on
the volume of business and the number of client relationships generated. We use
the same franchisee network for distributing our retail deposit products. They
supplement our growing network of branches and other electronic delivery
channels and enable us to achieve deeper penetration by offering doorstep
account opening facilities to the customer.
Mobile Phone Banking
We launched mobile phone banking in Mumbai on March 13, 2000. This will
enable our savings account and credit card customers to view their account
details on their mobile phone. We expect to provide the facility to conduct
transactions and to expand the service to other customers of ICICI group by
April 2000. We are in the process of finalizing agreements with several
telecommunication companies to provide the service in other cities in India. We
plan to introduce wireless application protocol based technology over time to
provide our customers with greater functionality.
TREASURY
Through our treasury operations, we seek to manage our balance sheet
including the maintenance of required regulatory reserves and to optimize
profits from our trading portfolio by taking advantage of market opportunities
using funds acquired from the inter-bank markets and corporate deposits. Our
trading portfolio includes our regulatory portfolio as there is no restriction
on active management of our regulatory portfolio.
GENERAL
Due to regulatory requirements, a substantial portion of our trading
portfolio consists of government of India securities. At March 31, 1999,
government of India securities represented 91.3% of our trading portfolio while
the remainder included domestic debt and equity securities and foreign currency
assets.
Under the Reserve Bank of India's statutory liquidity ratio requirement, we
are required to maintain 25.0% of our total demand and time liabilities by way
of approved securities, such as government of India securities and state
government securities. We maintain the statutory liquidity ratio through a
portfolio of government of India securities that we actively trade to optimize
the yield and benefit from price movements to increase our trading income from
this portfolio.
Under the Reserve Bank of India's cash reserve ratio requirements, we are
also required to maintain 9.0% of our demand and time liabilities in a current
account with the Reserve Bank of India. The Reserve Bank of India pays no
interest on these cash reserves up to 3.0% of the demand and time liabilities
and pays 4.0% on the balance. In calculating the cash reserve ratio requirement,
we exclude the following liabilities from demand and time liabilities:
- inter-bank liabilities;
- liabilities to primary dealers;
- deposits from non-resident Indians, both repatriable and non-repatriable
deposits;
- foreign currency deposits from non-resident Indians; and
- refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks.
57
<PAGE> 59
For further discussion of these regulatory reserves, see "Supervision and
Regulation -- Legal Reserve Requirements".
As part of our treasury activities, we maintain proprietary trading
portfolios in domestic debt and equity securities and in foreign currencies. We
have a limited equity portfolio because the Reserve Bank of India restricts our
incremental investment in equity securities in a fiscal year to 5.0% of the
increase in deposits in the previous fiscal year.
Our treasury engages in domestic and foreign exchange operations from a
centralized trading floor in Mumbai. We believe that our dealing room is one of
the best in India in terms of technological capability and skills. The
infrastructure includes the latest voice systems and electronic dealing
terminals with access to real time market information feeds. We are upgrading
our decision support systems.
The treasury has access to the ICICI group's research teams that regularly
track the debt, equity and currency markets. This helps us to respond quickly to
capitalize on market opportunities.
The treasury consists of two parts, domestic treasury and foreign exchange
treasury. At March 31, 1999, our domestic treasury represented 79.9% of our
treasury assets and our foreign exchange treasury represented 20.1% of our
treasury assets.
DOMESTIC TREASURY
Our domestic treasury manages our liquidity and regulatory reserves with an
objective of optimizing yield on our investment portfolio. It undertakes
transactions in both fixed income securities and equity securities. Our trading
portfolio consists mainly of fixed income securities. At March 31, 1999, fixed
income securities were 96.1% of our trading portfolio.
Our investment policy, approved by our board of directors, was instituted
in June 1994 and is updated periodically. This investment policy sets out the
broad guidelines for transactions in securities and incorporates the various
regulatory requirements. These guidelines include several checks on risk,
including a duration limit, holding period limits and stop-loss limits. Our
investment policy vests the Investment Committee, dealers and other officers
with different levels of authority for investment decisions. For a more complete
description of our investment policy, see "-- Risk Management -- Quantitative
and Qualitative Disclosures About Market Risk -- Market Risk Management
Procedures".
Liquidity management involves maintaining an optimum level of liquidity and
complying with the cash reserve ratio. The objective is to ensure the smooth
functioning of all our branches and at the same time avoid the holding of
excessive cash. Our domestic treasury maintains a balance between
interest-earning liquid assets and cash to optimize earnings.
Reserve management involves maintaining statutory reserves, including the
cash reserve ratio and the statutory liquidity ratio.
Our securities are classified into two categories, trading securities and
available for sale securities. Trading securities constitute a major portion of
our portfolio. The following table sets forth, for the periods indicated,
certain information related to our trading portfolio.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------
1998 1999 AT DECEMBER 31, 1999
--------- -------------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Government of India securities....... Rs. 6,987 Rs. 14,449 US$ 332 Rs. 28,100 US$ 646
Equity securities.................... 101 198 5 165 4
Commercial paper and certificates of
deposit............................ 222 750 17 -- --
--------- ---------- ------- ---------- -------
Total................................ Rs. 7,310 Rs. 15,397 US$ 354 Rs. 28,265 US$ 650
========= ========== ======= ========== =======
</TABLE>
58
<PAGE> 60
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on trading securities, net gain
from the sale of these securities and unrealized gain/(loss) on these
securities.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------ NINE MONTHS ENDED
1998 1999 DECEMBER 31, 1999
--------- ------------------ --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest and dividends................. Rs. 865 Rs. 2,247 US$ 52 Rs. 2,079 US$ 48
Gain on sale of trading securities..... 274 111 3 364 8
Unrealized gain/(loss) on trading
securities........................... (127) 23 1 334 8
--------- --------- ------ ---------- -------
Total.................................. Rs. 1,012 Rs. 2,381 US$ 56 Rs. 2,777 US$ 64
========= ========= ====== ========== =======
</TABLE>
In addition to trading securities, we also hold available for sale
securities, primarily corporate debt securities. The following tables set forth,
for the periods indicated, certain information related to our available for sale
securities.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------
1997 1998
----------------------------------------------- -----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate debt
securities............. Rs. 580 -- Rs. (9) Rs. 571 Rs. 1,117 Rs. 33 Rs. (14) Rs. 1,136
Government of India
securities............. 3,156 -- (10) 3,146 59 1 -- 60
--------- ---- ------- --------- --------- ------ ------- ---------
Total debt securities.... 3,736 -- (19) 3,717 1,176 34 (14) 1,196
Mutual fund securities... -- -- -- -- 280 -- -- 280
--------- ---- ------- --------- --------- ------ ------- ---------
Total.................... Rs. 3,736 -- Rs. (19) Rs. 3,717 Rs. 1,456 Rs. 34 Rs. (14) Rs. 1,476
========= ==== ======= ========= ========= ====== ======= =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1999
-------------------------------------------------------- ----------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED
COST GAIN LOSS FAIR VALUE COST GAIN
--------- ---------- ---------- ------------------ --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate debt
securities......... Rs. 2,860 Rs. -- -- Rs. 2,860 US$ 66 Rs. 2,218 Rs. 45
Government of India
securities......... 775 50 -- 825 19 916 75
--------- ------ ---- --------- ------ --------- -------
Total debt
securities......... 3,635 50 -- 3,685 85 3,134 120
Mutual fund
securities......... 266 12 -- 278 6 1,158 --
--------- ------ ---- --------- ------ --------- -------
Total................ Rs. 3,901 Rs. 62 -- Rs. 3,963 US$ 91 Rs. 4,292 Rs. 120
========= ====== ==== ========= ====== ========= =======
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------
GROSS
UNREALIZED
LOSS FAIR VALUE
---------- -------------------
(IN MILLIONS)
<S> <C> <C> <C>
Corporate debt
securities......... -- Rs. 2,263 US$ 52
Government of India
securities......... -- 991 23
------- --------- -------
Total debt
securities......... -- 3,254 75
Mutual fund
securities......... (10) 1,148 26
------- --------- -------
Total................ Rs. (10) Rs. 4,402 US$ 101
======= ========= =======
</TABLE>
59
<PAGE> 61
The following table sets forth, for the periods indicated, an analysis of
the maturity profile of our investments in corporate debt securities classified
as available for sale securities and the yields thereon.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
------------------------------------------------------------------------
MORE THAN TEN
UP TO ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS YEARS
--------------- ----------------- ----------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- --------- ----- -------- ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate debt securities......... Rs. 263 9.37% Rs. 1,492 8.69% Rs. 455 10.88% Rs. 53 14.15%
Other debt securities............. -- -- -- -- -- -- -- --
------- ---- --------- ---- ------- ----- ------ -----
Total interest-earning
securities...................... Rs. 263 9.37% Rs. 1,492 8.69% Rs. 455 10.88% Rs. 53 14.15%
------- ---- --------- ---- ------- ----- ------ -----
Total amortized cost.............. Rs. 263 Rs. 1,467 Rs. 438 Rs. 50
Total market value................ 263 1,492 455 53
</TABLE>
FOREIGN EXCHANGE TREASURY
Our foreign exchange treasury manages our foreign currency exposures,
offers foreign exchange and risk hedging derivative products to our customers
and engages in proprietary trading of currencies. At March 31, 1999, our foreign
exchange treasury represented 20.1% of our treasury assets.
The foreign exchange treasury tracks balances on a real time basis to
optimize the yield on funds across all currencies, using foreign exchange swaps
and short-term deposits with correspondent banks.
We deal in 15 major foreign currencies and we take deposits from
non-resident Indians in four major foreign currencies. We also manage onshore
accounts in foreign currencies. The foreign exchange treasury manages its
portfolio through money market and foreign exchange instruments to optimize
yield and liquidity.
We control market risk and credit risk on our foreign exchange trading
portfolio through an internal model which sets counterparty limits, stop-loss
limits and limits on the loss of the entire foreign exchange trading operations
and exception reporting. We also use a value at risk model to monitor our spot
positions.
Customer Foreign Exchange
We provide customer specific products and services and risk hedging
solutions in 15 currencies to meet the trade and service-related requirements of
our corporate clients. The products and services offered include:
- spot foreign exchange for the conversion of foreign currencies without
any value restrictions;
- forward foreign exchange for hedging future receivables and payables,
without any value restriction, up to a maximum period of three years;
and
- foreign exchange and interest rate derivatives for hedging long-term
exposures.
We earn commissions on these products and services from our corporate
customers.
Proprietary Trading in Currencies
We are active in the proprietary trading of currencies and are among the
few Indian banks to be approved by the Reserve Bank of India to initiate cross
currency positions abroad. Our trading is focused on US dollar, the Euro, the
Japanese yen and the UK pound sterling. The average monthly inter-bank volumes
in the nine months ended December 31, 1999 was US$ 2,480 million, up from US$
1,764 million in fiscal 1999.
60
<PAGE> 62
The following table sets forth, for the periods indicated, our growth in
trading volume in various segments of our foreign exchange operations.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
-------------------------------- ----------------------------------
1998 1999 1998 1999
--------- -------------------- --------- ----------------------
(IN BILLIONS, EXCEPT NUMBER OF CURRENCIES AND NOSTRO ACCOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Trading volume:
Inter-bank............. Rs. 422.6 Rs. 898.7 US$ 20.7 Rs. 551.3 Rs. 971.4 US$ 22.3
Merchants.............. 38.8 57.4 1.3 35.9 76.6 1.8
--------- --------- -------- --------- ----------- --------
Total trading volume..... Rs. 461.4 Rs. 956.1 US$ 22.0 Rs. 587.2 Rs. 1,048.0 US$ 24.1
========= ========= ======== ========= =========== ========
Size of foreign currency
book................... Rs. 59.0 Rs. 86.6 US$ 0.2 Rs. 90.1 Rs. 99.6 US$ 0.2
Number of currencies..... 12 15 15 15
Number of nostro
accounts............... 14 20 20 21
</TABLE>
FUNDING
Our funding operations are designed to ensure both stability of funding and
effective liquidity management. The primary source of funding is deposits raised
from corporate customers, which were 70.1% of total deposits at December 31,
1999. Retail deposits, which provide a cheaper source of funds, are the other
source of deposits and represented 29.9% of total deposits at December 31, 1999.
We expect retail deposits to account for a greater share of deposits in the
future as a result of our improved market presence. We constantly monitor our
funding strategy with a view to minimizing funding costs and matching maturities
with our loan portfolio.
TOTAL DEPOSITS
The following table sets forth, for the periods indicated, our average
outstanding deposits based on daily balances and the percentage composition by
each category of deposits. The average cost (interest expense divided by average
of daily balances) for each category of deposits is provided in the footnotes.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------- NINE MONTHS ENDED
1997 1998 1999 DECEMBER 31, 1999
---------------------- ----------------------- ----------------------- -----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits...... Rs. 2,170 21.9% Rs. 3,399 18.3% Rs. 3,539 9.0% Rs. 5,626 9.0%
Savings deposits(1).... 304 3.0 815 4.4 1,569 4.0 3,176 5.1
Time deposits(2)....... 7,449 75.1 14,325 77.3 34,347 87.0 53,432 85.9
--------- ----- ---------- ----- ---------- ----- ---------- -----
Total.................. Rs. 9,923 100.0% Rs. 18,539 100.0% Rs. 39,455 100.0% Rs. 62,234 100.0%
========= ===== ========== ===== ========== ===== ========== =====
</TABLE>
- ---------------
(1) With an average cost of 3.29% in fiscal 1997, 3.44% in fiscal 1998, 3.44%
in fiscal 1999 and 3.40% in the nine months ended December 31, 1999.
(2) With an average cost of 12.91% in fiscal 1997, 11.10% in fiscal 1998,
10.64% in fiscal 1999 and 10.21% in the nine months ended December 31,
1999.
For a breakdown of our corporate deposits, see "-- Corporate Banking --
Corporate Deposits", and for a breakdown of our retail deposits, see " -- Retail
Banking -- Deposits".
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<PAGE> 63
SHORT-TERM BORROWINGS
The following table sets forth for the periods indicated, certain
information related to our short-term rupee borrowings from banks, primary
dealers and financial institutions, excluding deposits.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31,(1) ENDED
------------------------------ DECEMBER 31,
1997 1998 1999 1999
-------- -------- -------- ------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Period end balance............................... Rs. 100 Rs.1,500 Rs. 325 Rs. 633
Average balance during the period(2)............. 1,024 1,250 2,193 2,576
Maximum month-end balance........................ 2,476 3,195 3,968 6,172
Average interest rate during the period(3)....... 12.70% 14.56% 10.31% 9.90%
Average interest at period end(4)................ 7.00 10.30 10.64 5.88
</TABLE>
- ---------------
(1) Short-term borrowings include trading liabilities, such as borrowings in
the call market and repurchase agreements.
(2) Average of daily balances outstanding.
(3) Represents the ratio of interest expense on short-term borrowings to the
average of daily balances of short-term borrowings.
(4) Represents the weighted average rate of the short-term borrowings
outstanding at year-end fiscal 1997, 1999 and 1999 and at December 31,
1999.
OTHER SOURCES OF FUNDS
We also obtain funds from the issuance of subordinated debt securities. In
May 1998, we issued Rs. 1.0 billion of subordinated debt due August 2003, and in
January 1999, we issued an additional Rs. 680 million of subordinated debt due
April 2006. This debt is classified as Tier 2 capital in calculating our capital
adequacy ratio. Under the Reserve Bank of India's capital adequacy requirements,
we are required to maintain a minimum ratio of capital to risk adjusted assets
and off-balance sheet items of 8.0% (9.0% effective March 31, 2000), at least
half of which must be Tier 1 capital. Total subordinated debt classified as Tier
2 capital cannot exceed 50.0% of Tier 1 capital. For a discussion of our capital
adequacy ratios, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital".
LOAN PORTFOLIO
At December 31, 1999, our gross loan portfolio, which includes our holdings
of corporate debt instruments, was Rs. 38.8 billion (US$ 893 million) and
represented approximately 1,400 loans outstanding. Corporate debt instruments
amounted to Rs. 8.5 billion (US$ 195 million) at December 31, 1999, or 21.8% of
our gross loans. No trading market exists for these corporate debt securities,
but we believe that as the secondary debt markets in India become more active,
lenders will be able to more easily sell these corporate debt securities,
thereby allowing for better management of mismatches in the maturity of assets
and liabilities and providing additional liquidity. Almost all of our loans are
to Indian borrowers.
For a description of our corporate and retail loan products, see "--
Corporate Banking -- Loan Products" and "-- Retail Banking -- Credit Cards"; and
"-- Retail Banking -- Retail Loan Products".
62
<PAGE> 64
The following table sets forth, for the periods indicated, our gross loan
portfolio classified by product group.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------------------------- --------------------
1997 1998 1999 1999 1999
--------- ---------- ---------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Working capital.................... Rs. 6,705 Rs. 9,256 Rs. 17,508 Rs. 26,005 US$ 598
Term loans(1)...................... 1,477 3,344 9,859 12,047 277
Retail loans....................... 380 590 1,110 780 18
--------- ---------- ---------- ---------- -------
Gross loans........................ Rs. 8,562 Rs. 13,190 Rs. 28,477 Rs. 38,832 US$ 893
========= ========== ========== ========== =======
Of which:
Corporate debt instruments....... Rs. 153 Rs. 1,424 Rs. 6,762 Rs. 8,471 US$ 195
</TABLE>
- ---------------
(1) Includes corporate debt instruments and lease finance products. We had
lease finance of Rs. 339 million (US$ 8 million) at December 31, 1999,
representing 0.9% of our gross loans. In 1995-1996, we offered lease
financing to a limited number of customers due to certain tax advantages to
us from these transactions. We discontinued all of our lease finance
activities in fiscal 1997 once the Indian tax authorities disputed this tax
treatment. For a discussion of this dispute, see "-- Legal and Regulatory
Proceedings".
SHIFT IN CUSTOMER FOCUS
Over the past year, consistent with our strategy of focusing on quality
growth opportunities, we have concentrated on financing large, highly rated
corporations by taking advantage of the corporate relationships of the ICICI
group. The following table sets forth, for the periods indicated, the volume of
our corporate loan approvals to new customers broken down by the revenues of
these new customers. This table demonstrates the ongoing shift in our loan
portfolio from small to medium-sized enterprises to large corporations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1999
------------------------------------- -------------------------------------
LOAN LOAN
APPROVALS TO APPROVALS TO
NUMBER OF NEW NUMBER OF NEW
REVENUES COMPANIES CUSTOMERS % OF TOTAL COMPANIES CUSTOMERS % OF TOTAL
- -------- --------- ------------ ---------- --------- ------------ ----------
(IN MILLIONS, EXCEPT NUMBER OF COMPANIES AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Below Rs. 5 million........ 5 Rs. 36 0.7% 6 Rs. 28 0.3%
Rs. 5 to 100 million....... 30 544 10.7 48 481 4.9
Rs. 100 to 1,000 million... 40 904 17.8 76 1,402 14.4
Rs. 1 to 10 billion........ 21 3,107 61.2 74 5,629 57.7
Rs. 10 to 20 billion....... -- -- -- 6 1,004 10.3
Above Rs. 20 billion....... 3 488 9.6 7 1,210 12.4
--- ---------- ----- --- ---------- -----
Total...................... 99 Rs. 5,079 100.0% 217 Rs. 9,754 100.0%
=== ========== ===== === ========== =====
</TABLE>
COLLATERAL -- COMPLETION, PERFECTION AND ENFORCEMENT
Our loan portfolio consists predominantly of working capital loans. These
loans are typically secured by a first lien on current assets, which normally
consist of inventory and receivables. Additionally, in some cases, we may take
further security of a first or second lien on fixed assets, a pledge of
financial assets like marketable securities, corporate guarantees and personal
guarantees. These security interests are perfected by the registration of these
interests within 30 days with the Registrar of Companies pursuant to the
provisions of the Indian Companies Act. This registration amounts to a
constructive public notice to other business entities. At December 31, 1999,
93.3% of our gross loans were secured. In general, our loans are
over-collateralized. In India, there are no regulations stipulating any
loan-to-collateral limits.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a
63
<PAGE> 65
decrease in the value of the collateral. These delays can last for several years
leading to deterioration in the physical condition and market value of the
collateral. In the event a borrower makes an application for relief to a
specialized quasi-judicial authority called the Board for Industrial and
Financial Reconstruction, foreclosure and enforceability of collateral is
stayed. For a discussion of the activities of the Board for Industrial and
Financial Reconstruction, see "Republic of India -- The Indian Economy --
Legislative Framework for Restructuring Sick Companies".
We recognize that our ability to realize the full value of our collateral
in respect of current assets is difficult, due to, among other things, delays on
our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers by
borrowers. However, cash credit facilities are so structured that we are able to
capture the cash flows of our customers for recovery of past due amounts. In
addition, we have a right of set-off for amounts due to us on these facilities.
Also, we monitor the cash flows of our working capital loan customers on a daily
basis so that we can take any actions required before the loan becomes
non-performing. On a case-by-case basis, we may also stop or limit the borrower
from drawing further credit from its facility.
Most of our corporate borrowers having large working capital requirements
borrow from more than one bank either under a consortium arrangement or under a
multiple banking arrangement. Under a consortium arrangement, the financing
banks formally decide on the credit proposal of the company and decide how the
funding should be distributed among the consortium banks. A lead bank, usually
the bank providing the largest share of the overall credit, is appointed under a
consortium lending arrangement. The lead bank coordinates credit appraisals,
execution of joint documents, regular review meetings and security inspections.
Under a consortium arrangement, typically the security is in the form of a
first lien on current assets, which is shared on a proportionate basis among the
participating banks. Theoretically, a member can exit from a consortium, with
its share taken either by an existing member or by induction of a new member in
the consortium. However, in the case of a non-performing loan, this exit route
is generally not available since the other members of the consortium are not
likely to take up additional credit that is impaired. Further, a member is
generally not allowed to take recovery action independent of the consortium in
the case of a non-performing loan. Hence, recovery from non-performing companies
that are under a consortium arrangement may be delayed.
Under a multiple banking arrangement, each bank stipulates its own terms
and obtains distinct and identifiable collateral. Individual documents are also
obtained and requisite liens created. Unlike a consortium arrangement lending,
in a multiple bank or sole bank lending, we can independently pursue recovery of
past due amounts either through full cash recovery, a negotiated settlement or a
legal suit. At December 31, 1999, loans with consortium arrangements accounted
for 46.0% of our gross non-performing loans, loans with multiple bank
arrangements accounted for 29.5% of our gross non-performing loans and sole bank
lending accounted for 24.5% of our gross non-performing loans.
LOAN CONCENTRATION
Pursuant to the guidelines of the Reserve Bank of India, our credit
exposure to individual borrowers must not exceed 25.0% of our capital funds
calculated under Indian GAAP (20.0% effective April 1, 2000). Our exposure to a
group of companies under the same management control must not exceed 50.0% of
our capital funds unless the exposure is in respect of an infrastructure
project. In that case, the exposure to a group of companies under the same
management control may be up to 60.0% of our capital funds. Pursuant to the
Reserve Bank of India guidelines, an exposure is calculated as the sum of 100.0%
of the committed funded amount or the outstanding funded amount, whichever is
higher, and 50.0% of the committed non-funded amount or the outstanding
non-funded amount, whichever is higher. Our loan exposures to individual and
group borrowers have been generally within the percentages prescribed by the
Reserve Bank of India based on the capital funds calculated under Indian GAAP.
In exceptional cases, where we have exceeded these percentages, we have obtained
the approval of the Reserve Bank of India as required.
We follow a policy of portfolio diversification and evaluate our total
financing exposure in a particular industry in light of our forecasts of growth
and profitability for that industry. Our risk management department
64
<PAGE> 66
monitors all major sectors of the economy and specifically follows industries in
which we have credit exposures. We respond to any economic weakness in an
industrial segment by restricting new credits to that industry segment and any
growth in an industrial segment by increasing new credits to that industry
segment, resulting in active portfolio management.
The following table sets forth, for the periods indicated, our gross loans
outstanding by the borrower's industry or economic activity and as a percentage
of our gross loans.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
1997 1998 1999 AT DECEMBER 31, 1999
----------------- ------------------ ---------------------------- ----------------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agriculture.......... Rs. 252 3.0% Rs. 501 3.8% Rs. 675 US$ 15 2.4% Rs. 1,912 US$ 44 4.9%
Auto including
trucks............. -- -- 600 4.5 1,006 23 3.5 1,518 35 3.9
Cement............... 60 0.7 170 1.3 540 12 1.9 1,060 24 2.7
Chemicals, drugs and
pharmaceuticals.... 490 5.7 1,092 8.3 2,420 56 8.5 4,221 97 10.9
Computer software.... -- -- 230 1.7 460 11 1.6 650 15 1.7
Construction(1)...... 510 6.0 770 5.8 740 17 2.6 940 22 2.4
Electricity.......... 470 5.5 540 4.1 1,488 34 5.2 1,645 38 4.2
Finance.............. 890 10.4 780 5.9 1,949 45 6.9 2,700 62 7.0
Iron and steel....... 380 4.4 460 3.5 620 14 2.2 715 16 1.8
Other metals and
metal products..... 220 2.6 330 2.5 1,370 31 4.8 1,120 26 2.9
Light manufacturing.. 1,280 14.9 1,300 9.9 2,800 64 9.8 4,528 104 11.7
Other personal
loans.............. 380 4.4 590 4.5 1,110 26 3.9 780 18 2.0
Paper and paper
products........... 150 1.8 240 1.8 373 9 1.3 663 15 1.7
Textiles............. 860 10.0 1,170 8.9 1,405 32 4.9 1,375 32 3.5
Transport............ 230 2.7 360 2.7 159 4 0.6 111 3 0.3
Other industries(2).. 2,390 27.9 4,057 30.8 11,362 261 39.9 14,894 342 38.4
--------- ----- ---------- ----- ---------- ------- ----- ---------- ------- -----
Gross loans.......... Rs. 8,562 100.0% Rs. 13,190 100.0% Rs. 28,477 US$ 654 100.0% Rs. 38,832 US$ 893 100.0%
========= ===== ========== ===== ========== ======= ===== ========== ======= =====
</TABLE>
- ---------------
(1) Includes engineering, procurement and construction projects and building
construction.
(2) Includes over 40 different industries with no industry constituting more
than 3.0%.
At December 31, 1999, no single industry accounted for more than 15.0% of
our gross loan portfolio.
In fiscal 1998 and 1999, there was an increase in the proportion of assets
in the chemicals, drugs and pharmaceuticals and other metals and metal products
sectors, while there was a decrease in the proportion of assets in the
construction, iron and steel, and textiles sectors. In fiscal 1995 and 1996, our
gross loans were significantly less than our gross loans at year-end fiscal 1998
and 1999 and there was no distinct trend in sectoral distribution of assets.
Our 10 largest loan exposures at December 31, 1999 totaled approximately
Rs. 4.3 billion (US$ 100 million) and represented 11.2% of our total gross loan
portfolio. The largest group of companies under the same management control
accounted for approximately 2.1% of our portfolio.
NON-PERFORMING LOANS
The following discussion on non-performing loans is based on US GAAP. For
classification of non-performing loans under Indian regulatory requirements, see
"Supervision and Regulation".
65
<PAGE> 67
IMPACT OF ECONOMIC ENVIRONMENT
The Indian economy was adversely affected by negative trends in the global
marketplace, particularly in the commodities markets, in fiscal 1998 and 1999,
which caused a slowdown in the industrial sector. The Indian industrial sector
has been subject to increasing competitive pressures, and Indian corporations
have had to respond to these pressures through a process of restructuring and
repositioning. This restructuring process is taking place in several industries,
primarily in sectors where many small, unprofitable manufacturing facilities
have existed, principally the iron and steel and textiles industries. This has
led to a decline in the operating performance of Indian corporations and the
impairment of related loan assets in the financial system, including some of our
assets. In fiscal 1999 gross non-performing loans increased primarily due to an
increase in non-performing loans to light manufacturing, iron and steel and
textiles industries.
At December 31, 1999, our gross non-performing loans as a percentage of
gross loan assets was 5.1% and our gross non-performing loans net of valuation
allowances as a percentage of net loan assets was 2.3%. We have made total
valuation allowances for 72.3% of our gross non-performing loans on which we
have made valuation allowances. These allowances are based on the expected
realization of cash flows from these assets. We had not made valuation
allowances on 23.8% of our gross non-performing loans at December 31, 1999 based
on the fact that the discounted cash flows from these borrowers were sufficient
to cover the entire exposure of these loans. At December 31, 1999, we had 70
non-performing loans outstanding of which the top ten represented 59.8% of all
non-performing loans and 3.0% of our gross loan portfolio.
The following tables set forth, for the periods indicated, certain details
of our gross non-performing portfolio.
<TABLE>
<CAPTION>
% OF TOTAL
AT MARCH 31, AT
-------------------------------------- DECEMBER
1997 1998 1999 AT DECEMBER 31, 1999 31, 1999
------- ------- ------------------ -------------------- ---------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing working
capital loans......... Rs. 66 Rs. 558 Rs. 1,158 US$ 27 Rs. 1,408 US$ 32 71.6%
Non-performing term
loans................. 121 46 236 5 245 6 12.5
Non-performing lease
loans................. -- -- 144 3 237 5 12.1
Non-performing corporate
debt instruments(1)... -- -- 75 2 75 2 3.8
------- ------- --------- ------ --------- ------ -----
Gross non-performing
loans................. Rs. 187 Rs. 604 Rs. 1,613 US$ 37 Rs. 1,965 US$ 45 100.0%
======= ======= ========= ====== ========= ====== =====
Gross non-performing
loans without
valuation
allowances(2)......... Rs. -- Rs. 26 Rs. 466 US $11 Rs. 467 US $11
Gross non-performing
loans with valuation
allowances(3)......... 187 578 1,147 26 1,498 34
Total valuation
allowances............ 187 425 880 20 1,083 25
Non-performing loans net
of valuation
allowances............ -- 179 733 17 882 20
Gross loan assets....... 8,562 13,190 28,477 654 38,832 893
Net loan assets......... 8,375 12,765 27,597 634 37,749 868
</TABLE>
- ---------------
(1) Includes debentures, preferred stock and bonds.
(2) Includes non-performing loans on which we have not made a valuation
allowance.
(3) Includes non-performing loans on which we have made a valuation allowance.
66
<PAGE> 68
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------- AT DECEMBER 31,
1997 1998 1999 1999
----- ----- --------- ---------------
(IN PERCENTAGES)
<S> <C> <C> <C> <C>
Gross non-performing loans as a percentage of gross
loan assets.......................................... 2.2% 4.6% 5.7% 5.1%
Gross non-performing loans with valuation allowances as
a percentage of gross loan assets.................... 2.2 4.4 4.0 3.9
Non-performing loans net of valuation allowances as a
percentage of net loan assets........................ -- 1.4 2.7 2.3
Total valuation allowances as a percentage of
non-performing loans with valuation allowances....... 100.0 73.5 76.7 72.3
</TABLE>
RECOGNITION OF NON-PERFORMING LOANS
We identify loans as non-performing and place them on a non-accrual basis
once we determine that interest or principal is past due beyond specified
periods or that the payment of interest or principal is doubtful. Regarding
interest or principal that is past due beyond specified periods, we classify
loans as non-performing when interest or principal is past due for 180 days
(typically two payment periods). We may consider the payment of interest or
principal to be doubtful if the borrower has ceased operations or has incurred
cash losses and the probability of revival is uncertain or the borrower's
industry is under stress. We provide for loan losses based on our internal
subjective assessment of the possibility of recovery of such loans based
principally on the realizable value of collateral and the discounted value of
future cash flows.
We do not recognize interest on non-performing loans or credit interest to
our income account unless it is collected. Any interest accrued and not received
on non-performing loans is reversed and charged against current earnings. We
return non-performing loans to accrual status when all contractual principal and
interest amounts are reasonably assured of repayment and, in the case of term
loans, there is a sustained period of repayment performance in accordance with
the contractual terms for at least one year.
Our non-performing loans, net of allowances for credit losses increased by
Rs. 554 million (US$ 13 million) in fiscal 1999 to Rs. 733 million (US$ 17
million) at March 31, 1999. Net non-performing loans were 2.7% of our total net
loan assets at March 31, 1999 compared to 1.4% at March 31, 1998. At December
31, 1999, net non-performing loans increased to Rs. 882 million (US$ 20 million)
and net non-performing loans as a percentage of total net loan assets reduced to
2.3%.
Under Indian GAAP, net non-performing loans outstanding (determined in
accordance with the Reserve Bank of India guidelines applicable at that time)
increased from Rs. 121 million (US$ 3 million) at March 31, 1998 to Rs. 608
million (US$ 14 million) at March 31, 1999 and to Rs. 686 million (US$ 16
million) at December 31, 1999. We did not have any net non-performing loans at
March 31, 1995, 1996 and 1997 under Indian GAAP. For a description of the
differences between Indian GAAP and US GAAP, see "Significant Differences
Between Indian GAAP and US GAAP".
ANALYSIS OF NON-PERFORMING LOANS BY DIRECTED LENDING SECTOR
In lending as required under Indian directed lending requirements, we
follow the same credit risk assessment and credit approval processes as in all
our lending. In view of the possibility of higher incidence of asset impairment
in directed lending relative to non-directed lending, we maintain the option of
fulfilling our priority sector obligations by making deposits with Indian
development banks since these yield a better risk adjusted return on capital,
though the nominal returns are much lower than in making loans.
67
<PAGE> 69
The following table sets forth, for the periods indicated, our gross loans
and our gross non-performing loans by segment and our gross non-performing loans
as a percentage of our gross loans in the same segment.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------
1997 1998 1999
--------------------------- ---------------------------- ------------------------------------
NON- NON-
GROSS PERFORMING GROSS PERFORMING GROSS NON-PERFORMING
LOANS LOANS % LOANS LOANS % LOANS LOANS %
-------- ---------- --- --------- ---------- --- --------- ----------------- ----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Directed Lending:
Agriculture............ Rs. 252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6% Rs. 675 Rs. 96 US$ 2 14.2%
Small scale
industries........... 1,860 37 2.0 2,753 170 6.2 3,510 209 5 6.0
Other.................. 1,708 19 1.1 2,419 44 1.8 4,500 100 2 2.2
-------- -------- --------- -------- --------- -------- ------
Total directed
lending................ 3,820 66 1.7 5,673 247 4.4 8,685 405 9 4.7
Non-directed lending.... 4,742 121 2.6 7,517 357 4.7 19,762 1,208 28 6.1
-------- -------- --------- -------- --------- -------- ------
Total................... Rs.8,562 Rs. 187 2.2% Rs.13,190 Rs. 604 4.6% Rs.28,477 Rs.1,613 US$ 37 5.7%
======== ======== ========= ======== ========= ======== ======
Allowance for credit
losses................. Rs. (187) Rs. (425) Rs. (880) (20)
-------- -------- -------- ------
Net non-performing
loans.................. -- Rs. 179 Rs. 733 US$ 17
======== ======== ======== ======
<CAPTION>
AT DECEMBER 31,
------------------------------------
1999
------------------------------------
GROSS NON-PERFORMING
LOANS LOANS %
--------- ----------------- ----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Directed Lending:
Agriculture............ Rs. 1,912 Rs. 137 US$ 3 7.2%
Small scale
industries........... 3,717 231 5 6.2
Other.................. 4,395 124 3 2.8
Total directed
lending................ 10,024 492 11 4.9
Non-directed lending.... 28,808 1,473 34 5.1
--------- -------- ------
Total................... Rs.38,832 Rs.1,965 US$ 45 5.1%
========= ======== ======
Allowance for credit
losses................. Rs.(1,083) US$(25)
-------- ------
Net non-performing
loans.................. Rs. 882 US$ 20
======== ======
</TABLE>
As shown by these tables, the quality of our directed lending portfolio is
similar to the quality of the rest of our loan portfolio. At December 31, 1999,
non-performing loans in the directed lending sector as a percentage of gross
loans was 4.9% and non-performing loans in the other sectors as a percentage of
gross loans was 5.1%.
ANALYSIS OF NON-PERFORMING LOANS BY PRODUCT
The following tables set forth, for the periods indicated, our
non-performing loans by product, and as a percentage of our non-performing
loans.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------------------------------------------------------- ----------------------------
1997 1998 1999 1999
---------------- ---------------- --------------------------- ----------------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital loans:
Cash credits/demand
loans.................... Rs 66 35.3% Rs. 537 88.9% Rs. 1,130 US$ 26 70.1% Rs. 1,339 US$ 31 68.1%
Bill discounting........... -- -- 21 3.5 28 1 1.7 69 2 3.5
Term loans................... 121 64.7 46 7.6 236 5 14.7 245 5 12.5
Lease finance................ -- -- -- -- 144 3 8.8 237 5 12.1
Corporate debt instruments... -- -- -- -- 75 2 4.7 75 2 3.8
-------- ----- -------- ----- --------- ------- ----- ---------- ------- -----
Total non-performing loans... Rs. 187 100.0% Rs. 604 100.0% Rs. 1,613 US$ 37 100.0% Rs. 1,965 US$ 45 100.0%
======== ===== ======== ===== ========= ======= ===== ========== ======= =====
Allowance for credit
losses..................... Rs. (187) Rs. (425) Rs. (880) US$ (20) Rs. (1,083) US$ (25)
-------- -------- --------- ------- ---------- -------
Net non-performing loans..... -- Rs. 179 Rs. 733 US$ 17 Rs. 882 US$ 20
======== ======== ========= ======= ========== =======
</TABLE>
Although lease finance represented 0.9% of our gross loans at December 31,
1999, it represented 12.1% of our gross non-performing loans. In fiscal 1996, we
offered lease financing to a limited number of small and medium-sized companies
because we gained certain tax advantages from these transactions. We
discontinued these activities in 1997 after the Indian tax authorities disputed
this tax treatment. For a discussion of this dispute, see "-- Legal and
Regulatory Proceedings". Due to the small size of these borrowers and their
concentration in industry sectors that have experienced a slowdown, such as the
textiles sector, we believe that our gross non-performing loans are greater for
this type of exposure compared to others.
68
<PAGE> 70
ANALYSIS OF NON-PERFORMING LOANS BY INDUSTRY SECTOR
The following table sets forth, for the periods indicated, our
non-performing loans by borrowers' industry or economic activity and as a
percentage of our loans in the respective industry or economic activity sector.
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ------------------------------- -----------------------------------------
NON- NON-
GROSS PERFORMING PERFORMING
LOANS LOANS % GROSS LOANS LOANS % GROSS LOANS NON-PERFORMING LOANS %
--------- ---------- ---- ----------- ---------- ---- ----------- -------------------- ----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agriculture.......... Rs. 252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6% Rs. 675 Rs. 96 US$ 2 14.2%
Auto including
trucks............. -- -- -- 600 -- -- 1,006 -- -- --
Cement............... 60 -- -- 170 -- -- 540 -- -- --
Chemicals, drugs and
pharmaceuticals.... 490 -- -- 1,092 58 5.3 2,420 79 2 3.3
Computer software.... -- -- -- 230 -- -- 460 -- -- --
Construction......... 510 -- -- 770 24 3.1 740 24 1 3.2
Electricity.......... 470 -- -- 540 -- -- 1,488 -- -- --
Finance.............. 890 -- -- 780 -- -- 1,949 61 1 3.1
Iron and steel....... 380 -- -- 460 56 12.2 620 268 6 43.2
Other metals and
metal products..... 220 -- -- 330 -- -- 1,370 -- -- --
Light manufacturing.. 1,280 148 11.6 1,300 94 7.2 2,800 400 9 14.3
Other personal
loans.............. 380 -- -- 590 -- -- 1,110 -- -- --
Paper and paper
products........... 150 -- -- 240 -- -- 373 -- -- --
Textiles............. 860 -- -- 1,170 62 5.3 1,405 313 7 22.3
Transport............ 230 -- -- 360 -- -- 159 -- -- --
Other industries..... 2,390 29 1.2 4,057 277 6.8 11,362 372 9 3.3
--------- -------- ---------- --------- ---------- --------- -------
Total................ Rs. 8,562 Rs. 187 2.2% Rs. 13,190 Rs. 604 4.6% Rs. 28,477 Rs. 1,613 US$ 37 5.7%
========= ======== ========== ========= ========== ========= =======
Allowance for credit
losses............. Rs. (187) Rs. (425) Rs. (880) US$(20)
-------- --------- --------- -------
Net non-performing
loans.............. Rs. -- Rs. 179 Rs. 733 US$ 17
======== ========= ========= =======
</TABLE>
69
<PAGE> 71
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------
GROSS LOANS NON-PERFORMING LOANS %
----------- --------------------- ----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Agriculture..................................... Rs. 1,912 Rs. 137 US$ 3 7.2%
Auto including trucks........................... 1,518 -- -- --
Cement.......................................... 1,060 -- -- --
Chemicals, drugs and pharmaceuticals............ 4,221 90 2 2.1
Computer software............................... 650 -- -- --
Construction.................................... 940 6 -- 0.6
Electricity..................................... 1,645 -- -- --
Finance......................................... 2,700 56 1 2.1
Iron and steel.................................. 715 274 6 38.3
Other metals and metal products................. 1,120 -- -- --
Light manufacturing............................. 4,528 581 13 12.8
Other personal loans............................ 780 -- -- --
Paper and paper products........................ 663 -- -- --
Textiles........................................ 1,375 299 7 21.7
Transport....................................... 111 -- -- --
Other industries................................ 14,894 522 13 3.5
---------- ---------- -------
Total........................................... Rs. 38,832 Rs. 1,965 US$ 45 5.1%
========== ========== =======
Allowance for credit losses..................... Rs. (1,083) US$ (25)
---------- -------
Net non-performing loans........................ Rs. 882 US$ 20
========== =======
</TABLE>
Our gross non-performing loans as a percentage of gross loans in the
respective industries was the highest in the iron and steel, textiles and light
manufacturing industries.
Iron and Steel. Over the last few years, a sharp reduction in
international steel prices to historic lows has had a significant impact on the
companies in this sector. In addition, a substantial reduction in import tariffs
over the last three years led to price competition from certain countries,
significantly reducing domestic prices. Our outlook for the medium-term for the
sector is positive due to the anticipated increase in prices from the historic
lows reached in fiscal 1999 and an increase in domestic consumption. The
majority of our loans to small steel plants and small re-rolling mills have
already been classified as non-performing, and the balance of loans in this
sector is primarily to economically sized plants with advanced technology. At
December 31, 1999, we had classified 38.3% of our gross loans in this sector as
non-performing.
Textiles. The textiles industry experienced a reduction in exports
following the devaluation of the south-east Asian currencies in 1998, which
resulted in less competitive Indian textile exports. The reduction in exports
was also due to reduced demand in the entire region. High cotton prices in the
last two years also increased the costs for Indian manufacturers. The majority
of our loans to small entities in this sector have been classified as
non-performing, and the balance of our exposure is primarily to large
economically sized plants. Our total exposure to this sector declined to Rs.
1,375 million at December 31, 1999 from Rs. 1,610 million at December 31, 1998.
At December 31, 1999, we had classified 21.7% of our gross loans in this sector
as non-performing.
Light Manufacturing. The light manufacturing industry category includes
manufacturers of electronic equipment, electrical cables, fasteners, watches and
other light manufacturing items. At December 31, 1999, 80.0% of the
non-performing loans in this sector were to middle market companies. The
downturn in certain sectors of the Indian economy during the last few years
affected the middle market companies to a greater extent in view of their higher
vulnerability to external factors. At December 31, 1999, of the non-performing
loans in the light manufacturing sector, 51.0% were to six companies engaged in
the manufacture of equipment, 15.0% were to three companies in the forging
sector, and 8.0% were to two manufacturers of electronic equipment. The lesser
number of new projects during the last three years has led to the depressed
performance of companies engaged in the manufacture of equipment. The increase
in our exposure to this sector at December 31, 1999
70
<PAGE> 72
compared to at March 31, 1999 has been to large sized companies with a
diversified product range. At December 31, 1999, we had classified 12.8% of our
gross loans in this sector as non-performing.
TOP TEN NON-PERFORMING LOANS
At December 31, 1999, we had 70 non-performing loans outstanding, of which
the top ten represented 59.8% of our gross non-performing loans, 84.5% of our
net non-performing loans and 3.0% of our gross loan portfolio. None of our top
ten non-performing loans has been restructured so far. However, we are currently
working out detailed restructuring packages for four borrowers in conjunction
with other term lenders and other working capital consortium members. Four other
borrowers have made an application for relief to the Board for Industrial and
Financial Reconstruction. For a discussion of the activities of the Board for
Industrial and Financial Reconstruction, see "Republic of India -- The Indian
Economy -- Legislative Framework for Restructuring Sick Companies".
The following table sets forth, for the period indicated, certain
information regarding our 10 largest non-performing loans.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------
PRINCIPAL
OUTSTANDING NET CURRENTLY
GROSS OF ALLOWANCE SERVICING
TYPE OF BANKING PRINCIPAL FOR CREDIT ALL INTEREST
INDUSTRY ARRANGEMENT OUTSTANDING LOSSES(1) COLLATERAL(2)(3) PAYMENTS(4)
------------------- --------------- ----------- --------------- ---------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Borrower A........... Textile Consortium Rs. 210 Rs. 210 Rs. 237 Yes
Borrower B........... Steel Multiple 172 172 218 Yes
Borrower C........... Light manufacturing Consortium 161 65 146 Yes
Borrower D........... Light manufacturing Multiple 104 104 40 No
Borrower E........... Energy Multiple 96 84 96 Yes
Borrower F........... Textile Consortium 93 19 59 No
Borrower G........... Steel Consortium 92 -- 66 No
Borrower H........... Light manufacturing Multiple 90 63 105 No
Borrower I........... Sugar Multiple 82 -- -- No
Borrower J........... Hotels/Resorts Consortium 75 28 56 No
--------- ------- ---------
Total...................................................... Rs. 1,175 Rs. 745 Rs. 1,023
========= ======= =========
</TABLE>
- ---------------
(1) The net realizable value of these loans on a present value basis is
determined by discounting the estimated cash flow over the expected period
of repayment by the rate implicit in the loan. Under US GAAP, the net
present value of a non-performing loan includes the net present value, to
the extent realizable, of the underlying collateral, if any.
(2) Collateral value is that reflected on the borrower's books, or that
determined by third party appraisers to be realizable, whichever is lower
or available. We have collateral in the form of first charge on current
assets for nine of these borrowers. Exposure to one of these nine borrowers
is additionally secured by fixed assets. The exposure to the remaining one
borrower is secured solely by a charge on fixed assets.
(3) Out of the above 10 cases, collection in the cases of borrower G and J are
collateral dependent. In all other cases, we are primarily dependent on
recovery through cash flows, collateral being of secondary importance.
(4) Since we also classify loans as non-performing once we determine that the
payment of interest or principal is doubtful, and since such classification
occurs even before the borrower stops paying interest and principal,
certain of our non-performing loans are currently servicing all interest
payments.
Five of our top ten non-performing loans were to borrowers where we acted
together with other banks or as part of a consortium of banks with our share of
exposure being a maximum of 10.0% of the total exposure of all banks to these
borrowers.
71
<PAGE> 73
INTEREST FOREGONE
Interest forgone is the interest due on non-performing loans that has not
been accrued in our books of accounts. The following table sets forth, for the
periods indicated, the amount of interest foregone.
<TABLE>
<CAPTION>
INTEREST FOREGONE
-----------------
(IN MILLIONS)
<S> <C> <C>
Fiscal 1997................................................. Rs. 26 US$ 1
Fiscal 1998................................................. 81 2
Fiscal 1999................................................. 93 2
Nine months ended December 31, 1999......................... 74 2
</TABLE>
RESTRUCTURING OF NON-PERFORMING LOANS
Our non-performing loans are restructured on a case-by-case basis after our
management has determined that restructuring is the best means of realizing
repayment of the loan. These loans continue to be on a non-accrual basis and
will be reclassified as performing loans only after sustained performance under
the loan's renegotiated terms for at least a period of one year.
The following table sets forth, for the periods indicated, our
non-performing loans that have been restructured through rescheduling of
principal repayments and deferral or waiver of interest.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------- AT DECEMBER 31,
1997 1998 1999 1999
------ ------- ---------------- ----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Gross restructured loans............ -- -- Rs. 38 US$ 0.9 Rs. 44 US$ 1.0
Allowance for credit losses......... -- -- (22) (0.5) (26) 0.6
Net restructured loans.............. -- -- 16 0.4 18 0.4
Gross restructured loans as a
percentage of gross non-performing
loans............................. -- -- 2.4% -- 2.2% --
Net restructured loans as a
percentage of net non-performing
loans............................. -- -- 2.2% -- 2.0% --
</TABLE>
We are currently working out restructuring packages for six borrowers along
with other term lenders and working capital consortium members in the case of
our non-performing loans under a consortium arrangement, and three borrowers who
are under sole banking arrangements. Five other borrowers have made an
application for relief to the Board for Industrial and Financial Reconstruction.
For a discussion of the activities of the Board for Industrial and Financial
Reconstruction, see "Republic of India -- The Indian Economy -- Legislative
Framework for Restructuring Sick Companies".
The following table sets forth, at the date indicated, the status of our
efforts in working out restructuring packages for non performing loans:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------------------
PRINCIPAL
GROSS OUTSTANDING NET OF
NUMBER OF PRINCIPAL ALLOWANCES FOR
BORROWERS OUTSTANDING CREDIT LOSSES
--------- ----------- ------------------
(IN MILLIONS, EXCEPT NUMBERS)
<S> <C> <C> <C>
Loans under consortium arrangements(1).............. 6 Rs. 486 Rs. 267
Loans under sole banking arrangements(1)............ 3 89 50
Loans to borrowers who have applied for relief to
the Board for Industrial and Financial
Reconstruction(2)................................. 5 385 129
-- ------- -------
Total............................................... 14 Rs. 960 Rs. 446
== ======= =======
</TABLE>
- ---------------
(1) None of these borrowers have applied for relief to the Board of Industrial
and Financial Reconstruction.
(2) For a discussion of the activities of the Board for Industrial and
Financial Reconstruction, see "Republic of India -- The Indian Economy --
Legislative Framework for Restructuring Sick Companies".
72
<PAGE> 74
NON-PERFORMING LOAN STRATEGY
The recovery and settlement of non-performing loans is of high priority to
us. In fiscal 1999, we set up a Special Asset Management Group, consisting of
seven members, for finding early solutions and pursuing recovery in
non-performing loans. The group, centralized at our corporate office in Mumbai,
is headed by one of our senior employees with over 20 years of experience in the
banking sector, and has representatives located at two branches having a higher
concentration of non-performing loans. The branch managers at the branches
having non-performing loans are also actively involved in supporting the efforts
of the Special Asset Management Group. This group works closely with the special
asset management group established in ICICI to work on restructuring and
settlement packages for common customers and to adapt successful recovery
strategies of ICICI. The group also uses the services of outside legal experts,
accountants and specialized agencies for due diligence, valuation and legal
advice to expedite early settlements.
Methods for resolving non-performing loans include the following:
- negotiated or compromise settlements on a one-time settlement basis;
- encouraging the financial restructuring of troubled but viable
corporations;
- encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants; and
- early enforcement of collateral through judicial means.
In the last 14 months, we fully recovered the principal outstanding of Rs.
62 million (US$ 1 million) from six non-performing borrowers. In six other
non-performing loan accounts, we negotiated settlements of Rs. 40 million (US$ 1
million).
We closely monitor migration of the credit ratings of our borrowers so we
can take proactive remedial measures to prevent loans from becoming
non-performing. We frequently review the industry outlook and analyze the impact
of changes in the regulatory and fiscal environment, helping us to contain our
non-performing loans. Our quarterly review systems help us to monitor the health
of accounts and to take prompt remedial measures.
Our current approval process generally requires a minimum credit rating by
us of A-. However, prior to our organizational restructuring in April 1999, our
minimum credit rating for credit approval was BBB. At present, some of our loans
are rated BBB or below since we closely monitor the credit rating of our
borrowers and downgrade the rating of credits as soon as they show any signs of
deterioration.
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<PAGE> 75
ALLOWANCE FOR CREDIT LOSSES
The following table sets forth, for the periods indicated, movements in our
allowance for credit losses.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------
1997 1998 1999 AT DECEMBER 31, 1999
------- ------- ---------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Allowance for credit losses at
the beginning of the period... Rs. -- Rs. 187 Rs. 425 US$ 10 Rs. 880 US$ 20
Add:
Provisions for credit losses:
Working capital............... 66 256 349 8 196 5
Term loans.................... 121 104 17 -- 10 --
Leasing finance............... -- -- 144 3 12 --
Marketable corporate debt
instruments................ -- -- 30 1 -- --
------- ------- ------- ------ --------- --------
Total provisions for credit
losses........................ 187 360 540 12 218 5
------- ------- ------- ------ --------- --------
Less:
Write-offs...................... -- (122) (85) (2) (15) --
------- ------- ------- ------ --------- --------
Allowances for credit losses at
the end of the Period......... Rs. 187 Rs. 425 Rs. 880 US$ 20 Rs. 1,083 US$ 25
======= ======= ======= ====== ========= ========
</TABLE>
We conduct a comprehensive analysis of our entire loan portfolio on a
quarterly basis. The analysis considers both qualitative and quantitative
criteria including, among others, the account conduct, future prospects,
repayment history and financial performance. This comprehensive analysis
includes an account by account analysis of our entire loan portfolio, and an
allowance is made for any probable loss on each account. In estimating the
allowance, we consider the net realizable value on a present value basis by
discounting the future cash flows over the expected period of recovery. Further,
we also consider our past history of credit losses and value of underlying
collateral. For further discussions of our allowances for credit losses, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Result of operations -- Provisions for Credit Losses".
Under our US GAAP analysis of the provisions for non-performing loans, we
are required to take into account the time delay in our ability to foreclose
upon and sell collateral. Under US GAAP, the net present value of a
non-performing loan includes the net present value of the underlying collateral,
if any. As a result, even though we are generally over-collateralized,
allowances are required under US GAAP that would not be required under Reserve
Bank of India regulations because US GAAP takes into account the time value of
money.
RISK MANAGEMENT
As a financial intermediary, we are exposed to various risks that are
related to our lending and trading businesses, deposit taking activities and our
operating environment. Our aim in risk management is to ensure that we
understand, measure and monitor the various risks that arise and that our
organization adheres strictly to the policies and procedures which are
established to address these risks.
We are exposed to three broad categories of risk: credit risk, market risk
and operational and legal risk.
In October 1999, our risk management function was reorganized and
integrated into a single Risk Management Department separate from our three
business units. The Risk Management Department works in close association with
the business units to implement the various risk management strategies. Our Risk
Management Department is completely independent of all business operations. This
department identifies, assesses, monitors and manages all our principal risks in
accordance with well-defined policies and procedures. The Risk Management
Department consists of 20 experienced bankers and analysts and is led by a
Senior Executive Vice President reporting directly to our Managing Director and
Chief Executive Officer and the Audit and Risk Committee of our board of
directors.
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<PAGE> 76
The organizational structure of our Risk Management Department is shown in
the following chart.
[FLOWCHART]
CREDIT RISK
Credit risk primarily arises in our lending operations from the failure of
any party, principally our borrowers, to abide by the terms and conditions of
any financial contract with us, principally the failure to make required
payments on loans due to us. Our standardized credit approval process includes a
well-established procedure of credit evaluation and approval. We measure,
monitor and manage credit risk for each borrower. We have a comprehensive system
for tracking the rating profile of our loan portfolio and are now working on a
comprehensive portfolio risk evaluation mechanism.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal,
we assess a variety of risks relating to the borrower and the relevant industry.
If the borrower is undergoing a major expansion project that requires them to
obtain project finance from a financial institution in addition to working
capital loans from us, we also assess the risks relating to the project.
We evaluate borrower risk by considering:
- the financial position of the borrower by analyzing the quality of its
financial statements, its past financial performance, its financial
flexibility in terms of ability to raise capital and its cash flow
adequacy;
- the borrower's relative market position and operating efficiency; and
- the quality of management by analyzing their track record, payment
record and financial conservatism.
We evaluate industry risk by considering:
- certain industry characteristics, such as the importance of the industry
to the economy, its growth outlook, cyclicality and government policies
relating to the industry;
- the competitiveness of the industry; and
- certain industry financials, including return on capital employed,
operating margins and earnings stability.
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<PAGE> 77
After conducting an analysis of a specific borrower's risk, we assign a
credit rating to the borrower. We have a scale of ten ratings ranging from AAA
to B and an additional default rating of D. Before November 1999, we had a scale
of six ratings ranging from AAA to D. We are in the process of re-rating all our
existing exposures according to the new credit rating model. We expect to
complete this process by the end of the first quarter of fiscal 2001. Credit
rating is a critical input for the credit approval process. We use studies on
the historical default patterns of loans in order to predict defaults. We
determine the desired credit risk spread over our cost of funds by considering
the borrower's credit rating and the default pattern corresponding to the credit
rating. Our credit approval process generally requires a benchmark minimum
credit rating of A-. Prior to April 1999, our benchmark credit risk rating was
BBB.
We study industry sectors and published reports from online databases,
including the Center for Monitoring the Indian Economy and Internet Securities
(a Euromoney group company), and review our large exposures by industry and by
corporate client. We identify, through these internal studies, the growing
industry sectors to which we should increase our exposure and the stagnating
sectors to which we should decrease our exposure. These ongoing studies and
reviews also enable us to regularly adjust a borrower's credit rating in
response to changes in that borrower's risk and the risk associated with that
borrower's industry.
Working capital loans are generally approved for a period of 18 months. At
the end of 12 months, we review the loan arrangement and the credit rating of
the borrower and take a decision on continuation of the arrangement and the
changes in the loan covenants as may be necessary. We intend to review the
credit rating of borrowers with higher credit risks more frequently.
In addition to the above, our credit policy includes the following internal
restrictions:
- Our focus will continue to be on short-term working capital financing.
We focus on corporate lending to large and medium-sized industries and
trade and service sectors;
- Term loan exposure will be limited to 15.0% to 25.0% of our loan
portfolio, in line with our resources profile;
- Credit exposure to a particular industry is restricted to 15.0% of our
gross loan assets;
- We will extend credit to non-banking finance companies selectively --
only to those who are registered with the Reserve Bank of India and have
an acceptable credit rating from reputed credit rating agencies;
- We normally do not grant fixed rate loans except for credit in the form
of corporate debt investments;
- Rates of interest on foreign currency loans are generally with reference
to London Inter-Bank Offer Rate;
- We have set a benchmark level current ratio (current assets to current
liabilities) of 1.25 and a benchmark level ratio of total liabilities to
tangible net worth of 2.50 for our borrowers. Deviation from these
levels are permitted by us only in exceptional cases.
Depending upon market conditions, we may change our credit policy.
Credit Approval Procedures for Corporate Loans
Our corporate banking approval process is dictated by our credit policy
approved by our board of directors. This policy sets out our maximum credit
exposures to individual companies, groups of companies and industries.
We have established a strong framework for the appraisal and execution of
working capital and term loan finance transactions. Pursuant to our
organizational restructuring that was implemented on April 1, 1999, our credit
appraisal and approval processes have been centralized. We evaluate commercial,
financial, marketing and management factors relating to the borrower and the
sponsor's financial strength and experience. We make use of databases of
approximately 3,000 Indian companies that contain historical financial and
operating information on these companies. We also extensively use industry
analysis reports and interact with external rating agencies to track business
cycles in specific sectors and industries, the impact of emerging fiscal,
regulatory and other environmental factors and the financial performance of
Indian companies. Once this review is completed, an appraisal note is prepared
for credit approval purposes. A structured appraisal format is used to ensure a
uniform standard across the organization. Quantitative tools like inter-firm
comparisons, sensitivity analysis and analysis
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<PAGE> 78
of demand-supply gap patterns are used to analyze the performance of the
borrower. As part of the appraisal process, we generate a risk matrix, which
identifies each of the risks, mitigating factors and residual risks associated
with the proposal.
Credit Approval Authority for Corporate Loans
We have established five distinct levels of credit approval authorities for
our corporate banking activities: the head of Corporate Banking, the Managing
Director and Chief Executive Officer (or the Credit Committee of Executives that
acts in the absence of the Managing Director and Chief Executive Officer), the
Investment Committee, the Committee of Directors and our board of directors.
The following table sets forth the composition of the committees and
approval authority of the committees and the authorized officers.
<TABLE>
<CAPTION>
AUTHORIZED EXECUTIVES AND COMMITTEES MEMBERS APPROVAL AUTHORITY
- ------------------------------------ ------- ------------------
<S> <C> <C>
Board of Directors................... All the members on our board All approvals (in practice,
of directors generally above the
prescribed authority of the
Committee of Directors and
the Investment Committee)
Committee of Directors............... Managing Director and Chief All approvals to companies up
Executive Officer and four to Rs. 400 million
other directors
Investment Committee................. Managing Director and Chief All approvals for subscribing
Executive Officer, heads of to debentures, preferred
Corporate Banking, Retail stock, bonds and commercial
Banking, Risk Management, paper
Domestic Treasury and Foreign
Exchange Treasury and the
Chief Financial Officer
Managing Director and
Chief Executive Officer............ All approvals up to Rs. 160
million
Credit Committee of Executives....... Heads of Corporate Banking, In the absence of the
Retail Banking and Risk Managing Director and Chief
Management and the Chief Executive Officer, all
Financial Officer approvals within the
prescribed authority of the
Managing Director and Chief
Executive Officer
Head of Corporate Banking............ All approvals up to Rs. 100
million
</TABLE>
The branch managers of corporate banking branches are not individually
authorized to approve loans. They are however authorized to approve excess
borrowing above the approved limits up to Rs. 10 million in respect of corporate
loans. These loans are reported to the corporate office for ratification.
Disbursement Procedures for Corporate Loans
After credit approval, we disburse the loans though our corporate branches.
Our corporate office sends credit approval letters to the branches stating the
covenants governing the approval. Based on the credit approval letter received
from the corporate office, branches issue a credit arrangement letter to the
borrower outlining the terms of the facility, sponsors' obligations, conditions
precedent to disbursement and undertakings from and covenants on the borrower.
After the borrower accepts the terms, the loan agreement and other documents are
executed.
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<PAGE> 79
The borrower account is then made operational in the case of a working capital
facility and disbursements are made to the borrower in the case of other loan
facilities. Our cash credit facilities operate as revolving asset backed
overdraft facilities. We determine the amount that can be drawn by the borrower
on the basis of monthly cash flow statements or statements of current assets
provided by the borrower and the stipulated current asset cover margins.
Credit Monitoring Procedures for Corporate Loans
We have established detailed procedures for the monitoring of our credit
exposures. Our aim in credit monitoring is to:
- ensure compliance with the terms and conditions of the credit approval;
- review performance of our borrowers against projections;
- detect early warning signals and take appropriate corrective actions;
and
- observe the performance of the borrowers.
With a view to achieve the above, we have laid out operating procedures for
our branches and the frequency of credit monitoring activities to be undertaken.
Our branches prepare various credit monitoring reports at periodic intervals.
Any irregularity in the account is reported to the appropriate credit approval
authority on a monthly basis. The performance of the borrowers is monitored
through quarterly information reports. Monthly cash flow statements are obtained
wherever considered necessary. We monitor the performance of companies by
comparing the published results against the projections. We undertake stock
inspections and stock audits on a regular basis.
Credit Approval Procedures for Credit Cards
The initial target group for credit cards are our present Power Pay account
holders and ICICI's retail bond customers where relationships are already
established and customer details are already available to us.
We believe that the improper verification of identity and applicant
information and payment delinquencies are the main source of credit risk in the
credit card business.
We use the services of external agencies for verification of applicant
information and for collection of past due amounts. Detailed credit applications
have been devised for aggregating information on a prospective customer, such as
the person's place of work and residence.
Credit checks are undertaken before the credit card applicants are
approved. These credit checks contain a list of the delinquent customers of
ICICI and a few non-banking finance companies. Copies of a prospective
customer's income tax return and paychecks are also obtained to determine the
income and tax status of the prospective customer. There are no credit bureaus
in India, but we are in the process of implementing our own internal credit
scoring model. We have set individual credit limits based on the monthly salary
of the credit card holder.
Credit Approval Procedures for Other Retail Loans
Since substantially all of our retail loans are fully collateralized with
either cash (in the case of loans against time deposits) or liquid equity
securities (in the case of loans against subscriptions for initial public
offering), we have not yet devised any credit risk procedures for these loans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the value of a financial
instrument as a result of changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect
market risk sensitive instruments. Market risk is attributed to all market risk
sensitive financial instruments, including securities, loans, deposits,
borrowings and derivative instruments. Our exposure to market risk is a function
of our asset and liability
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<PAGE> 80
management activities, our proprietary trading activities, and our role as a
financial intermediary. The objective of market risk management is to avoid
excessive exposure of our earnings and equity to loss and to reduce the
volatility inherent in financial instruments.
Market Risk Management Procedures
Our board of directors reviews and approves the policies for the management
of market risks and has delegated the responsibility for market risk management
to the Asset Liability Management Committee. Our Managing Director and Chief
Executive Officer chairs the Asset Liability Management Committee. Our Chief
Financial Officer, executives of various business units and the Risk Management
Department are the members of the committee. The committee generally meets on a
monthly basis and reviews our interest rate and liquidity gap position,
formulates a view on interest rates, sets deposit and benchmark lending rates
and reviews the business profile and its impact on asset liability management.
Emergency meetings of the committee are convened to respond to developments in
the markets and economy. The committee also sets market risk limits for our
trading activities. The committee reports to the Audit and Risk Committee of our
board of directors on a quarterly basis.
We have established a mid-office independent of treasury, which monitors
the risks in our treasury operations and ensures adherence to various risk
control limits on a daily basis. The mid-office at regular intervals submits
reports to the head of the Risk Management Department and the Managing Director
and Chief Executive Officer on the extent of our market risk exposure.
We have established risk control limits, including holding period limits
and stop loss limits. Additionally, in the case of foreign exchange trading, we
have set up loss limits for each half-year period (April-September and
October-March). These limits are monitored on a daily basis. We have also
implemented a value at risk model for measuring market risk of our foreign
exchange spot positions.
Our exposure to market risk arises mainly from interest rate risk, equity
risk, exchange rate risk and liquidity risk. We discuss, in the following
paragraphs, each of these sources of risk and the methods we have adopted to
manage them.
Interest Rate Risk
Since our balance sheet consists predominantly of rupee assets and
liabilities, movements in domestic interest rates constitute the main source of
interest rate risk. Our portfolio of traded debt securities is negatively
impacted by an increase in interest rates while our loan portfolio benefits from
a rise in interest rates.
We measure our exposure to fluctuations in interest rates primarily by way
of gap analysis, providing us a static view of the maturity and re-pricing
characteristics of balance sheet positions. An interest rate gap report is
prepared by classifying all assets and liabilities into various time period
categories according to contracted maturities or anticipated re-pricing date.
The difference in the amount of assets and liabilities maturing or being
re-priced in any time period category, would then give us an indication of the
extent to which we are exposed to the risk of potential changes in the margins
on new or re-priced assets and liabilities.
Our core business is deposit taking and lending, in both rupees and foreign
currencies, as permitted by the Reserve Bank of India. As the rupee market
differs significantly from the international credit asset markets, our gap
positions in these markets are different.
In the Indian market, our liabilities are mostly at fixed rates of interest
for fixed periods. However, we have a mix of floating and fixed interest rate
assets. We have term-based prime lending rates. We quote interest rates for our
short-term working capital loan products as a markup over the relevant prime
lending rate, effectively making these floating rate loans. Our corporate loan
portfolio consists principally of working capital loans, which are on a floating
rate basis.
Our foreign currency liabilities, which are primarily deposits from
non-resident Indians, are at fixed rates. A large portion of our foreign
currency loans is on a floating rate basis. Although this leads to interest rate
risk, the
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<PAGE> 81
volumes are not significant. Foreign currency liabilities, net of foreign
currency loans, enable us to raise rupee liquidity quickly by way of currency
swaps, which help us to address any liquidity risk.
The following table sets forth for both our loan portfolio and our trading
portfolio, for the period indicated, our asset-liability gap position.
<TABLE>
<CAPTION>
AT MARCH 31, 1999(1)-(7)
------------------------------------------------------------------------------------------------------------
GREATER THAN
ONE YEAR AND
6-12 TOTAL WITHIN UP TO FIVE GREATER THAN
0-28 DAYS 29-90 DAYS 91-180 DAYS MONTHS ONE YEAR YEARS FIVE YEARS TOTAL
---------- ---------- ----------- ---------- ------------ ------------ ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net........... Rs. -- Rs. 19,870 Rs. -- Rs. -- Rs. 19,870 Rs. 5,977 Rs. 1,751 Rs. 27,598
Securities........... -- -- 1,034 57 1,091 2,172 700 3,963
Fixed assets......... -- -- -- -- -- -- 1,761 1,761
Trading assets....... 606 607 97 217 1,527 10,712 3,583 15,822
Cash and cash
Equivalents........ 12,657 1,266 4,565 -- 18,488 -- -- 18,488
Other assets(6)...... -- -- -- -- -- 396 1,210 1,606
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets......... Rs. 13,263 Rs. 21,743 Rs. 5,696 Rs. 274 Rs. 40,976 Rs. 19,257 Rs. 9,005 Rs. 69,238
========== ========== ========== ========== ========== ========== ========== ==========
Stockholders'
equity............. Rs. -- Rs. 218 Rs. -- Rs. -- Rs. 218 Rs. -- Rs. 2,612 Rs. 2,830
Debt(6).............. -- -- -- -- -- 1,084 680 1,764
Deposits............. 13,861 11,245 13,430 11,564 50,100 10,629 -- 60,729
Other
liabilities(6)..... 3,915 -- -- -- 3,915 -- -- 3,915
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities.... Rs. 17,776 Rs. 11,463 Rs. 13,430 Rs. 11,564 Rs. 54,233 Rs. 11,713 Rs. 3,292 Rs. 69,238
========== ========== ========== ========== ========== ========== ========== ==========
Total gap............ Rs. (4,513) Rs. 10,280 Rs. (7,734) Rs.(11,290) Rs.(13,257) Rs. 7,544 Rs. 5,713
========== ========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Assets and liabilities are classified into the applicable categories, based
on residual maturity or re-pricing date whichever is earlier.
(2) Items that neither mature nor re-price are included in the "greater than
five years" category. This includes stockholders' equity and fixed assets.
Expected dividend payout of Rs. 218 million, which is included in
stockholders' equity, has been classified in the "29-90 day" category.
(3) Non-performing loans are classified in the "greater than five years"
category.
(4) Based on past trends, 80.0% of non-interest-bearing non-maturity deposit
accounts have been classified as "greater than one year and up to five
years" category and 20.0% in the "0-28 days" category.
(5) Based on past trends, 90.0% of interest-bearing non-maturity deposit
accounts have been classified as "greater than one year and up to five
years" category and 10.0% in the "0-28 days" category.
(6) The categorization for these items is different from that reported in the
financial statements.
(7) Cash and cash equivalents include balances with the Reserve Bank of India
required by its cash reserve ratio requirement. These balances are held in
the form of overnight cash deposits but we classify these balances under
the "91-180 days" category as these balances cannot be readily withdrawn
from the Reserve Bank of India.
Price Risk (Loan Portfolio)
The following table sets forth, for the period indicated, the impact of
changes in interest rates on net interest revenue for fiscal 2000, assuming a
parallel shift in yield curve at year-end fiscal 1999.
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<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------------------
CHANGE IN INTEREST RATES
(IN BASIS POINTS)
-----------------------------------
(100) (50) 50 100
------ ------ ------- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Rupee portfolio......................................... Rs. 36 Rs. 18 Rs. (18) Rs. (36)
Foreign currency portfolio.............................. (1) (1) 1 1
------ ------ ------- -------
Total................................................... Rs. 35 Rs. 17 Rs. (17) Rs. (35)
====== ====== ======= =======
Profit/(loss) as a % of net income...................... 6.9% 3.4% (3.4%) (6.9%)
</TABLE>
Given our asset and liability position at March 31,1999, if interest rates
increased by 100 basis points, we expect that net interest revenue for fiscal
2000 would fall by Rs. 35 million (US$ 804,000). If interest rates decreased by
100 basis points, our net interest revenue for fiscal 2000 would rise by Rs. 35
million (US$ 804,000). The amount of Rs. 35 million was 6.9% of our net income
for fiscal 1999. This sensitivity analysis is for risk management purposes and
assumes we make no other changes in our portfolio. Actual changes in net
interest revenue will vary from the model.
Price Risk (Trading Portfolio)
Trading activities are undertaken primarily to optimize the income from our
portfolio of government of India securities that we are required to hold under
the Reserve Bank of India's statutory liquidity ratio requirement and
secondarily to enhance our earnings through profitable trading for our own
account. A substantial proportion of our trading portfolio (91.3%) consisted of
investments in government of India securities at March 31, 1999. We are required
by law to invest 25.0% of our demand and time liabilities in specified
securities, including government of India securities. Duration limits, holding
period limits and stop-loss limits are used by us to manage risks for debt
security positions in our trading book.
The following table sets forth, for the period indicated, the impact of
changes in interest rates on a tax adjusted basis on the value of our fixed
income trading portfolio as a percentage of net income, assuming a parallel
shift in yield curve at year-end fiscal 1999.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------------------------
CHANGE IN INTEREST RATES
(IN BASIS POINTS)
------------------------------------------
PORTFOLIO SIZE (100) (50) 50 100
-------------- ------- ------- -------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Government of India securities(1).... 14,449 Rs. 263 Rs. 131 Rs. (131) Rs. (259)
Others............................... 751 1 1 (1) (1)
---------- ------- ------- -------- --------
Total................................ Rs. 15,200 Rs. 264 Rs. 132 Rs. (132) Rs. (260)
========== ======= ======= ======== ========
Profit/(loss) as % of net income..... 52.5% 26.2% (26.2%) (51.7%)
</TABLE>
- ---------------
(1) For the purpose of analysis, certain quasi-government corporate securities
are included as government of India securities.
At March 31, 1999, the total value of our rupee fixed income trading
portfolio was Rs. 15.2 billion (US$ 349 million). As set forth in the table
above, if interest rates rose by 100 basis points, the value of this portfolio
would fall, on a tax-adjusted basis, by Rs. 260 million (US$ 6 million) and if
interest rates fell by 100 basis points, the value of this portfolio would rise,
on a tax adjusted basis by Rs. 264 million (US$ 6 million). The sensitivity of
the net interest revenue to interest rate changes is largely due to the
government of India securities that we are required to hold under the Reserve
Bank of India's statutory liquidity ratio requirement. However, in an increasing
interest rate environment, we would shift the average maturity of our fixed
income trading portfolio to shorter term government of India securities in order
to contain any decrease in the value of our fixed income trading portfolio. This
sensitivity analysis is for risk management purposes and assumes we make no
other changes in our portfolio. Actual changes may vary from the model.
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Equity Risk
Our equity positions include both equity securities and units of mutual
funds. We only invest in equity securities in book-entry form, which decreases
our settlement and liquidity risk. Our total exposure to these investments is
not significant and was Rs. 198 million at March 31, 1999 and Rs. 165 million at
December 31, 1999. Position limits, stop-loss limits and holding period limits
are used by us to manage risks for equity positions in the trading book. The
Reserve Bank of India requires that the net incremental investment by banks in
equity securities in a fiscal year cannot exceed 5.0% of the incremental
deposits in the previous fiscal year.
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps and forwards to our
clients. We actively use cross currency swaps and forwards to hedge ourselves
against exchange risks arising out of these transactions. Our trading activities
in the foreign currency markets expose us to exchange rate risks. We mitigate
this risk by setting counterparty limits, stipulating stop-loss limits by deal
and limits on the loss of the entire foreign exchange trading floor,
implementing an internal value at risk model for all spot positions and engaging
in exception reporting
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the risk
of unexpected increases in the cost of funding our asset portfolio at
appropriate maturities and the risk of being unable to liquidate a position in a
timely manner at a reasonable price. The goal of liquidity management is for us
to be able, even under adverse conditions, to meet all our liability repayments
on time and fund all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. We fund our operations principally by accepting
deposits from retail and corporate depositors. We also borrow in the short-term
inter-bank market. Loan maturities and sale of investments also provide
liquidity.
We use the majority of funds raised by us to extend loans or purchase
securities. Generally, deposits are of shorter average maturity than loans or
investments.
We maintain a substantial portfolio of liquid high quality securities that
may be sold on an immediate basis to meet the liquidity needs. We also have the
option to manage our liquidity by borrowing in the inter-bank market on a
short-term basis. While generally this market provides an adequate amount of
liquidity, the interest rates at which funds are available can sometimes be
volatile. We prepare regular maturity gap analyses to review our liquidity
position.
The Reserve Bank of India adopted a directive on asset liability management
in February 1999. Starting from April 1, 1999, we were required to submit gap
analysis on a quarterly basis to the Reserve Bank of India. Effective April 1,
2000, our liquidity gap (if negative) must not exceed 20.0% of outflows in the
0-28 day time category.
OPERATIONAL AND LEGAL RISK
Due to our vast geographical spread and our operations being largely
transaction oriented, we are exposed to many types of operational risks.
Operational risks are risks arising from non-adherence to systems and procedures
or from frauds resulting in financial or reputation loss. The Audit Department
is part of our operational risk group and the head of the Audit Department
reports to the head of the Risk Management Department. It inspects branches and
conducts revenue and management audits based on an inspection calendar drawn up
each year. The primary objective of the inspection function is to ascertain and
ensure that the business activities are carried out in accordance with our
policies, systems and procedures. The Audit and Risk Committee of our board of
directors reviews the inspection function each quarter. Any weakness noticed in
either systems or procedures is addressed appropriately. The Reserve Bank of
India requires us to have a process of concurrent audits at our branches
handling large volumes, to cover a minimum of 50.0% of our business
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volumes. We have instituted systems to conduct concurrent audits, using reputed
chartered accountancy firms, to cover about 85.0% of our business.
We plan to introduce snap audits in the future, which will entail a quick
review of the implementation of various procedures in key areas at the branches.
These audits are intended to rectify any procedural irregularities, especially
in newly opened branches and new activities.
We are subject to inspections conducted by the Reserve Bank of India under
the Indian Banking Regulation Act. The Reserve Bank of India has adopted the
global practice of subjecting banks to examination on the basis of the CAMELS
model, a model that assigns confidential ratings to banks based on their capital
adequacy, asset quality, management, earnings, liquidity and systems and
controls. We also have independent statutory audits conducted on a quarterly
basis by auditors appointed by our shareholders.
We are now re-engineering the audit process to make it more risk-oriented.
We propose to assign each operating group to a particular level of perceived
operational risk. This would then determine a level of capital to be allocated
for unexpected losses from that operating group. Aggregation of these
allocations across operating groups would enable us to arrive at a capital
allocation for operational risks. We have, on the basis of preliminary studies,
decided to allocate capital to the extent of 0.25% of our stockholders' equity
effective April 1, 2000 for operational risks. This capital allocation is not
required by Indian regulations. We expect that we will be the first bank in
India to have this capital allocation for operational risks.
There is regular monitoring of complaints at the branches to improve
customer service. We intend to centralize our complaint tracking mechanisms
soon.
We consider legal risk as a part of operational risk. The uncertainty of
the enforceability of the obligations of our customers and counterparties,
including the foreclosure on collateral, creates legal risk. Changes in law and
regulation could also adversely affect us. Legal risk is higher in new areas of
business where the law is often untested in the courts. For example, critical
legal issues in the area of Internet banking are unresolved in India as well as
other jurisdictions to which we would like to offer our products and services
using the Internet. Legislation has been proposed in India in this area, but
until this legislation is passed by the parliament, there will be uncertainty
regarding the following issues: legal recognition of electronic records,
validity of contracts entered into online and the validity of digital
signatures. Legal risk in other jurisdictions is also increased by the
international reach of Internet delivery.
We seek to minimize legal risk by using stringent legal documentation,
employing procedures designed to ensure that transactions are properly
authorized and consulting legal advisers. Our internal auditors scrutinize all
loan documents to ensure that these are correctly drawn up to withstand scrutiny
in court.
We are formulating a new product policy that requires the operating groups
to test run their new products a certain number of times before launching them
and to prepare detailed product profiles and requires each new product to be
thoroughly evaluated by the Operational Risk Group.
We plan to form an independent Operations Department to oversee our
operations, branches and regional processing centers by the end of the first
quarter of fiscal 2001. This action will enable the heads of our operating
groups and our Chief Financial Officer to be freed from operational
responsibilities. A new Chief Operations Officer will be named as the head of
the Operations Department. All branches and other operational units will report
to the Chief Operations Officer for operational matters.
Operational Controls and Procedures in Branches
We have operating manuals detailing the procedures for the processing of
various banking transactions and the operation of our main application software,
BANCS2000. Amendments to these manuals are implemented through circulars sent to
all offices.
When taking a deposit from a new customer, we require the new customer to
complete a relationship form, which details the terms and conditions for
providing various banking services. Photographs of customers are also obtained
for our records, and specimen signatures are scanned and stored in the system
for online verification. We enter into a relationship with our customer only
after the customer is properly introduced to us. When time
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deposits become due for repayment, the deposit is paid to the depositor. System
generated reminders are sent to depositors before the due date for repayment.
Where the depositor does not apply for repayment on the due date, the amount is
transferred to an overdue deposits account for follow up. Balances in overdue
deposit accounts are controlled by the corporate office through monthly
statements from branches.
We have a scheme of delegation of financial powers that sets out the
monetary limit for each employee with respect to the processing of transactions
in a customer's account. Withdrawals from customer accounts are controlled by
dual authorization. Senior officers have delegated power to authorize larger
withdrawals. Our operating system validates the check number and balance before
permitting withdrawals. Cash transactions over Rs. 1 million (US$ 23,000) are
subject to special scrutiny to avoid money laundering.
We have given importance to computer security. A comprehensive computer
security manual has been provided to all offices. There is a system room in each
office where the server is located. Access to the server room is regulated. Our
banking software, BANCS2000, has multiple security features to protect the
integrity of application and data. There are user access rights and
terminal-based security features.
Operational Controls and Procedures for Internet Banking
The opening of a bank account online by a new customer is a two-step
process. First, the customer fills out an online application, giving his
personal details. Based on this preliminary information, we allot the customer a
user ID and password. Second, the customer must send to us further documentation
to prove the customer's identity, including a copy of the customer's passport, a
photograph and specimen signature of the customer and a voided personal check so
that we can contact his existing bank, if required. After the customer completes
these formalities satisfactorily, we give him full access to his account online.
For a description of the security features of our technology related to Internet
banking, see "-- Technology".
Operational Controls and Procedures in Regional Processing Centers
To improve customer service at our physical locations, we propose to handle
transaction processing centrally by taking away such operations from branches.
The centralization is being done both at the corporate office and on a regional
basis. We started this process in September 1999 when we implemented the
quasi-centralization of branch operations in important cities where we have more
than one branch. We have centralized operations at regional processing centers
in Mumbai, New Delhi, Chennai and Bangalore. These regional processing centers
process clearing checks and inter-branch transactions, make inter-city check
collections, and engage in back office activities for account opening, standing
instructions and auto-renewal of deposits. We plan to centralize operations in
Pune, Calcutta, Hyderabad and Ahmedabad and add to the list of regionally
centralized activities, such as cash pick-up and delivery services.
In Mumbai, we have centralized transaction processing on a nationwide basis
for transactions like the issue of ATM cards and PIN mailers, reconciliation of
ATM transactions, monitoring of ATM functioning, issue of passwords to internet
banking customers and credit card transaction processing. Centralized processing
is being extended to the issuance of personalized check books, back office
activities of non-resident Indian accounts, opening of new bank accounts who
seek web broking services and recovery of service charges for accounts for
holding shares in book-entry form.
Operational Controls and Procedures in Treasury
Management believes that we have the highest level of automation in trading
operations in India. We use technology to monitor risk limits and exposures on a
near real-time basis. Our front office, back office and accounting and
reconciliation functions are fully segregated in both the domestic treasury and
foreign exchange treasury. The respective middle offices use various risk
monitoring tools such as counterparty limits, position limits, exposure limits
and individual dealer limits. Procedures for reporting breaches in limits are
also in place.
Domestic Treasury. Our front office consists of dealers in fixed income
securities, equity securities and inter-bank money markets. The dealers analyze
the market conditions and take views on price movements.
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Thereafter, they strike deals in conformity with various limits relating to
counterparties, securities and brokers. The deals are then forwarded to the back
office for settlement.
Our middle office plays the role of a risk manager, reporting to the Risk
Management Department, with an emphasis on market risk. The major functions of
the middle office are to monitor counterparty limits, evaluate the
mark-to-market impact on various positions taken by dealers and monitor market
risk exposure of the investment portfolio.
Our back office undertakes the settlement of funds and securities. The back
office exercises controls for minimizing operational risks, including deal
confirmations with counterparties, verifies authenticity of counterparty checks
and securities, ensures receipt of contract notes from brokers, monitors receipt
of interest and principal amounts on due dates, ensures transfer of title in the
case of purchases of securities, reconciles actual security holdings with the
holdings pursuant to the records, and reports any irregularity or shortcoming
observed.
Foreign Exchange Treasury. The inter-bank foreign exchange operations are
conducted through Reuters dealing systems. Brokered deals are concluded through
voice systems. Deals done through Reuters systems are captured on a real time
basis for processing. Deals carried out through voice systems are input in the
system immediately by the dealers for processing. The entire process from deal
origination to settlement and reconciliation takes place via straight through
processing. The processing ensures adequate checks at critical stages. Our
foreign exchange dealings are carried out within the guidelines and directives
outlined by the Risk Management Department. Trade strategies are discussed
frequently and decisions are taken based on the market forecasts, information
and liquidity considerations. Dealers are assigned specific currencies for
dealing to ensure focused attention. Trading operations are conducted in
conformity with the code of conduct prescribed by internal and regulatory
guidelines.
Our middle office is responsible for monitoring risk inherent to our
operations. The middle office monitors counterparty limits, positions taken by
dealers and adherence to various market risk limits set by the Risk Management
Department.
Our back office procedures were put in place to ensure speedy processing,
confirmation, accounting, confirmation matching, deal settlements and cash
balance monitoring. Our back office systems are designed to minimize settlement
risk. The matching and checking of counterparty confirmation of deals is fully
automated. Our 21 nostro accounts (our foreign overseas centers) in 15
currencies handle almost 8,000 transactions on average per month. Reconciliation
of nostro accounts is automated and is carried out on a daily basis.
Disaster Recovery
Our disaster recovery site for treasury operations is located in downtown
Mumbai about 15 kilometers away from our existing treasury location. The site is
equipped with standard installations to run full-fledged trading operations in
case of any contingency.
TECHNOLOGY
With our focus on the application of technology to our business operations,
particularly with respect to the Internet and electronic commerce solutions, we
believe we are well positioned to continue to gain market share in our target
market. We believe technology is the primary source of competitive advantage in
the Indian banking sector. Our focus on technology emphasizes:
- Electronic and online channels to:
- Reach new target customers;
- Enhance existing customer relationships;
- Offer easy access to our products and services; and
- Reduce distribution costs.
- Application of information systems to:
- Effectively market to our target customers;
- Monitor and control risks; and
- Identify, assess and capitalize on market opportunities.
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TECHNOLOGY ORGANIZATION
Our technology initiatives are undertaken in conjunction with ICICI
Infotech Services Limited, the technology arm of the ICICI group and an ISO 9001
certified company. ICICI Infotech is divided into business groups, which include
retail banking technology, corporate banking technology, infrastructure
(comprising network management and technology operations), software development
and web technology. At December 31, 1999, a team of 33 full-time professionals
have been seconded to us from ICICI Infotech to supervise our technology
operations in retail and corporate banking.
ELECTRONIC AND ONLINE CHANNELS
At December 31, 1999, all of our 71 branches and 13 extension counters were
completely automated to ensure prompt and efficient delivery of products and
services. We use the branch banking software, BANCS2000, developed by Infosys
Technologies Limited, which is flexible and scalable and integrates well with
our electronic delivery channels.
Our ATMs are from NCR and Diebold, the world's leading vendors. These ATMs
work with our main banking system, BANCS2000, and are proposed to be integrated
with the recently launched credit card system.
Our telephone banking call centers use an Interactive Voice Response System
(IVRS). The call centers are based on the latest technology, providing an
integrated customer database that allows the call agents to get a complete
overview of the customer's relationship with other ICICI group companies and us.
The database enables customer segmentation and assists the call agent in
identifying cross-selling opportunities. We are implementing a technology
architecture which enables a customer to access any product from any channel.
We believe that the Internet in India will help accelerate our customer
acquisition rate through our Internet banking service. We expect the Internet to
emerge as a key service delivery channel in the future.
We continually seek to complement our delivery channels and product
offerings with strategic alliances. We have recently signed a memorandum of
understanding with a leading Indian portal and Internet service provider for
online distribution of certain retail banking products and services.
We are in the process of finalizing agreements with several
telecommunications companies. When finalized, these agreements will allow our
customers to conduct banking operations through their mobile phones. This
service will initially be based on short messaging system technology to offer
account balances and stock market quotes. Gradually, this application is
scheduled to adopt wireless application protocol technology to provide greater
functionality to users.
APPLICATION OF INFORMATION SYSTEMS
Treasury and Trade Finance Operations
We believe we have one of the most technologically sophisticated treasury
operations in India. We use technology to monitor risk limits and exposures on a
real time basis. We have invested significantly to acquire advanced systems from
IBM, Reuters and TIBCO and connectivity to the SWIFT network.
Banking Application Software
We have installed an advanced banking system which addresses our corporate
banking as well as retail banking requirements. It is robust, flexible and
scalable and allows us to effectively and efficiently serve our growing customer
base.
High-Speed Electronic Communications Infrastructure
We have installed a nationwide data communications network linking all our
offices. The network design is based on a mix of dedicated leased lines and
satellite links to provide for redundancy and reach which is imperative in a
vast country like India. The communications network is monitored 24 hours a day
using advanced network management software. We also use a sophisticated data
center in Mumbai for data storage and retrieval.
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SECURITY FEATURES OF OUR TECHNOLOGY
We depend heavily on our technological base to provide our customers with
high-quality service. Security is critical due to the diversity of product
delivery platforms and the inherently sensitive nature of banking transactions.
We use well laid out processes including access control, complex passwords and
dual authentication. For our Internet banking service, we use 128 bit
encryption, secure socket layer technology, digital certificates, multiple
firewalls and isolation of web servers.
We also employ the services of technical security advisory organizations
for planned penetration of our systems, particularly our Internet banking
service. The penetration tests have found our systems to be highly resilient.
RECOGNITION FOR TECHNOLOGY USAGE
We have received various awards for our innovative use of technology. Bank
Technology News International, in their November 1997 issue, listed us as among
the 43 True Internet Banks outside the United States. The Financial Times,
London and UUNET, UK have consistently rated our website as a "highly commended"
for the last three years. In 1998, we also received the Computer Society of
India -- Tata Consultancy Services National Award for best information
technology usage.
COMPETITION
We face strong competition in all our principal areas of business from
Indian public sector banks, private sector banks, foreign banks and mutual
funds. We believe that our principal competitive advantage over our competitors
arises from our use of technology, our innovative products and services and our
highly motivated and experienced staff. In addition, our parent company, ICICI,
has long-standing customer relationships which we continue to exploit to
cross-sell our products and services. Because of these factors, we believe that
we have a strong competitive position in the Indian financial services market.
CORPORATE BANKING
Our principal competition in corporate lending comes from public sector
banks, which have built extensive branch networks that have enabled them to
raise low cost deposits and, as a result, price their loans very competitively.
Supported by their large retail deposit bases, public sector banks have over
80.0% of the market share for working capital financing. Their wide geographical
reach facilitates the delivery of banking products to their corporate customers
located in most parts of the country. We have been able, however, to build a
quality loan portfolio without compromising our minimum lending rates, because
of our efficient service and prompt turnaround times that are significantly
faster than public sector banks. We seek to compete with the large branch
networks of the public sector banks through our multi-channel distribution
approach.
Foreign banks have traditionally served Indian corporates with cross-border
trade finance, fee-based services and other short-term financing products. We
effectively compete with foreign banks in cross-border trade finance as a result
of our strong correspondent banking relationships with over 105 international
banks, our SWIFT-enabled corporate branches and customized trade financing
solutions. We have established strong fee-based cash management services and
compete with foreign banks due to our technological edge and competitive pricing
strategies.
Other new private sector banks also compete in the corporate banking market
on the basis of efficiency, service delivery and technology. However, the ICICI
group's strong corporate relationships and our ability to use technology to
provide innovative, value-added products and services provide us with a
competitive edge.
RETAIL BANKING
In the retail banking market, we face strong competition from commercial
banks and mutual funds. Indian commercial banks attract the majority of retail
bank deposits, historically the preferred retail savings product in India. We
have exploited the ICICI group's corporate relationships to gain individual
customer accounts through
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payroll management products such as Power Pay and will continue to pursue a
multi-channel distribution strategy utilizing physical branches, ATMs, telephone
banking call centers and the Internet to reach our customers.
With access to the latest technology and the benefit of strategies
developed in mature and highly competitive overseas markets, several foreign
banks have recently started to target middle and upper middle class retail
customers, particularly salary earners. These banks have installed ATM networks
and introduced utility bill payment schemes, mortgages and personal loans.
We also face competition from foreign banks and some new private sector
banks in the areas of retail deposits and credit cards. Citibank recently
launched a savings bank product to attract the middle income group. Other new
private sector banks have been launching international debit cards and other
innovative deposit schemes. There could be an increase in the consolidation of
private sector banks that seek to exploit synergies of branch networks and
technologies and realize economies of scale.
Mutual funds have recently emerged as another source of competition to us.
In its fiscal 2000 budget, the government of India waived the tax on dividends
received from mutual funds. This change has made mutual fund offerings a viable
alternative to bank deposits.
GENERAL
The following table gives a comparison pursuant to Indian GAAP of the
relative levels of deposits and loans of leading foreign banks and new private
sector banks in India.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
DEPOSITS LOANS(1)
------------------------ ------------------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
Total commercial banks................. Rs.6,662.6 Rs.7,999.5 Rs.3,896.6 Rs.4,622.8
Total foreign banks.................... 428.3 474.5 336.8 386.6
Of which leading banks are:
Citibank NA.......................... Rs. 75.5 Rs. 94.4 Rs. 51.8 Rs. 59.4
ANZ Grindlays Bank................... 77.6 86.9 51.6 57.7
Hong Kong and Shanghai Banking
Corporation....................... 54.9 63.9 33.0 40.9
Standard Chartered Bank.............. 48.1 53.5 34.5 44.4
Bank of America...................... 38.6 35.0 40.6 43.5
Deutsche Bank 20.0...... 21.3 19.9 23.9
ABN Amro Bank........................ 14.6 18.8 16.0 25.9
Total new private sector banks......... Rs. 217.4 Rs. 308.1 Rs. 141.8 Rs. 211.1
Of which leading banks are:
ICICI Bank........................... Rs. 26.3 Rs. 60.7 Rs. 14.5 Rs. 34.4
IndusInd Bank........................ 42.7 50.2 28.6 32.3
Global Trust Bank.................... 32.9 41.0 21.4 30.2
Times Bank(2)........................ 22.1 30.1 13.6 16.8
HDFC Bank(2)......................... 21.9 29.2 13.9 24.4
Centurion Bank....................... 12.5 21.4 9.2 18.3
</TABLE>
- ---------------
(1) Loans include advances and investments in non-statutory liquidity ratio
securities.
(2) HDFC Bank and Times Bank merged with effect from February 26, 2000.
Source: Reserve Bank of India publications.
EMPLOYEES
At December 31, 1999, we had 1,190 employees, an increase from 891
employees at March 31, 1999, 603 employees at March 31, 1998 and 445 employees
on March 31, 1997. Of the 1,190 employees at December 31,
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1999, 564 were professionals, holding degrees in management, accountancy,
engineering, law, computer science, economics and banking.
We consider our relations with our employees to be good. Our human resource
practices are open and transparent. Our employees do not belong to any union.
We use incentives in structuring compensation packages and have established
a performance-based bonus scheme under which permanent employees can
significantly increase their pay (up to 100.0% of their base salary). We have a
transparent system of performance measurement, consisting of review by an
employee's superiors as well as a self review and, in some cases, review by any
employee's peers. To encourage commitment to results and productivity, our board
of directors has recently approved an employee stock option scheme, which was
approved by our shareholders at an extraordinary general meeting on February 21,
2000. For further details on this scheme, see "Management -- Employee Stock
Option Scheme".
In addition to basic compensation, employees are eligible to receive loans
from us at subsidized rates and to participate in our provident fund and other
employee benefit plans. The provident fund, to which both we and our employees
contribute a defined amount, is a savings scheme, required by government
regulation, under which we at present are required to pay to employees a minimum
12.0% annual return. If such return is not generated internally by the fund, we
are liable for the difference. Our provident fund has generated sufficient funds
internally to meet the 12.0% annual return requirement since inception of the
funds. We have also set up a superannuation fund to which we contribute defined
amounts. In addition, we contribute specified amounts to a gratuity fund set up
pursuant to Indian statutory requirements.
We focus on training our employees on a continuous basis and we were named
"learning organization" by the Asian Banking Digest and awarded the Asian
Banking Award for the year 1998. We have training centers in Delhi and Mumbai,
where we conduct regular training programs designed to impart the necessary
skills to our employees including orientation sessions for new employees.
Training programs are also conducted for developing functional as well as
managerial skills. We regularly offer courses conducted by both national and
international faculty, drawn from industry, academia and our own organization.
For the career progression and promotion of employees, we use the
assessment center approach to identify the potential of employees to assume new
responsibilities. Career progression is assessed on the basis of job
performance, future potential and abilities to handle assignments in the higher
grade.
We share no employees with our parent company ICICI. For the nine months
ended December 31, 1999, we had seconded 16 employees to ICICI, and ICICI had
seconded five employees to us. In addition, ICICI Infotech had seconded 33
employees to us. When we second an employee to ICICI, we pay the salary of that
employee, but this expense is reimbursed to us by ICICI. When ICICI seconds an
employee to us, ICICI pays the salary of that employee, but this expense is
reimbursed to ICICI by us. We paid Rs. 2 million in fiscal 1997, Rs. 1 million
in fiscal 1998 and Rs. 1 million in fiscal 1999 to ICICI for the secondment of
ICICI employees to us.
In accordance with our corporate policy, all our employees, other than
those who are executive directors, retire at the age of 58 years.
PROPERTIES
Our registered office is located at Land Mark, Race Course Circle,
Vadodara-390 007, Gujarat, India. Our corporate headquarters are located at
ICICI Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
We had a principal office network consisting of 71 branches, 13 extension
counters and 32 off-site ATMs at December 31, 1999. These facilities are located
throughout India. Sixteen of these facilities are located on properties owned by
us, while the remaining facilities are located on leased properties. The net
book value of all our owned properties at December 31, 1999 was Rs. 1,234
million (US$ 28 million), which includes two residential facilities for our
employees and residential flats under construction.
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LEGAL AND REGULATORY PROCEEDINGS
We are involved in a number of legal proceedings in the ordinary course of
our business. However, excluding the legal proceedings discussed below, we are
not a party to any proceedings and no proceedings are known by us to be
contemplated by governmental authorities or third parties, which, if adversely
determined, may have a material adverse effect on our financial condition or
results of operations.
At March 6, 1999, we had been assessed an aggregate of Rs. 469 million (US$
11 million) in income tax, interest tax and sales tax demands by the government
of India's tax authorities for past years ended March 31, 1997. We have paid Rs.
426 million (US$ 10 million) of this amount to the tax authorities. We have
appealed the tax demands for Rs. 264 million (US$ 6 million), which represents
the disputed amount, of which we have paid Rs. 221 million (US$ 5 million). We
believe that we have a good chance of success in these appeals for the following
reasons:
- Of the aggregate assessed tax of Rs. 469 million (US$ 11 million), Rs.
271 million (US$ 6 million) represents income tax recoverable from
lessees of assets under various lease agreements. In accordance with the
expert opinion obtained by us, the tax treatment adopted by us is in
conformity with industry practice and in our view, the demand by the
Indian tax authorities cannot be substantiated. Accordingly, we have not
provided for or disclosed this tax demand as a contingent liability.
- The Indian appellate authorities have ruled in our favor in respect of
the deductibility of software expenses. The Indian tax authorities,
however, have appealed against this ruling that is pending adjudication
before a higher appellate authority.
- We have treated interest accrued on securities at the time of their
purchase as revenue expenditure in accordance with standard accounting
practices and the Reserve Bank of India guidelines. The Indian tax
authorities have, however, treated such interest as capital expenditure.
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SELECTED FINANCIAL AND OPERATING DATA
Our selected financial and other data at year-end fiscal 1998 and 1999 and
for fiscal 1997, 1998 and 1999 and at and for the nine months ended December 31,
1999 have been derived from our financial statements prepared in accordance with
US GAAP, included in this prospectus. These financial statements have been
audited by KPMG, independent accountants. The selected financial and other data
at year-end fiscal 1997 and at nine months ended December 31, 1998 have been
derived from our financial statements that are not included in this prospectus.
The selected financial and other data at December 31, 1998 and for the nine
months ended December 31, 1998 have been derived from our unaudited interim
financial statements prepared in accordance with US GAAP. Capital adequacy
ratios have been calculated both from the financial statements prepared in
accordance with Indian GAAP and the financial statements prepared in accordance
with US GAAP. Five years of selected Indian GAAP financial information is given
in "Selected Financial Information For ICICI Bank Under Indian GAAP".
You should read the following data with the more detailed information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements, included in this
prospectus. Historical results do not necessarily predict the results in the
future. The results for the nine months ended December 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal 2000.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------- --------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
--------- --------- --------- -------- --------- --------- --------
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Interest revenue............ Rs. 1,843 Rs. 2,579 Rs. 5,390 US$ 124 Rs. 3,758 Rs. 5,837 US$ 134
Interest expense............ (1,170) (1,854) (4,244) (98) (2,962) (4,783) (110)
--------- --------- --------- -------- --------- --------- --------
Net interest revenue........ 673 725 1,146 26 796 1,054 24
Provisions for credit
losses.................... (187) (360) (540) (12) (398) (218) (5)
--------- --------- --------- -------- --------- --------- --------
Net interest revenue after
provisions for credit
losses.................... 486 365 606 14 398 836 19
Non-interest revenue, net... 317 591 866 20 551 1,343 31
Net revenue................. 803 956 1,472 34 949 2,179 50
Non-interest expense........ (406) (554) (799) (18) (517) (850) (19)
--------- --------- --------- -------- --------- --------- --------
Income before taxes......... 397 402 673 16 432 1,329 31
Income tax expense.......... (155) (104) (170) (4) (112) (303) (7)
--------- --------- --------- -------- --------- --------- --------
Net income.................. Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 320 Rs. 1,026 US$ 24
========= ========= ========= ======== ========= ========= ========
PER COMMON SHARE DATA:
Net income(2)............... Rs. 1.61 Rs. 1.84 Rs. 3.05 US$ 0.07 Rs. 1.94 Rs. 6.22 US$ 0.15
Dividends................... 1.00 1.00 1.20 0.03 -- -- --
Book value.................. 11.67 14.98 17.15 0.39 16.02 22.24 0.51
Common shares outstanding at
end of period (in millions
of common shares)......... 150 165 165 165 165
Weighted average common
shares outstanding (in
millions of common
shares)................... 150 162 165 165 165
</TABLE>
- ---------------
(1) Rupee amounts for fiscal 1999 and for the nine months ended December 31,
1999 have been translated into US dollars using the noon buying rate in
effect on December 31, 1999 of Rs.43.51 = US$1.00.
(2) During these periods, we have not issued any securities convertible into
equity shares that could dilute our equity shares.
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<PAGE> 93
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of our average total assets for the
respective period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------- ------------------
1997 1998 1999 1998(1) 1999(1)
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Interest revenue.................................. 11.55% 9.67% 10.25% 10.29% 9.49%
Interest expense.................................. (7.33) (6.95) (8.07) (8.11) (7.78)
----- ----- ----- ----- -----
Net interest revenue.............................. 4.22 2.72 2.18 2.18 1.71
Provisions for credit losses...................... (1.17) (1.35) (1.03) (1.09) (0.35)
----- ----- ----- ----- -----
Net interest revenue after provisions for credit
losses.......................................... 3.05 1.37 1.15 1.09 1.36
Non-interest revenue, net......................... 1.98 2.22 1.65 1.51 2.18
----- ----- ----- ----- -----
Net revenue....................................... 5.03 3.59 2.80 2.60 3.54
Non-interest expense.............................. (2.54) (2.08) (1.52) (1.42) (1.38)
----- ----- ----- ----- -----
Income before taxes............................... 2.49 1.51 1.28 1.18 2.16
Income tax expense................................ (0.97) (0.39) (0.32) (0.30) (0.49)
----- ----- ----- ----- -----
Net income........................................ 1.52% 1.12% 0.96% 0.88% 1.67%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Annualized.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------------------------------ ------------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
---------- ---------- ---------- --------- ---------- ----------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Total assets.......... Rs. 19,766 Rs. 35,278 Rs. 74,825 US$ 1,720 Rs. 59,346 Rs. 102,205 US$ 2,349
Cash and cash
equivalents......... 4,099 8,728 18,488 425 15,298 18,590 427
Trading account
assets.............. 3 7,387 15,822 364 11,599 28,606 657
Loans, net(2)......... 8,374 12,765 27,597 634 20,880 37,749 868
Securities............ 3,816 1,476 3,963 91 2,912 4,402 101
Non-performing loans,
net................. -- 179 733 17 594 882 20
Total liabilities..... 18,016 32,807 71,995 1,655 56,703 98,536 2,264
Long-term debt........ 89 129 1,764 41 1,110 1,734 40
Deposits.............. 13,476 26,290 60,729 1,396 46,424 85,002 1,953
Stockholders'
equity.............. 1,750 2,471 2,830 65 2,643 3,669 85
PERIOD AVERAGE(3):
Total assets.......... 15,958 26,661 52,605 1,209 48,715 82,044 1,886
Interest-earning
assets.............. 11,730 19,467 42,521 977 38,599 62,349 1,433
Loans, net(2)......... 7,224 9,498 18,546 426 16,623 28,469 654
Total liabilities..... 14,270 24,351 49,937 1,148 46,142 78,779 1,811
Interest-bearing
Liabilities......... 9,484 17,185 41,212 947 37,837 63,202 1,453
Long-term debt........ 76 109 1,127 26 958 1,763 41
Total deposits........ 9,923 18,539 39,455 907 36,977 62,234 1,430
Of which:
Interest-bearing
deposits............ 7,753 15,140 35,916 825 33,533 56,608 1,301
Stockholders'
equity.............. 1,688 2,310 2,668 61 2,573 3,265 75
</TABLE>
92
<PAGE> 94
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------------- ------------------
1997 1998 1999 1998 1999
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
PROFITABILITY(4):)
Net income as a percentage of:
Average total assets...................... 1.52% 1.12% 0.96% 0.88% 1.67%
Average stockholders' equity.............. 14.34 12.90 18.85 16.58 41.90
Dividend payout ratio(5).................... 61.98 59.89 43.30 -- --
Spread(6)................................... 3.37 2.46 2.38 2.54 2.39
Net interest margin(7)...................... 5.74 3.72 2.70 2.75 2.25
Cost-to-income ratio(8)).................... 41.01 42.10 39.71 38.38 35.47
Cost-to-average assets ratio(9)............. 2.54 2.08 1.52 1.42 1.38
CAPITAL:
Total capital adequacy ratio(10)............ 13.04 13.48 11.06 11.60 9.41
Tier 1 capital adequacy ratio(10)........... 12.71 13.38 7.32 9.12 6.60
Tier 2 capital adequacy ratio(10)........... 0.33 0.10 3.74 2.48 2.81
Average stockholders' equity as a percentage
of average total assets................... 10.58 8.66 5.07 5.28 3.98
ASSET QUALITY:
Gross non-performing loans as a percentage
of gross loans............................ 2.18 4.58 5.66 6.53 5.06
Net non-performing loans as a percentage of
net loans................................. -- 1.40 2.66 2.84 2.34
Net non-performing loans as a percentage of
total assets.............................. -- 0.51 0.98 1.00 0.86
Allowance for credit losses as a percentage
of gross non-
Performing loans.......................... 100.00 70.36 54.56 58.08 55.11
Allowance for credit losses as a percentage
of gross total loans...................... 2.18 3.22 3.09 3.79 2.79
</TABLE>
- ---------------
(1) Rupee amounts for fiscal 1999 and for the nine months ended December 31,
1999 have been translated into US dollars using the noon buying rate in
effect on December 31, 1999 of Rs. 43.51 = US$ 1.00.
(2) Net of allowance for credit losses in respect of non-performing loans.
(3) Average balances are the daily average outstanding amounts.
(4) Profitability data for the nine months ended December 31, 1998 and 1999 is
annualized.
(5) Represents the ratio of total dividends payable on common stock, including
the dividend distribution tax, as a percentage of net income.
(6) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(7) Represents the ratio of net interest revenue to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(8) Represents the ratio of non-interest expense to the sum of net interest
revenue and non-interest revenue.
(9) Represents the ratio of non-interest expense to average total assets.
(10) Our capital adequacy is computed in accordance with the Reserve Bank of
India guidelines. The computation is based on our financial statements
prepared in accordance with Indian GAAP. Our total
93
<PAGE> 95
capital adequacy ratio computed under the applicable Reserve Bank of India
guidelines and based on our financial statements prepared in accordance
with US GAAP was 9.08% at December 31, 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.69% and our Tier 2
capital adequacy ratio was 2.39% at December 31, 1999. See "'Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Financial Condition -- Capital".
AVERAGE BALANCE SHEET
The average balance is the daily average of balances outstanding. The
amortized portion of loan origination fees (net of loan origination costs) is
included in interest revenue on loans, representing an adjustment to the yield.
The average yield on average interest-earning assets is the ratio of interest
revenue to average interest-earning assets. The average cost on average
interest-bearing liabilities is the ratio of interest expense to average
interest-bearing liabilities. The average balances of loans include
non-performing loans and are net of allowance for credit losses. We have not
recalculated tax-exempt income on a tax-equivalent basis because we believe the
effect of doing so would not be significant. The following tables set forth, for
the periods indicated, the average balances of our assets and liabilities
outstanding, which are major components of interest revenue, interest expense
and net interest margin.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999
--------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE COST(1) BALANCE EXPENSE COST(1)
---------- ---------- ------- ---------- ---------- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Cash, cash equivalents and trading
assets(2)................................... Rs. 19,524 Rs. 1,640 11.20% Rs. 28,548 Rs. 2,142 10.00%
Securities(3)................................. 2,452 209 11.36 5,332 525 13.13
Loans net..................................... 16,623 1,853 14.86 28,469 3,080 14.43
Other interest income(4)...................... 56 90
---------- ---------- ---------- ----------
Total interest-earning assets................. 38,599 3,758 12.98 62,349 5,837 12.48
NON-INTEREST-EARNING ASSETS:
Cash and cash equivalents(5).................. 3,537 5,473
Acceptances................................... 3,988 6,978
Property and equipment........................ 1,397 1,606
Other assets.................................. 1,194 5,638
Total non-earning assets...................... 10,116 19,695
---------- ---------- ---------- ----------
Total assets.................................. Rs. 48,715 Rs. 3,758 Rs. 82,044 Rs. 5,837
========== ========== ========== ==========
LIABILITIES:
INTEREST-BEARING LIABILITIES:
Savings account deposits...................... Rs. 1,447 Rs. 36 3.32% Rs. 3,176 Rs. 81 3.40%
Time deposits................................. 32,086 2,573 10.69 53,432 4,091 10.21
Long-term debt................................ 958 102 14.20 1,763 184 13.92
Trading account and other liabilities......... 3,346 251 10.00 4,831 427 11.78
---------- ---------- ---------- ----------
Total interest-bearing Liabilities............ 37,837 2,962 10.44 63,202 4,783 10.09
========== ========== ========== ==========
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits................. 3,444 5,626
Other liabilities............................. 4,861 9,951
Total non-interest-bearing Liabilities........ 8,305 15,577
---------- ----------
Total liabilities............................. 46,142 2,962 78,779 4,783
---------- ========== ---------- ==========
Stockholders' equity.......................... 2,573 3,265
---------- ----------
Total liabilities and Stockholders' equity.... Rs. 48,715 Rs. 82,044
========== ==========
</TABLE>
94
<PAGE> 96
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------
1997 1998
-------------------------------- ----------------------
INTEREST AVERAGE INTEREST
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/
BALANCE EXPENSE COST BALANCE EXPENSE
---------- --------- ------- ---------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Cash, cash equivalents and trading
assets(2)............................ Rs. 1,159 Rs. 81 6.99% Rs. 8,637 Rs. 913
Securities(3)......................... 3,347 421 12.58 1,332 148
Loans, net............................ 7,224 1,341 18.56 9,498 1,499
Other interest income(4).............. -- -- -- -- 19
---------- --------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS......... 11,730 1,843 15.71 19,467 2,579
---------- --------- ---------- ---------
NON-INTEREST-EARNING ASSETS:
Cash and cash equivalents(5).......... 1,287 2,776
Acceptances........................... 2,507 2,575
Property and equipment................ 212 910
Other assets.......................... 222 933
Total non-earning assets.............. 4,228 7,194
---------- --------- ---------- ---------
Total assets.......................... Rs. 15,958 Rs.1,843 Rs. 26,661 Rs.2,579
========== ========= ========== =========
LIABILITIES:
INTEREST-BEARING LIABILITIES:
Savings account deposits.............. Rs. 304 Rs. 10 3.29% Rs. 815 Rs. 28
Time deposits......................... 7,449 962 12.91 14,325 1,590
Long-term debt........................ 76 13 17.11 109 16
Trading account and other
liabilities.......................... 1,655 185 11.18 1,936 220
---------- --------- ---------- ---------
Total interest-bearing Liabilities.... 9,484 1,170 12.34 17,185 1,854
---------- --------- ---------- ---------
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing Deposits......... 2,170 3,399
Other liabilities..................... 2,616 3,767
---------- ----------
Total non-interest-bearing
liabilities.......................... 4,786 7,166
---------- --------- ---------- ---------
Total liabilities..................... Rs. 14,270 Rs.1,170 Rs. 24,351 Rs.1,854
---------- ========= ---------- =========
Stockholders' equity.................. Rs. 1,688 Rs. 2,310
---------- ----------
Total liabilities and stockholders'
equity............................... Rs. 15,958 Rs. 26,661
========== ==========
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1998 1999
------- --------------------------------
AVERAGE INTEREST AVERAGE
YIELD/ AVERAGE REVENUE/ YIELD/
COST BALANCE EXPENSE COST
------- ---------- --------- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Cash, cash equivalents and trading
assets(2)............................ 10.57% Rs. 21,143 Rs.2,297 10.86%
Securities(3)......................... 11.11 2,832 305 10.77
Loans, net............................ 15.78 18,546 2,707 14.60
Other interest income(4).............. -- -- 81 --
---------- ---------
TOTAL INTEREST-EARNING ASSETS......... 13.25 42,521 5,390 12.68
---------- ---------
NON-INTEREST-EARNING ASSETS:
Cash and cash equivalents(5).......... 3,625
Acceptances........................... 4,388
Property and equipment................ 1,704
Other assets.......................... 367
Total non-earning assets.............. 10,084
---------- ---------
Total assets.......................... Rs. 52,605 Rs.5,390
========== =========
LIABILITIES:
INTEREST-BEARING LIABILITIES:
Savings account deposits.............. 3.44% Rs. 1,569 Rs. 54 3.44%
Time deposits......................... 11.10 34,347 3,653 10.64
Long-term debt........................ 14.68 1,127 155 13.75
Trading account and other
liabilities.......................... 11.36 4,169 382 9.16
---------- ---------
Total interest-bearing Liabilities.... 10.79 41,212 4,244 10.30
---------- ---------
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing Deposits......... 3,539
Other liabilities..................... 5,186
----------
Total non-interest-bearing
liabilities.......................... 8,725
---------- ---------
Total liabilities..................... Rs. 49,937 Rs.4,244
---------- =========
Stockholders' equity.................. Rs. 2,668
----------
Total liabilities and stockholders'
equity............................... Rs. 52,605
==========
</TABLE>
- ---------------
(1) Average yield and average cost for the nine months ended December 31, 1998
and 1999 are annualized.
(2) Includes government of India securities, inter-bank deposits and lending,
commercial paper, certificate of deposits and equity securities.
(3) Includes corporate debt securities, government of India securities held as
available for sale and mutual fund units.
(4) Includes interest income earned on balances maintained with the Reserve
Bank of India pursuant to the cash reserve ratio requirement, which is
currently 9.0% of our demand and time liabilities, excluding certain
specified liabilities. See "Supervision and Regulation -- Legal Reserve
Requirements -- Cash Reserve Ratio". Up to fiscal 1997, no interest was
payable by the Reserve Bank of India on these balances. Since fiscal 1998,
the Reserve Bank of India pays interest of 4.0% per annum on balances in
excess of 3.0% of our demand and time liabilities.
(5) Includes balances maintained with the Reserve Bank of India pursuant to the
cash reserve ratio requirement.
95
<PAGE> 97
ANALYSIS OF CHANGES IN INTEREST REVENUE AND INTEREST EXPENSE VOLUME AND RATE
ANALYSIS
The following table sets forth, for the periods indicated, the changes in
the components of our net interest revenue.
<TABLE>
<CAPTION>
FISCAL 1998 VS. FISCAL 1997 FISCAL 1999 VS. FISCAL 1998
---------------------------------- -------------------------------------
INCREASE (DECREASE)(1) DUE TO INCREASE (DECREASE)(1) DUE TO
---------------------------------- -------------------------------------
CHANGE IN CHANGE IN
NET AVERAGE CHANGE IN AVERAGE CHANGE IN
CHANGE VOLUME AVERAGE RATE NET CHANGE VOLUME AVERAGE RATE
------- --------- ------------ ---------- --------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST REVENUE:
Cash, cash
equivalents and
trading assets..... Rs. 832 Rs. 790 Rs. 42 Rs. 1,384 Rs. 1,359 Rs. 25
Securities........... (273) (224) (49) 157 162 (5)
Loans, net........... 158 359 (201) 1,208 1,321 (113)
Other interest
income............. 19 19 -- 62 62 --
------- ------- --------- --------- --------- ---------
Total interest
revenue............ Rs. 736 Rs. 944 Rs. (208) Rs. 2,811 Rs. 2,904 Rs. (93)
======= ======= ========= ========= ========= =========
INTEREST EXPENSE:
Savings account
deposits........... Rs. 18 Rs. 18 Rs. -- Rs. 26 Rs. 26 Rs. --
Time deposits........ 628 763 (135) 2,063 2,129 (66)
Long-term debt....... 3 5 (2) 139 140 (1)
Trading account and
other
Liabilities........ 35 32 3 162 205 (43)
------- ------- --------- --------- --------- ---------
Total interest
expense............ Rs. 684 Rs. 818 Rs. (134) Rs. 2,390 Rs. 2,500 Rs. (110)
======= ======= ========= ========= ========= =========
Net interest
revenue............ Rs. 52 Rs. 126 Rs. (74) Rs. 421 Rs. 404 Rs. 17
======= ======= ========= ========= ========= =========
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1999
VS. NINE MONTHS ENDED
DECEMBER 31, 1998
------------------------------------
INCREASE (DECREASE)(1) DUE TO
------------------------------------
CHANGE IN CHANGE IN
AVERAGE AVERAGE
NET CHANGE VOLUME RATE
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
INTEREST REVENUE:
Cash, cash
equivalents and
trading assets..... Rs. 502 Rs. 735 Rs (233)
Securities........... 316 273 43
Loans, net........... 1,227 1,300 (73)
Other interest
income............. 34 34 --
--------- --------- --------
Total interest
revenue............ Rs. 2,079 Rs. 2,342 Rs. (263)
========= ========= ========
INTEREST EXPENSE:
Savings account
deposits........... Rs. 45 Rs. 44 Rs. 1
Time deposits........ 1,518 1,673 (155)
Long-term debt....... 82 85 (3)
Trading account and
other
Liabilities........ 176 116 60
--------- --------- --------
Total interest
expense............ Rs. 1,821 Rs. 1,918 Rs. (97)
========= ========= ========
Net interest
revenue............ Rs. 258 Rs. 424 Rs. (166)
========= ========= ========
</TABLE>
- ---------------
(1) The changes in net interest revenue between periods have been reflected as
attributed either to volume or rate changes. For the purpose of this table,
changes which are due to both volume and rate have been allocated solely to
volume.
96
<PAGE> 98
YIELDS, SPREADS AND MARGINS
The following table sets forth, for the periods indicated, the yields,
spreads and interest margins on our interest earning assets.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31(1),
-------------------------------------- ------------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Interest revenue.......... Rs. 1,843 Rs. 2,579 Rs. 5,390 Rs. 3,758 Rs. 5,837
Average interest-earning
assets.................. 11,730 19,467 42,521 38,599 62,349
Interest expense.......... 1,170 1,854 4,244 2,962 4,783
Average interest-bearing
liabilities............. 9,484 17,185 41,212 37,837 63,202
Average total assets...... 15,958 26,661 52,605 48,715 82,044
Average interest-earning
assets as a percentage
of Average total
assets.................. 73.5% 73.0% 80.8% 79.2% 76.0%
Average interest-bearing
liabilities as a
percentage of Average
total assets............ 59.4 64.5 78.3 77.7 77.0
Average interest-earning
assets as a percentage
of Average
interest-bearing
liabilities............. 123.7 113.3 103.2 102.0 98.7
Yield..................... 15.71 13.25 12.68 12.98 12.48
Cost of funds............. 12.34 10.79 10.30 10.44 10.09
Spread(2)................. 3.37 2.46 2.38 2.54 2.39
Net interest margin(3).... 5.74 3.72 2.70 2.75 2.25
</TABLE>
- ---------------
(1) Yield, cost of funds, spread and net interest margin are annualized for the
nine months ended December 31, 1998 and 1999.
(2) Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(3) Net interest margin is the ratio of net interest revenue to average
interest-earning assets. The difference in net interest margin and spread
arises due to the difference in amount of average interest-earning assets
and average interest-bearing liabilities. If average interest-earning
assets exceed average interest-bearing liabilities, net interest margin is
greater than the spread and if average interest-bearing liabilities exceed
average interest-earning assets, net interest margin is less than the
spread.
97
<PAGE> 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our audited financial
statements and unaudited interim financial statements included in this
prospectus. The following discussion is based on our audited financial
statements and unaudited interim financial statements, which have been prepared
in accordance with US GAAP. The results for the nine months ended December 31,
1999 are not necessarily indicative of the results to be expected for the full
fiscal 2000. Our fiscal year ends on March 31 of each year so all references to
a particular fiscal year are to the year ended March 31 of that year.
INTRODUCTION
Our loan portfolio, financial condition and results of operations have
been, and in the future, are expected to be influenced by economic conditions,
particularly industrial growth, in India and certain global developments,
particularly in commodity prices relating to the business activities of our
corporate customers. For ease of understanding the discussion of our results of
operations that follows, you should consider the introductory discussion of
these macroeconomic factors.
INDIAN ECONOMY
Despite the slowdown in the global economy between 1997 and 1999 stemming
from the economic crisis in Asia, Russia and elsewhere, the GDP growth rate for
the Indian economy was 7.5% in fiscal 1997, 5.0% in fiscal 1998 and 6.8% in
fiscal 1999. Growth in industrial production in India, however, slowed to 4.0%
in fiscal 1999 from 6.6% in fiscal 1998 and 5.6% in fiscal 1997, with overall
GDP growth driven by other sectors such as agriculture and services. Average
inflation, as measured by the wholesale price index, remained below 7.0% in each
of fiscal 1997, 1998 and 1999. After the Asian crisis in 1997-1998, unlike
certain south-east Asian currencies, the rupee maintained its value due to
effective exchange rate management by the Reserve Bank of India and the fact
that convertibility of the rupee is still controlled.
The Indian economy registered a GDP growth rate of 5.9% in the six months
ended September 30, 1999 compared to 4.0% in the six months ended September 30,
1998. The higher GDP growth rate was due to an improvement in growth in all the
three sectors: agriculture, industry and services. Growth in industrial
production was also higher at 7.2% in the period April 1999 to January 2000
compared to 3.8% in the period April 1998 to January 1999. This industrial
growth was a result of higher demand for consumer, capital and intermediate
goods, an increase in exports and a firming of international commodity prices.
This recovery was evident particularly in the textiles, metals and machinery
segments. Average inflation, as measured by the wholesale price index, for the
period April 1999 to January 2000 was 3.0% compared to 7.7% during the
corresponding period of the previous fiscal year. Lower inflation was
essentially due to the easing of prices of primary articles and manufactured
products, which more than offset the rise in the price of fuel.
Fiscal 1999, in particular, was a difficult year for the Indian financial
sector. There was an overall decline in asset quality principally due to an
increase in non-performing loans to certain borrowers in the manufacturing
sector, particularly in the textiles, man-made fibers, iron and steel and light
manufacturing industries.
The rapid reduction in trade barriers and integration with global markets,
and the downtrend in global commodity markets, caused difficulty in the Indian
economy for those commercial enterprises with cost inefficiencies, poor
technology and fragmented capacities. Over the last few years, a sharp reduction
in international steel prices to historic lows has had an adverse impact, for
example, on the companies in the iron and steel industry. In addition, a
significant reduction in import tariffs over the last three years led to price
competition from certain countries, substantially reducing domestic steel
prices. The textiles industry was also affected by a reduction in exports as a
result of the devaluation of certain south-east Asian currencies in 1998, making
Indian exports less competitive, and resulting in a decrease in demand in Asia.
While the Indian economy as a whole has continued to grow, although at a
slower rate than in past periods, the decline in commodities prices has made it
difficult for those Indian companies whose business is dependent
98
<PAGE> 100
upon commodities to operate profitably. Middle market companies (companies with
annual sales of less than Rs. 1.0 billion (US$ 23 million)) in particular have
had to restructure their operations to deal with the resulting financial stress
and in some cases, have had to operate at levels below their overall capacities,
suffering cash losses as a result. This financial stress and decline in
profitability had an adverse impact on the financial strength of some of our
borrowers, which has resulted in an overall increase in non-performing loans in
our loan portfolio. The impact was more on the middle market companies due to
their generally weaker financial strength and lesser ability to withstand
stress. In certain cases, while continuing to generate revenue and net profits,
some of our borrowers have had to make significant changes in their operations,
selling unproductive assets, merging with other market participants, reducing
costs and refocusing their business objectives. This has resulted in the need to
restructure and renegotiate credit and related facilities with banks and
financial institutions including, in some cases, us.
BANKING SECTOR
According to the Reserve Bank of India's data, total deposits of all
commercial banks have increased by 16.5% in fiscal 1997, 19.8% in fiscal 1998
and 17.9% in fiscal 1999. In fiscal 1997 and 1998, the high growth in deposits
was primarily the result of a shift in depositor preference towards bank
deposits and away from capital market instruments due to depressed capital
market conditions resulting from relatively lower industrial growth. In fiscal
1999, the government-controlled State Bank of India, the largest commercial bank
in India, issued bonds, totaling Rs. 179.5 billion (US$ 4.1 billion), to
non-resident Indians living abroad. The Reserve Bank of India included these
bonds in computing the total deposits of all commercial banks in fiscal 1999.
Excluding these proceeds, growth in deposits would have been 15.0% in fiscal
1999 compared to 19.8% in fiscal 1998. This slowdown in the growth of core
deposits reflected a higher holding by households of cash and non-bank deposits.
In the nine months ended December 31, 1999, bank deposits increased 10.4%
compared to 13.4% in the nine months ended December 31, 1998. The higher growth
rate in the nine months ended December 31, 1998 was also due to the State Bank
of India's bond issuance program. Excluding these proceeds, growth in deposits
in the nine months ended December 31, 1999 would have been 10.6% compared to
10.4% in the nine months ended December 31, 1998.
According to the Reserve Bank of India's data, bank credit increased at a
slower rate than total bank deposits in recent years, growing 9.6% in fiscal
1997, 16.4% in fiscal 1998 and 13.8% in fiscal 1999. These growth rates
reflected the trend in growth in industrial production during these years. In
addition to loans, banks in India also invest in commercial paper, medium and
long-term bonds and, to a limited extent, in equity securities. Including these
investments, the total growth in bank credit was 12.3% in fiscal 1997, 18.1% in
fiscal 1998 and 16.4% in fiscal 1999. As a result of improved growth in GDP and
industrial production in fiscal 2000, growth in bank credit was 11.3% in the
nine months ended December 31, 1999 compared to 7.1% in the nine months ended
December 31, 1998. The comparable figures for growth in total bank credit,
including investments, was 10.5% in the nine months ended December 31, 1999 and
9.1% in the nine months ended December 31, 1998.
There has been a downward movement in interest rates during the last three
fiscal years principally due to the Reserve Bank of India's policy of assuring
adequate liquidity to the banking system by generally lowering the rate at which
it will lend to Indian banks to ensure that corporate borrowers have access to
funding at competitive rates. The Reserve Bank of India's primary motive has
been to realign interest rates with the market to facilitate a smooth transition
from a government-controlled regime in the early 1990s, when interest rates were
heavily regulated, to a more market-oriented interest rate regime. Banks have
generally followed the direction of interest rates set by the market and
adjusted both their deposit rates and lending rates downward.
99
<PAGE> 101
The following table sets forth the decline in average deposit rates and
average lending rates of five major public sector banks for the last three
years.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT RATE AVERAGE PRIME
FOR OVER ONE YEAR TERM LENDING RATE
FISCAL YEAR (RANGE) (RANGE)
- ----------- ---------------------- -------------
<S> <C> <C>
1997........................................................ 11.0-12.0% 14.5-15.0%
1998........................................................ 10.5-11.0 14.0
1999........................................................ 9.0-11.0 12.0-13.0
2000 (to December 31, 1999)................................. 8.0-10.5 12.0-12.5
</TABLE>
- ---------------
Source:Reserve Bank of India: Handbook of Statistics on Indian Economy, 1999 and
Weekly Statistical Supplements.
In line with the general market trends illustrated in the above table, our
average deposit rate for deposits with a maturity of greater than one year
decreased to 10.5%-11.0% in the nine months ended December 31, 1999 from
12.0%-14.5% in fiscal 1997 and our average prime lending rate range decreased to
13.5% in the nine months ended December 31, 1999 from 17.0%-18.5% in fiscal
1997.
RESULTS OF OPERATIONS
In spite of the slowdown in the Indian economy between 1997 and 1999 and
stress on certain core sectors of industry such as iron and steel and textiles,
we were able to add to our assets and liabilities at a rapid pace. This was
largely due to the fact that, as a recent entrant in the commercial banking
sector, we were able to acquire new customers from public sector banks. We
cannot guarantee that we will be able to continue to achieve the same growth
rates as those achieved in the last three fiscal years.
We analyze our financial performance in terms of interest revenue earned
from cash, cash equivalents, trading account assets (i.e., interest-earning
liquid assets maintained by our domestic treasury for meeting reserve
requirements), loans and securities as offset by interest expense incurred from
deposits, long-term debt and trading account liabilities. We analyze our average
cost of deposits, yield on loans and returns from our trading portfolio and
portfolio of available for sale securities on a regular basis. Along with these
measures, we also focus on the gross non-performing loans, allowance for credit
losses, non-interest revenue and non-interest expense to study our
profitability. We discuss below these measures of financial performance.
NET INTEREST REVENUE
Nine months ended December 31, 1999 compared to Nine months ended December
31, 1998
Net interest revenue increased 32.4% in the nine months ended December 31,
1999 compared to the nine months ended December 31, 1998 reflecting mainly the
following factors:
- an increase of 61.5% in the average volume of interest-earning assets,
offset by
- a decrease of 50 basis points in the net interest margin to 2.25% in the
nine months ended December 31, 1999 from 2.75% in the nine months ended
December 31, 1998 and a decrease of 15 basis points in our spread to
2.39% in the nine months ended December 31, 1999 from 2.54% in the nine
months ended December 31, 1998.
The increase in our average volume of interest-earning assets was primarily
due to a rise in our loans to more highly rated corporate clients resulting from
our joint marketing efforts with ICICI through the Major Clients Group. During
this period, our net interest margin decreased primarily due to this shift
towards loans to higher rated clients, which loans, consistent with market
conditions typically, earn lower yields due to the lower credit risk associated
with these borrowers, an increase in gross non-performing loans, a 120 basis
point decline in yield on cash, cash equivalents and trading account assets and
a decline in average interest-earning assets as a percentage of average
interest-bearing liabilities to 98.7% in the nine months ended December 31, 1999
from 102.0% in the nine months ended December 31, 1998, as described below.
100
<PAGE> 102
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue (which reflects interest revenue from
cash, cash equivalents and trading account assets, securities, loans and other
assets minus interest expense on deposits, long-term debt and trading account
and other liabilities). For further information on assets and liabilities,
changes in interest revenue and interest expense volume and rate analysis,
yields, spreads and margins for these periods, see "Selected Financial and
Operating Data".
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
----------------------------------------------
1999/1998
1998 1999 1999 % CHANGE
--------- --------- ------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
INTEREST REVENUE
Cash, cash equivalents and trading account
assets........................................ Rs. 1,640 Rs. 2,142 US$ 49 30.6%
Securities...................................... 209 525 12 151.2
Loans........................................... 1,853 3,080 71 66.2
Others.......................................... 56 90 2 60.7
--------- --------- -------
Total interest revenue.......................... Rs. 3,758 Rs. 5,837 US$ 134 55.3
--------- --------- -------
INTEREST EXPENSE
Savings account deposits........................ Rs. 36 Rs. 81 US$ 2 125.0%
Time deposits................................... 2,573 4,091 94 59.0
Long-term debt.................................. 102 184 4 80.4
Trading account and other liabilities........... 251 427 10 70.1
--------- --------- -------
Total interest expense.......................... Rs. 2,962 Rs. 4,783 US$ 110 61.5
--------- --------- -------
NET INTEREST REVENUE............................ Rs. 796 Rs. 1,054 US$ 24 32.4
========= ========= =======
</TABLE>
Interest revenue increased 55.3% in the nine months ended December 31, 1999
compared to the nine months ended December 31, 1998 reflecting an increase in
the average volume of interest-earning assets, principally loans, offset by a
decline in the gross yield on interest-earning assets. The average volume of
loans increased by Rs. 11.8 billion (US$ 272 million) or 71.3% to Rs. 28.5
billion (US$ 654 million) in the nine months ended December 31, 1999 compared to
the nine months ended December 31, 1998. Our loan growth was largely due to an
increase in our working capital loans primarily to more highly rated, larger
corporate clients acquired through our joint marketing efforts with ICICI
through the Major Clients Group. For a further discussion of our joint marketing
efforts see, "Relationship with ICICI Group -- Group Operating Strategy". The
decline in yield on interest-earning assets was primarily due to a 43 basis
points decline in yield on loans to 14.43% in the nine months ended December 31,
1999 from 14.86% in the nine months ended December 31, 1998. This decrease
reflected a general decline in interest rates during this period as well as an
increased volume of loans to higher rated clients which loans, consistent with
market conditions, typically earn lower yields due to the lower credit risk
associated with these borrowers. Our yield was also lower due to an increase in
our non-performing loans on which we do not accrue interest.
The average volume of cash, cash equivalents and trading account assets
increased 46.2% in the nine months ended December 31, 1999 by Rs. 9.0 billion
(US$ 207 million) compared to the nine months ended December 31, 1998 primarily
due to increased reserve requirements resulting from a 68.3% increase in average
deposits in the nine months ended December 31, 1999. Our trading portfolio
principally consists of government of India securities which are primarily held
to meet our statutory liquidity reserve requirements. For further discussion of
regulatory requirements applicable to our business, see "Supervision and
Regulation". The yield on cash, cash equivalents and trading account assets
decreased 120 basis points in the nine months ended December 31, 1999. This
decrease was primarily caused by reduced opportunities to swap rupee funds into
US dollars at forward rates as attractive as those prevalent in the nine months
ended December 31, 1998.
The average volume of our securities portfolio increased 117.5% to Rs. 5.3
billion (US$ 123 million) in the nine months ended December 31, 1999 from Rs.
2.5 billion in the nine months ended December 31, 1998. The yield on these
available for sale securities increased to 13.13% in the nine months ended
December 31, 1999 from 11.36% in the nine months ended December 31, 1998
primarily due to the higher level of dividend income
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<PAGE> 103
earned from investments in mutual funds. Our investment in mutual funds
increased to Rs. 1.2 billion (US$ 27 million) at December 31, 1999 from Rs. 266
million (US$ 6 million) at year-end fiscal 1999 primarily to take advantage of
the buoyant Indian equity capital markets. Dividend income increased to Rs. 240
million (US$ 6 million) in the nine months ended December 31, 1999 from Rs. 44
million (US$ 1 million) in the nine months ended December 31, 1998.
The average volume of our interest-bearing liabilities increased primarily
due to an increase in time deposits which were 84.5% of average interest-bearing
liabilities in the nine months ended December 31, 1999. The average volume of
time deposits increased by Rs. 21.3 billion (US$ 491 million) or 66.5% to Rs.
53.4 billion (US$ 1.2 billion) in the nine months ended December 31, 1999 from
Rs. 32.1 billion (US$ 737 million) in the nine months ended December 31, 1998
primarily due to an increase in corporate time deposits. The growth in our
corporate deposits was driven by our provision of daily quotes of interest rates
for deposits in excess of Rs. 10 million, a service not provided by most of our
competitors during this period.
The increase in the average volume of interest-bearing liabilities was also
driven by a general increase in retail deposits. We were able to increase
deposit taking from retail customers by offering products targeted at new
segments of customers, including "Power Pay", a direct deposit product designed
to streamline the salary payment systems of our corporate customers. The share
of new "Power Pay" accounts as a percentage of all new savings accounts opened
in the nine months ended December 31, 1999 was 42.0%. New "Power Pay" customers
generally tended to also open time deposit accounts leading to a further
increase in time deposits. Our focus on retail deposit taking resulted in the
67.9% growth in our retail deposits in the nine months ended December 31, 1999
compared to 30.7% growth in our corporate deposits in the same period.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits offset, in part, by the
increase in cost of trading account and other liabilities. As our retail
deposits typically carry lower interest rates compared to our corporate
deposits, the increase in retail deposits as a percentage of total deposits over
the past year resulted in the average cost of time deposits decreasing 48 basis
points to 10.21% in the nine months ended December 31, 1999 from 10.69% in the
nine months ended December 31, 1998.
The average volume of trading account liabilities, consisting of borrowings
from the inter-bank money market and short-term borrowings from institutions,
increased 44.4% in the nine months ended December 31, 1999 to Rs. 4.8 billion
(US$ 111 million) from Rs. 3.3 billion (US$ 77 million) in the nine months ended
December 31, 1998 primarily due to the overall growth in our business. The cost
of trading account liabilities increased to 11.78% in the nine months ended
December 31, 1999 from 10.00% in the nine months ended December 31, 1998,
primarily due to our conversion in the nine months ended December 31, 1999 of
foreign currency liabilities into rupee funds through swap transactions to take
advantage of domestic market trading opportunities. The cost of these swap
transactions was accounted for as an interest expense and included in interest
expense on trading account liabilities.
Fiscal 1999 compared to Fiscal 1998
Net interest revenue increased 58.1% in fiscal 1999 compared to fiscal 1998
reflecting mainly the following factors:
- an increase of 118.4% in the average volume of interest-earning assets,
offset by
- a decrease of 102 basis points in the net interest margin to 2.70% in
fiscal 1999 from 3.72% in fiscal 1998 and a decrease of eight basis
points in our spread to 2.38% in fiscal 1999 from 2.46% in fiscal 1998.
The increase in our average volume of interest-earning assets was primarily
due to growth in cash, cash equivalents and trading account assets as discussed
below. Our net interest margin decreased during this period primarily due to a
shift towards loans to more highly rated clients resulting in lower credit
spreads, an increase in gross non-performing loans and the decline in average
interest-earning assets as a percentage of average interest-bearing liabilities
to 103.2% in fiscal 1999 from 113.3% in fiscal 1998, as described below.
102
<PAGE> 104
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue. For further information on assets and
liabilities, changes in interest revenue and interest expense volume and rate
analysis, yields, spreads and margins, see "Selected Financial and Operating
Data".
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
1999/1998
1998 1999 1999 % CHANGE
--------- --------- ------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
INTEREST REVENUE
Cash, cash equivalents and trading account
assets..................................... Rs. 913 Rs. 2,297 US$ 53 151.6%
Securities................................... 148 305 7 106.1
Loans........................................ 1499 2,707 62 80.6
Others....................................... 19 81 2 326.3
--------- --------- -------
Total interest revenue....................... Rs. 2,579 Rs. 5,390 US$ 124 109.0
--------- --------- -------
INTEREST EXPENSE
Savings account deposits..................... Rs. 28 Rs. 54 US$ 1 92.9%
Time deposits................................ 1,590 3,653 84 129.7
Long-term debt............................... 16 155 4 868.8
Trading account and other liabilities........ 220 382 9 73.6
--------- --------- -------
Total interest expense....................... Rs. 1,854 Rs. 4,244 US$ 98 128.9
--------- --------- -------
NET INTEREST REVENUE......................... Rs. 725 Rs. 1,146 US$ 26 58.1%
========= ========= =======
</TABLE>
Interest revenue increased 109.0% in fiscal 1999 compared to fiscal 1998
reflecting an increase in the average volume of interest-earning assets, offset
by a decline in the gross yield on interest-earning assets. The increase in our
interest-earning assets was primarily driven by the growth in cash, cash
equivalents and trading account assets. The average volume of cash, cash
equivalents and trading account assets increased 144.8% in fiscal 1999 to Rs.
21.1 billion (US$ 486 million) compared to fiscal 1998 primarily due to
increased reserve requirements resulting from a 112.8% increase in average
deposits in fiscal 1999. Contributing to this increase in interest-earning
assets were foreign currency denominated deposits which increased as a result of
rupee funds being occasionally swapped into US dollars at attractive forward
rates and placed in banks outside India.
The decline in yield on interest-earning assets was primarily due to the
decline in yield on loans. The average volume of loans increased by Rs. 9.0
billion (US$ 208 million) or 95.3% to Rs. 18.5 billion (US$ 426 million) in
fiscal 1999 compared to fiscal 1998 due to an increase in our working capital
loans acquired through our joint marketing efforts with ICICI through the Major
Clients Group. The yield on loans decreased 118 basis points to 14.6% in fiscal
1999 from 15.78% in fiscal 1998 primarily due to lower market rates generally
prevalent in fiscal 1999 compared to fiscal 1998 and the increased volume of
loans to higher rated clients which, consistent with market conditions,
typically earn lower yields. Our yield was also lower due to an increase in our
non-performing loans as we do not accrue interest on non-performing loans.
The average volume of our securities portfolio increased 112.6% to Rs. 2.8
billion (US$ 65 billion) in fiscal 1999 from Rs. 1.3 billion (US$ 31 million) in
fiscal 1998. The yield on these available for sale securities declined to 10.77%
in fiscal 1999 from 11.11% in fiscal 1998 primarily due to the lower coupon rate
on additional securities purchased during the year in line with the general
downward movement in market interest rates.
Other interest revenue was derived from interest paid on cash reserves we
were required to deposit with the Reserve Bank of India in accordance with their
cash reserve ratio requirements. These amounts increased 326.3% from fiscal 1998
to fiscal 1999 primarily due to the fact that we received interest revenue on
these cash reserves for all of fiscal 1999 compared to only six months of fiscal
1998 since the Reserve Bank of India paid interest on cash reserves beginning
October 1997 only. In addition, other interest revenue increased due to increase
in cash reserves as a result of the increase in our average deposits since the
cash reserve requirement is
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<PAGE> 105
calculated as a percentage of our demand and time deposits. For a further
discussion of these cash reserve requirements, see "Business -- Treasury --
General".
The average volume of our interest-bearing liabilities increased primarily
due to an increase in time deposits which accounted for 83.3% of average
interest-bearing liabilities in fiscal 1999. The average volume of time deposits
increased by Rs. 20.0 billion (US$ 460 million) or 139.8% to Rs. 34.3 billion
(US$ 789 million) in fiscal 1999 from Rs. 14.3 billion (US$ 329 million) in
fiscal 1998. This increase was attributable to our continued focus on deposit
taking by offering products targeting different segments of customers with
features tailored to their specific requirements. We were thereby able to build
existing customer relationships and acquire new time deposit customers.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits and trading account and other
liabilities. The market interest rates were generally lower in fiscal 1999
compared to fiscal 1998. Consequently, we reduced the interest rate payable on
short-term deposits to 5.0%-10.0% in fiscal 1999 from 6.0%-13.0% (except for one
day during this period when the interest rate payable was 16.0%) in fiscal 1998
and the interest rate payable on deposits of over one year maturity to 11.0%-
11.5% in fiscal 1999 from 8.5%-13.0% in fiscal 1998. As a result of these
interest rate reductions, the average cost of time deposits decreased 46 basis
points to 10.64% in fiscal 1999 from 11.10% in fiscal 1998. The reduction in the
average cost of time deposits was lower than the reduction in the interest rates
offered on time deposits because our time deposits re-price only at maturity and
existing deposits continue to earn interest at the original contracted rate
until their maturity. As a result, revised interest rates on deposits are
applicable only to new deposits made.
The average volume of trading account liabilities, consisting of borrowings
from the inter-bank call money market and short-term borrowings from
institutions, increased 115.3% in fiscal 1999 to Rs. 4.2 billion (US$ 96
million) from Rs. 1.9 billion (US$ 44 million) in fiscal 1998 primarily due to
the overall growth in our business. The cost of trading account liabilities
decreased to 9.16% in fiscal 1999 from 11.36% in fiscal 1998 in line with the
lower market rates prevalent in fiscal 1999.
Fiscal 1998 compared to Fiscal 1997
Net interest revenue increased 7.7% in fiscal 1998 compared to fiscal 1997
reflecting mainly the following factors:
- an increase of 66.0% in the average volume of interest-earning assets,
offset by
- a decrease of 202 basis points in the net interest margin to 3.72% in
fiscal 1998 from 5.74% in fiscal 1997 and a decrease of 91 basis points
in our spread to 2.46% in fiscal 1999 from 3.37% in fiscal 1997.
The increase in the average volume of our interest-earning assets was
primarily the result of an increase in cash, cash equivalents and trading
account assets as discussed below. Our net interest margin decreased primarily
due to the over 2.0% decline in our average lending rates in fiscal 1998 and a
decline in average interest-earning assets as a proportion of average
interest-bearing liabilities to 113.3% in fiscal 1998 from 123.7% in fiscal
1997, as described below.
104
<PAGE> 106
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue (which reflects interest revenue from
cash, cash equivalents and trading account assets, securities, loans and other
assets minus interest expense on deposits, long-term debt and trading account
and other liabilities). For further information on assets and liabilities,
changes in interest revenue and interest expense volume and rate analysis,
yields, spreads and margins for these periods, see "Selected Financial and
Operating Data".
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1998/1997
1997 1998 % CHANGE
--------- --------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
INTEREST REVENUE
Cash, cash equivalents and trading accounts assets....... Rs. 81 Rs. 913 1,027.2%
Securities............................................... 421 148 (64.8)
Loans.................................................... 1,341 1,499 11.8
Other.................................................... 19 --
--------- ---------
Total interest revenue................................... Rs. 1,843 Rs. 2,579 39.9
--------- ---------
INTEREST EXPENSE
Savings account deposits................................. Rs. 10 Rs. 28 180.0
Time deposits............................................ 962 1,590 65.3
Long-term debt........................................... 13 16 23.1
Trading account and other liabilities.................... 185 220 18.9
Total interest expense................................... Rs. 1,170 Rs. 1,854 58.5
--------- ---------
NET INTEREST REVENUE..................................... Rs. 673 Rs. 725 7.7
========= =========
</TABLE>
Interest revenue increased 39.9% in fiscal 1998 compared to fiscal 1997
reflecting mainly on increase in the average volume of interest-earning assets
The increase in our interest-earning assets was primarily due to the growth in
cash, cash equivalents and trading account assets. The average volume of cash,
cash equivalents and trading account assets increased 645.2% in fiscal 1998 to
Rs. 8.6 billion (US $198 million) compared to fiscal 1997 primarily due to
increased reserve requirements resulting from an 86.8% increase in average
deposits and our decision to shift towards trading operations by trading our
government of India securities portfolio to maximize our earnings from this
portfolio. Further, we swapped rupee funds into foreign currency at attractive
forward rates and placed them in foreign currency denominated deposits with
banks outside India. The yield on cash, cash equivalents and trading account
assets increased significantly to 10.57% in fiscal 1998 from 6.99% in fiscal
1997 as a result of increase in our trading portfolio and higher yields earned
on rupee funds held as foreign currency deposits as described above.
The yield on interest-earning assets in fiscal 1998 decreased 246 basis
points principally due to a decline in yield on loans offset, in part, by an
increase in yield on cash, cash equivalents and trading account assets. The
average volume of loans increased by Rs. 2.3 billion (US$ 52 million) or 31.5%
to Rs. 9.5 billion (US$ 218 million) in fiscal 1998 compared to fiscal 1997
primarily due to the increased level of corporate customers acquired as a result
of our focus on commercial lending. The yield on loans decreased 278 basis
points to 15.78% in fiscal 1998 from 18.56% in fiscal 1997 as our average
lending rates were over 2.0% lower in fiscal 1998 compared to fiscal 1997, in
keeping with the general market decline in interest rates caused by the Reserve
Bank of India's policy of assuring adequate liquidity to the banking system and
generally lowering the rate at which it will lend to Indian banks to ensure that
corporate borrowers have access to funding at competitive rates. In addition, an
increase in our non-performing loans had an adverse effect on the yield on loans
as we do not accrue interest on non-performing loans. For a discussion of
factors contributing to the overall increase in our non-performing loans, see
"-- Provisions for Credit Losses".
The average volume of our securities portfolio decreased 60.2% to Rs. 1.3
billion (US$ 31 million) in fiscal 1998 from Rs. 3.3 billion in fiscal 1997
primarily as a result of the market in fiscal 1998 offering more opportunities
for obtaining capital gains. At that time, we sold securities we had held as
"available for sale" in fiscal 1997 and replaced these securities with bonds
carrying market-related yields, which, as a result of lower
105
<PAGE> 107
interest rates caused by the above-mentioned changes in Reserve Bank of India
monetary policy, were lower in fiscal 1998 compared to fiscal 1997.
The average volume of interest-bearing liabilities increased primarily due
to an increase in time deposits, which accounted for 83.4% of average
interest-bearing liabilities in fiscal 1998. Both corporate and retail deposits
increased significantly due to increased marketing efforts, which resulted in
the average volume of time deposits increasing by Rs. 6.9 billion (US$ 158
million) or 92.3% to Rs. 14.3 billion (US$ 329 million) in fiscal 1998 from Rs.
7.4 billion (US$ 171 million) in fiscal 1997.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits offset in part by the increase
in cost of trading account and other liabilities. The average cost of time
deposits decreased 181 basis points to 11.10% in fiscal 1998 from 12.91% in
fiscal 1997 primarily due to a decrease in market interest rates resulting from
the Reserve Bank of India lowering the cash reserve ratio to release more funds
into the system to create more liquidity and lowering the bank rate to create a
decline in interest rates.
The average volume of trading account liabilities increased 17.0% in fiscal
1998 to Rs. 1.9 billion (US$ 44 million) from Rs. 1.7 billion (US$ 38 million)
in fiscal 1997 primarily due to the overall growth in our business. The cost of
trading account liabilities increased 18 basis points in fiscal 1998 compared to
fiscal 1997 primarily due to high inter-bank call money rates in the last
quarter of fiscal 1998 on account of measures by the Reserve Bank of India to
control volatility in the foreign exchange markets.
PROVISIONS FOR CREDIT LOSSES
The following table sets forth, for the periods indicated, certain
information regarding our non-performing loans.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------- AT DECEMBER 31,
1998/1997 1999/1998 ------------------
1997 1998 % CHANGE 1999 1999 % CHANGE 1999 1999
------- ------- --------- --------- ------ --------- --------- ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross non-performing
loans.................... Rs. 187 Rs. 604 223.0% Rs. 1,613 US$ 37 167.1% Rs. 1,965 US$ 45
Allowance for credit
losses................... 187 425 127.3 880 20 107.1 1,083 25
Net non-performing loans... -- 179 733 17 309.5 882 20
Gross non-performing loans
as a percentage of gross
loans.................... 2.18% 4.58% 5.66% 5.06%
Net non-performing loans as
a percentage of net
loans.................... -- 1.40 2.66 2.34
Allowances for credit
losses as a percentage of
gross non-performing
loans.................... 100.00 70.36 54.56 55.11
Allowances for credit
losses as a percentage of
gross total loans........ 2.18 3.22 3.09 2.79
</TABLE>
106
<PAGE> 108
The following table sets forth, for the periods indicated, certain
information regarding our provisions for credit losses.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------ -------------------------
1997 1998 1999 1999 1998 1999 1999
------- ------- ------- ------ ------- ------- -----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Provisions for credit loss.............. Rs. 187 Rs. 360 Rs. 540 US$ 12 Rs. 398 Rs. 218 US$ 5
Provisions for credit losses as a
percentage of net loans............... 2.23% 2.82% 1.96% 1.91% 0.58%
Provisions for credit losses as a
percentage of total assets............ 0.95 1.02 0.72 0.67 0.21
</TABLE>
For information on changes in the allowance for credit losses, see
"Business -- Non-Performing Loans -- Allowance for Credit Losses".
Our loan portfolio is composed largely of short-term working capital loans
where we have a security interest and first lien on all the current assets of
the borrower, typically inventory and accounts receivable. We typically lend
between 60.0% and 80.0% of the appraised value of collateral to ensure that our
loans are sufficiently over-collateralized. However, the recoveries from
non-performing loans are subject to delays that may take several years, due to
the long legal collection process in India. For a further discussion of
enforcement of collateral interests in India, see "Business -- Loan Portfolio --
Collateral -- Completion, Perfection and Enforcement". As a result, we make an
allowance for the loans based on the time value of money or the present value of
expected realizations of collateral, which takes into account the delay we will
experience before recovering our principal. The time to recovery, expected
future cash flows and realizable value for collateral value are periodically
reviewed in estimating the allowance.
We make an allowance for credit losses resulting from a non-performing loan
by comparing the net present value of the expected cash flows from the loan
discounted at the effective interest rate of the loan and our carrying value of
the loan. We believe that our process for ascertaining our allowance for credit
losses captures the expected losses on our entire loan portfolio and that our
current allowance for credit losses is sufficient to cover all currently known
credit losses in our existing portfolio. There can, however, be no guarantee
that non-performing loans will not increase and that the current allowance for
credit losses will be sufficient. For further discussion of our treatment of
non-performing loans, see "Business -- Loan Portfolio -- Recognition of Non-
Performing Loans".
Changes in our provisions and our allowance for credit losses as a whole
reflect economic trends in the key manufacturing, middle market corporate
segments in which many of our customers operate. The manufacturing sector was
adversely impacted during fiscal 1998 and 1999 primarily due to a slowdown in
the Indian economy, a downturn in global commodity prices, particularly in the
steel and textiles sub-sectors, and a rapid reduction in import duties which
adversely impacted the performance of borrowers in these sectors. The impact
was, in particular, more on the middle market corporate segment which, because
of our small balance sheet in our first few years of operation were our target
customers, due to their lower resilience to external factors. As a result of
these adverse economic factors during fiscal 1998 and 1999, some of our loans to
these borrowers became non-performing. As the Indian economy improved in the
nine months ended December 31, 1999, non-performing loans increased at a slower
rate than they had during the nine months ending December 31, 1998.
Growth in gross non-performing loans slowed significantly to 21.8% in the
nine months ended December 31, 1999 to Rs. 2.0 billion (US$ 45 million) as
compared to Rs. 1.6 billion (US$ 37 million) at year-end fiscal 1999. As in
fiscal 1998 and fiscal 1999, the increase in non-performing loans was primarily
due to our loans made to middle market companies in earlier years becoming
non-performing during this period. The middle market companies accounted for
approximately 85.0% of the increase in gross non-performing loans in the nine
months ended December 31, 1999. A significant portion of loans that became
non-performing in the nine months ended December 31, 1999 were made in fiscal
1996 and 1997 when our focus was on middle market companies. Of the increase in
non-performing loans of Rs. 341 million, Rs. 288 million were to middle
107
<PAGE> 109
market companies. This included Rs. 181 million to light manufacturing sector
and Rs. 41 million to the agriculture sector. For a discussion on impact of
economic changes in these sectors in fiscal 1999, see "--Introduction -- Indian
Economy". The gross non-performing loans as a percentage of gross loans declined
to 5.06% at December 31, 1999 from 5.66% at year-end fiscal 1999. As a
percentage of net loans, net non-performing loans declined to 2.34% at December
31, 1999 from 2.66% at year-end fiscal 1999. Provisions for credit losses in the
nine months ended December 31, 1999 decreased 45.2% to Rs. 218 million (US$ 5
million) from Rs. 398 million (US$ 9 million) in the nine months ended December
31, 1998 primarily due to the lower addition to non-performing loans in the nine
months ended December 31, 1999 as a result of positive trends in the Indian
economy. The gross non-performing loans increased by Rs. 352 million (US$ 8
million) in the nine months ended December 31, 1999 compared to an increase of
Rs. 813 million (US$ 19 million) in gross non-performing loans in the nine
months ended December 31, 1998. The coverage ratio for gross non-performing
loans increased to 55.11% at December 31, 1999 from 54.56% at year-end fiscal
1999.
Gross non-performing loans increased 167.1% in fiscal 1999 to Rs. 1.6
billion (US$ 37 million) at year-end fiscal 1999 from Rs. 604 million (US$ 14
million) at year-end fiscal 1998 due to an increase in non-performing loans to
middle market companies of Rs. 542 million (US$ 12 million) primarily in the
light manufacturing and agriculture sectors caused by a slowdown in the Indian
economy. The non-performing loans in the light manufacturing, iron and steel and
textile sector increased by Rs. 769 million (US$ 18 million) in fiscal 1999.
This led to an increase in gross non-performing loans as a percentage of gross
loans to 5.66% at year-end fiscal 1999 from 4.58% at year-end fiscal 1998. As a
percentage of net loans, net non-performing loans increased to 2.66% at year-end
fiscal 1999 from 1.40% at year-end fiscal 1998. Provisions for credit losses in
fiscal 1999 increased 50.0% to Rs. 540 million (US$ 12 million) from Rs. 360
million (US$ 8 million) in fiscal 1998 in line with the increase in gross
non-performing loans.
Gross non-performing loans increased 223.0% in fiscal 1998 to Rs. 604
million (US$ 14 million) at year-end fiscal 1998 from Rs. 187 million (US$ 4
million) at year-end fiscal 1997. All the loans that became non-performing in
fiscal 1998 were to middle market companies, primarily in the textiles and iron
and steel industries, that were adversely impacted principally by the slowdown
in the Indian economy. This led to an increase in gross non-performing loan as a
percentage of gross loans to 4.58% at year-end fiscal 1998 from 2.18% at
year-end fiscal 1997. As a percentage of net loans, net non-performing loans
increased to 1.40% at year-end fiscal 1998 from none at year-end fiscal 1997.
Provisions for credit losses in fiscal 1998 increased 92.5% to Rs. 360 million
(US$ 8 million) from Rs. 187 million (US$ 4 million) in fiscal 1997 in line with
the increase in gross non-performing loans.
Management believes that several loans which became non-performing in
fiscal 1998, 1999 and the nine months ended December 31, 1999 are essentially
loans to inherently viable companies. Many of these borrowers are still making
interest payments. Management expects credit losses in these loans to be lower
due to the viability of these companies and our belief that they will eventually
begin making all required payments. These loans were classified as
non-performing as a result of continued stress on cash flows of these borrowers,
primarily due to the slowdown in the Indian economy, the global downtrend in
commodity prices coupled with the rapid reduction in domestic trade barriers
over the past few years. In some cases, the non-performing loans are to
operating companies generating positive, albeit reduced, cash flows because they
are operating at levels below their overall capacities. In some cases, in
management's view the future cash flows, discounted at the contracted rate of
the loan, adequately cover our current outstanding principal and require no
allowance for credit losses. Many of these borrowers are making current interest
payments. They have been classified as non-performing in view of the stressed
cash flow of the borrower, the borrower's relatively weak position in its
industry or, in the case of some of the borrowers, a delay in making interest
payments. In all cases, management believes that it has a strong collateral
position. We are monitoring the situation of these loans and borrowers carefully
and will make allowances if our view of the situation changes. Gross
non-performing loans that require no allowance for credit losses increased to
Rs. 466 million (US$ 10 million) at year-end fiscal 1999 from Rs. 26 million
(US$ 600,000) at year-end fiscal 1998. As a result, the coverage ratio for gross
non-performing loans decreased to 54.56% at year-end fiscal 1999 from 70.36% at
year-end fiscal 1998 and 100.00% at year-end fiscal 1997. This was also
reflected in the provisions for credit losses as a percentage of total assets
declining to 0.72% in fiscal 1999 from 1.02% in fiscal 1998. We have also
reached negotiated settlements with some of our
108
<PAGE> 110
borrowers where we expect to recover the majority of the gross principal
outstanding. At December 31, 1999, we had 19 non-performing loans having a gross
principal outstanding of Rs. 467 million (US$ 11 million) for which no allowance
for credit losses have been made, as compared to 13 loans having a gross
principal outstanding of Rs. 339 million (US$ 8 million) at December 31, 1998.
For a more detailed discussion of our non-performing loan portfolio, see
"Business -- Non-Performing Loans".
We typically calculate our allowance for credit losses on a loan-for-loan
basis. In the medium-term, as we increase our exposure to credit cards and other
retail loans, we expect to change the way we calculate our allowance to
incorporate the statistical methods for loan impairment that are used by banks
in developed countries in their retail portfolios, including credit scoring and
other methods designed to evaluate consumer credit risk.
NON-INTEREST REVENUE
Nine months ended December 31, 1999 compared to Nine months ended December
31, 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------
1999/1998
1998 1999 1999 % CHANGE
------- --------- ------ ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Fees and commissions(1)......................... Rs. 261 Rs. 408 US$ 9 56.3%
Trading account revenue(2)...................... 11 698 16 6,245.5
Securities transactions(3)...................... 22 70 2 218.2
Foreign exchange transactions(4)................ 257 167 4 (35.2)
Other revenue................................... -- -- -- --
------- --------- ------
Total non-interest revenue, net................. Rs. 551 Rs. 1,343 US$ 31 143.7
======= ========= ======
</TABLE>
- ---------------
(1) Primarily from fee-based income on services such as the issue of
documentary credits, the issue of guarantees, cash management services and
remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for sale
securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 143.7% in the nine months ended December 31,
1999 to Rs. 1.3 billion (US$31 million) from Rs. 551 million (US$13 million) in
the nine months ended December 31, 1998, primarily due to an increase in trading
account revenue and fees and commissions. The increase in trading account
revenue was primarily due to the significantly higher level of trading
opportunities in the nine months ended December 31, 1999 compared to the nine
months ended December 31, 1998. These types of market opportunities may not be
available in every period.
109
<PAGE> 111
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------
1999/1998
1998 1999 1999 % CHANGE
-------- -------- ------ ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Remittances..................................... Rs. 28 Rs. 36 US$ -- 28.6%
Cash management services........................ 35 74 2 111.4
Commissions:
Bills......................................... 47 71 2 51.1
Guarantees.................................... 60 79 2 31.7
Documentary credits........................... 55 88 2 60.0
Others........................................ 36 60 1 66.7
-------- -------- ------
Total commissions............................... 198 298 7 50.5
-------- -------- ------
Total fees and commissions...................... Rs. 261 Rs. 408 US$ 9 56.3
======== ======== ======
</TABLE>
Fees and commissions increased 56.3% in the nine months ended December 31,
1999 primarily due to the increase in income from cash management services and
commissions on documentary credits and guarantees. Increased marketing efforts
through the Growth Clients Group and the Major Clients Group helped us to
increase cash management services, guarantees, documentary credits and bills.
The number of our customers for cash management services alone increased to 231
at December 31, 1999 from 130 at December 31, 1998 and the amount handled under
cash management services also increased significantly to Rs. 441.3 billion (US$
10.1 billion) in the nine months ended December 31, 1999 from Rs. 228.3 billion
(US$ 5.2 billion) in the nine months ended December 31, 1998. As a result,
income from cash management services increased 111.4% to Rs. 74 million (US$ 2
million) in the nine months ended December 31, 1999 compared to the nine months
ended December 31, 1998. Commissions increased 50.5% to Rs. 298 million (US$ 7
million) in the nine months ended December 31, 1999 from Rs. 198 million (US$ 5
million) in the nine months ended December 31, 1998. Our guarantees increased
45.2% to Rs. 6.7 billion (US$ 154 million) at December 31, 1999 from Rs. 4.6
billion (US$ 106 million) at year-end fiscal 1999. Our acceptances, primarily
consisting of documentary credits, increased 40.0% to Rs. 7.8 billion (US$ 180
million) at December 31, 1999 from Rs. 5.6 billion (US$ 128 million) at year-end
fiscal 1999. As a result, in the nine months ended December 31, 1999,
commissions on guarantees increased 31.7% and commissions on documentary credits
increased 60.0%. Commissions on bills also increased 51.1% in the nine months
ended December 31, 1999 compared to the nine months ended December 31, 1998.
Trading account revenue, resulting largely from sales of government of
India securities, increased to Rs. 698 million (US$ 16 million) in the nine
months ended December 31, 1999 from Rs. 11 million (US$ 252,000) in the nine
months ended December 31, 1998 primarily due to the significantly higher level
of trading opportunities. We took advantage of the decline in the yield on debt
securities and sold higher yielding debt securities from our portfolio. Although
our equity investments are limited by Reserve Bank of India requirements, we
nonetheless were able to benefit from a buoyant equity capital market. As a
result, in the nine months ended December 31, 1999, the gain on sale of trading
securities was Rs. 364 million (US$ 8 million) and the revaluation gain on
trading securities was Rs. 334 million (US$ 8 million). While the interest rates
have been continuously declining and the Indian government's policy seems to
support a lower interest rate regime, there can be no assurance that this type
of market opportunities would be available in the future.
Our income from foreign exchange transactions declined 35.2% to Rs. 167
million (US$ 4 million) in the nine months ended December 31, 1999 compared to
the nine months ended December 31, 1998 primarily due to the decline in spread
on corporate transactions on account of competition and the restricted trading
opportunities in this period since exchange rates remained steady.
110
<PAGE> 112
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1999/1998
1998 1999 1999 % CHANGE
------- ------- ------ ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Fees and commissions(1)........................... Rs. 240 Rs. 370 US$ 9 54.2%
Trading account revenue(2)........................ 147 134 3 (8.8)
Securities transactions(3)........................ 32 21 -- (34.4)
Foreign exchange transactions(4).................. 171 341 8 99.4
Other revenue..................................... 1 -- -- --
------- ------- ------
Total non-interest revenue........................ Rs. 591 Rs. 866 US$ 20 46.5
======= ======= ======
</TABLE>
- ---------------
(1) Primarily from fee-based income on services like the issue of documentary
credits, the issue of guarantees, cash management services and remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for sale
securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 46.5% in fiscal 1999 to Rs. 866 million (US$
20 million) from Rs. 591 million (US$ 14 million) in fiscal 1998, primarily due
to a 54.2% increase in income from fees and commissions and a 99.4% increase in
income from foreign exchange transactions offset, in part, by a decline in
trading account revenue and income from securities transactions.
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1999/1998
1998 1999 1999 % CHANGE
------- ------- ----- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Remittances........................................ Rs. 24 Rs. 38 US$ 1 58.3%
Cash management services........................... 35 53 1 51.4
Commissions:
Bills............................................ 45 68 2 51.1
Guarantees....................................... 51 75 2 47.1
Documentary credits.............................. 45 73 2 62.2
Others........................................... 40 63 1 57.5
------- ------- -----
Total commissions.................................. 181 279 7 54.1
------- ------- -----
Total fees and commissions......................... Rs. 240 Rs. 370 US$ 9 54.2
======= ======= =====
</TABLE>
The increase in income from fees and commissions in fiscal 1999 was
primarily due to an increase in fees from cash management services and
commissions from guarantees and documentary credits. Increased marketing efforts
through the Growth Clients Group and the Major Clients Group helped us in
increasing cash management services, guarantees, documentary credits and bills.
The number of customers for cash management services increased to 155 at
year-end fiscal 1999 from 105 at year-end fiscal 1998. The amount handled under
cash management services also increased significantly to Rs. 389.4 billion (US$
8.9 billion) in fiscal 1999 from Rs. 100.7 billion (US$ 2.3 billion) in fiscal
1998. As a result, income from cash management services increased 51.4% to Rs.
53 million (US$ 1 million) in fiscal 1999 compared to fiscal 1998.
111
<PAGE> 113
Commissions increased 54.1% to Rs. 279 million (US$ 7 million) at year-end
fiscal 1999 from Rs. 181 million (US$ 4 million) at year-end fiscal 1998.
Guarantees increased 75.0% to Rs. 4.6 billion (US$ 106 million) at year-end
fiscal 1999 from Rs. 2.6 billion (US$ 61 million) at year-end fiscal 1998 and
acceptances increased 94.9% to Rs. 5.6 billion at year-end fiscal 1999 from Rs.
2.9 billion at year-end fiscal 1998. As a result, commissions on guarantees
increased 47.1% in fiscal 1999 and commissions on documentary credits increased
62.2% in fiscal 1999. Commissions on bills increased 51.1% in fiscal 1999
compared to fiscal 1998.
Trading account revenue, resulting primarily from sales of government of
India securities, decreased 8.8% to Rs. 134 million (US$ 3 million) in fiscal
1999 from Rs. 147 million (US$ 3 million) in fiscal 1998. Income from securities
transactions, primarily consisting of capital gains realized on the sale of
corporate debt securities, decreased 34.4% to Rs. 21 million (US$ 483,000) in
fiscal 1999 from Rs. 32 million (US$ 735,000) in fiscal 1998. The decrease in
trading account revenue and income from securities transactions was due to
restricted trading opportunities in the domestic market in fiscal 1999 primarily
due to uncertainty in the foreign currency markets with respect to the valuation
of the rupee in fiscal 1999 caused by economic sanctions imposed on India in
1998 after nuclear testing was conducted in India. Subdued sentiment in the debt
market also led to a decrease in capital gains realized in fiscal 1999. While
the interest rates have been continuously declining and the Indian government's
policy seems to support a lower interest rate regime, there can be no assurance
that this type of market opportunities would be available in the future.
Our income from foreign exchange transactions increased 99.4% to Rs. 341
million (US$ 8 million) in fiscal 1999 from Rs. 171 million (US$ 4 million) in
fiscal 1998 due to favorable market conditions in foreign exchange markets and
increase in volume of transactions to Rs. 956.1 billion (US$ 22.0 billion) in
fiscal 1999 from Rs. 461.3 billion (US$ 10.6 billion) in fiscal 1998.
Fiscal 1998 compared to Fiscal 1997
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1998/1997
1997 1998 % CHANGE
-------- -------- ----------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fees and commissions(1)..................................... Rs. 149 Rs. 240 61.1%
Trading account revenue(2).................................. -- 147 --
Securities transactions(3).................................. 80 32 (60.0)
Foreign exchange transactions(4)............................ 86 171 98.8
Other revenue............................................... 2 1 --
------- -------
Total interest revenue...................................... Rs. 317 Rs. 591 86.4
======= =======
</TABLE>
- ---------------
(1) Primarily from fee-based income on services like the issue documentary
credits, the issue of guarantees, cash management services and remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for sale
securities.
(4) Arises primarily from purchase and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 86.4% in fiscal 1998 to Rs. 591 million (US$
14 million) from Rs. 317 million (US$ 7 million) in fiscal 1997, primarily due
to the increase in income from fees and commissions, foreign exchange
transactions and trading account revenue, offset, in part, by the decline in
income from securities transactions.
112
<PAGE> 114
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1998/1997
1997 1998 % CHANGE
-------- -------- ----------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Remittances................................................. Rs. 15 Rs. 24 60.0%
Cash management services.................................... 2 35 --
Commissions
Bills..................................................... 29 45 55.2
Guarantees................................................ 34 51 50.0
Documentary credits....................................... 46 45 (2.2)
Others.................................................... 23 40 73.9
Total commissions........................................... 132 181 37.1
------- -------
Total fees and commissions.................................. Rs. 149 Rs. 240 61.1
======= =======
</TABLE>
The increase in our income from fees and commissions in fiscal 1998 was
primarily due to the increase in income from cash management services which we
began offering in fiscal 1997, and increased commissions from guarantees and
income on remittances. The income from cash management services increased to Rs.
35 million (US$ 804,000) in fiscal 1998 compared to Rs. 2 million in fiscal 1997
when we first began offering the service. Our marketing efforts helped us to
increase guarantees issued by 42.6% to Rs. 2.6 billion (US$ 61 million) at
year-end fiscal 1998 from Rs. 1.8 billion (US$ 43 million) at year-end fiscal
1997. As a result, commissions on guarantees increased 50.0% in fiscal 1998.
Trading account revenue, resulting largely from sales of government of
India securities, was Rs. 147 million (US$ 3 million) in fiscal 1998. We did not
have a trading account portfolio in fiscal 1997. The Reserve Bank of India's
monetary policy in fiscal 1998 reduced cash reserve requirements for banks
thereby reducing the market interest rates. This helped to improve trading
opportunities. Our income from trading activities was high in fiscal 1998 as we
capitalized on these available market opportunities in an environment where
interest rates moved sharply during short periods. Income from securities
transactions decreased 60.0% to Rs. 32 million (US$ 735,000) in fiscal 1998 from
Rs. 80 million (US$ 2 million) in fiscal 1997. The decline in income from
securities transactions was primarily due to the 61.3% decrease in our
securities portfolio to Rs. 1.5 billion (US$ 34 million) at year-end fiscal 1998
from Rs. 3.8 billion (US$ 88 million) at year-end fiscal 1997 as a result of a
shift in our focus to trading operations.
Our income from foreign exchange transactions increased 98.8% to Rs. 171
million (US$ 4 million) in fiscal 1998 from Rs. 86 million (US$ 2 million) in
fiscal 1997. This increase was primarily due to the increase in the volume of
transactions to Rs. 461.3 billion (US$ 10.6 billion) in fiscal 1998 from Rs.
214.4 billion (US$ 4.9 billion) in fiscal 1997 as a result of the overall growth
in our business and an increase in our corporate foreign exchange customers.
113
<PAGE> 115
NON-INTEREST EXPENSE
Nine months ended December 31, 1999 compared to Nine months ended December
31, 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-----------------------------------------
1999/1998
1998 1999 1999 % CHANGE
------- ------- ------ ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Employee expense:
Salaries....................................... Rs. 100 Rs. 158 US$ 4 58.0%
Employee benefits.............................. 30 48 1 60.0
------- ------- ------
Total employee expense........................... 130 206 5 58.5
Premises and equipment expense:
Premises....................................... 37 49 1 32.4
------- ------- ------
Computer and office equipment.................. 149 173 4 16.1
------- ------- ------
Total premises and equipment expense............. 186 222 5 19.4
------- ------- ------
Administration and other expense:
Rentals, taxes and electricity................. 70 123 3 75.7
Advertisement and publicity.................... 24 28 -- 16.7
Communications expense......................... 31 38 1 22.6
Other.......................................... 76 233 5 206.6
------- ------- ------
Total administration and other expense........... 201 422 9 110.0
------- ------- ------
Total non-interest expense....................... Rs. 517 Rs. 850 US$ 19 64.4
======= ======= ======
</TABLE>
Non-interest expense increased 64.4% in the nine months ended December 31,
1999 to Rs. 850 million (US$ 19 million) from Rs. 517 million (US$ 12 million)
in the nine months ended December 31, 1998 primarily due to a significant
increase in administration and other expenses. Non-interest expense as a
percentage of average total assets decreased to 1.38% in the nine months ended
December 31, 1999 from 1.42% in the nine months ended December 31, 1998.
Administration and other expense increased 110.0% in the nine months ended
December 31, 1999 compared to the nine months ended December 31, 1998 primarily
due to additional rental payments resulting from the expansion of our branch
network and a one-time increase in expenses from the issuance of new ATM cards
to all our existing customers due to the networking of our ATMs to Switch which
enabled all of our customers to access their accounts online at any of our ATM
machines throughout India . As we focused on increasing our retail deposits, we
engaged the services of direct selling agents in the nine months ended December
31, 1999 resulting in higher expenses. The agents were paid commissions based on
the number of acceptable accounts mobilized.
Employee expense increased 58.5% in the nine months ended December 31, 1999
due to a 46.4% increase in the number of employees to 1,190 at December 31, 1999
from 813 at December 31, 1998 as we expanded our branch network to 84 branches
and extension counters from 64 branches and extension counters at March 31, 1999
and 49 branches and extension counters at December 31, 1998.
Premises and equipment expense increased 19.4% in the nine months ended
December 31, 1999 compared to the nine months ended December 31, 1998, primarily
due to a 32.4% increase in premises expenses as a result of the addition of 20
new branches and extension counters in the nine months ended December 31, 1999.
Computer and office equipment expense increased 16.1% in the nine months ended
December 31, 1999 primarily due to the depreciation on technology equipment
including servers, personal computers, ATMs, VSATs and BANCS2000.
114
<PAGE> 116
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1999/1998
1998 1999 1999 % CHANGE
------- ------- ------ ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Employee expense:
Salaries....................................... Rs. 116 Rs. 172 US$ 4 48.3%
Employee benefits.............................. 21 32 1 52.4
------- ------- ------
Total employee expense........................... 137 204 5 48.9
Premises and equipment expense:
Premises....................................... 21 49 1 133.3
Computer and office equipment.................. 141 183 4 29.8
------- ------- ------
Total premises and equipment expense............. 162 232 5 43.2
------- ------- ------
Administration and other expenses:
Rentals, taxes and electricity................. 77 114 2 48.1
Advertisement and publicity.................... 21 34 1 61.9
Communications expense......................... 22 43 1 95.5
Other.......................................... 135 172 4 27.4
------- ------- ------
Total administration and other expense........... 255 363 8 42.4
------- ------- ------
Total non-interest expense....................... Rs. 554 Rs. 799 US$ 18 44.2
======= ======= ======
</TABLE>
Non-interest expense increased 44.2% in fiscal 1999 to Rs. 799 million (US$
18 million) from Rs. 554 million (US$ 13 million) in fiscal 1998 due to a 48.9%
increase in employee expense, a 43.2% increase in premises and equipment expense
and a 42.4% increase in administration and other expense. Non-interest expense
as a percentage of average total assets decreased to 1.52% in fiscal 1999 from
2.08% in fiscal 1998.
Total employee expense increased 48.9% in fiscal 1999 due to a 47.8%
increase in the number of employees to 891 at year-end fiscal 1999 from 603 at
year-end fiscal 1998 as we expanded our branch network in fiscal 1999 to 64
branches and extension counters from 37 branches and extension counters at
year-end fiscal 1998.
Premises and equipment expense increased 43.2% in fiscal 1999 compared to
fiscal 1998, primarily due to a 133.3% increase in premises expenses as a result
of the addition of 27 new branches and extension counters and the renovation in
some of our branches in key locations. Computer and office equipment expense
increased 29.8% in fiscal 1999 primarily due to the depreciation on technology
equipment including servers, personal computers, ATMs, VSATs and BANCS2000.
Administration and other expenses increased 42.4% in fiscal 1999 compared
to fiscal 1998 primarily due to additional rental payments resulting from the
expansion of our branch network, an increase in communication expenses, such as
telecommunications and postage expenses, resulting from a rapid growth in the
number of our customers and an increase in advertising expenses associated with
building the ICICI Bank brand name and marketing our products.
115
<PAGE> 117
Fiscal 1998 compared to Fiscal 1997
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1998/1997
1997 1998 % CHANGE
-------- -------- ----------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Employee expense:
Salaries.................................................. Rs. 55 Rs. 116 110.9%
Employee benefits......................................... 12 21 75.0
-------
Total employee expense...................................... 67 137 104.5
Premises and equipment expense:
Premises.................................................. 17 21 23.5
Computer and office equipment............................. 99 141 42.4
------- -------
Total premises and equipment expense........................ 116 162 39.7
------- -------
Administration and other expense:
Rentals, taxes and electricity............................ 49 77 57.1
Advertisement and publicity............................... 8 21 162.5
Communications expense.................................... 13 22 69.2
Other..................................................... 153 135 (11.8)
------- -------
Total administration and other expense...................... 223 255 14.3
------- -------
Total non-interest expense.................................. Rs. 406 Rs. 554 36.5
======= =======
</TABLE>
Non-interest expense increased 36.5% in fiscal 1998 to Rs. 554 million (US$
13 million) from Rs. 406 million (US$ 9 million) in fiscal 1997 primarily due to
a 104.5% increase in employee expense. Non-interest expense as a percentage of
average total assets decreased to 2.08% in fiscal 1998 from 2.54% in fiscal
1997.
Employee expenses increased 104.5% in fiscal 1998 principally due to a
35.5% increase in the number of employees to 603 at year-end fiscal 1998 from
445 at year-end fiscal 1997 as we rapidly expanded our branch network in fiscal
1998 and an increase of approximately 14.0% in employee salaries due to the
periodic revision of our employees' salaries.
Premises and equipment expense increased 39.7% in fiscal 1998 compared to
fiscal 1997, due to a 23.5% increase in premises expenses as a result of
addition of 13 new branches and extension counters in fiscal 1998 and a 42.4%
increase in the computer and office equipment expense in fiscal 1998 primarily
due to depreciation on technology equipment including servers, personal
computers, ATMs, VSATs and BANCS2000.
Administration and other expenses increased 14.3% in fiscal 1998 compared
to fiscal 1997 primarily due to additional rental payments resulting from the
expansion of our branch network offset, in part, by a reduction in rent on
office premises as we purchased three branch premises from ICICI. The
communications expenses also increased due to the rapid growth in the number of
our customer accounts.
INCOME TAX EXPENSE
Income tax expense increased 170.5% in the nine months ended December 31,
1999 to Rs. 303 million (US$ 7 million) from Rs. 112 million (US$ 3 million) in
the nine months ended December 31, 1998 primarily due to the higher level of
income in the nine months ended December 31, 1999. Our effective tax rate was
22.8% in the nine months ended December 31, 1999 compared to 25.9% in the nine
months ended December 31, 1998. Our effective tax rate was lower than the
marginal tax rate of 38.5% and 35.0% applicable to companies generally in India
in fiscal 2000 and fiscal 1999 primarily due to the tax-exempt income from
certain investments of our treasury department including bonds of certain public
sector corporations and mutual funds units. The
116
<PAGE> 118
government of India, in order to facilitate access to competitive funding for
certain public sector companies, allows these companies to issue bonds, the
interest on which is tax-exempt to the bondholder. The government of India also
passed a regulation providing that any dividends received on mutual fund units
are tax exempt to the holder of the mutual fund units.
Income tax expense increased 63.5% in fiscal 1999 to Rs. 170 million (US$ 4
million) from Rs. 104 million (US$ 2 million) in fiscal 1998 primarily due to
the higher level of income in fiscal 1999. Our effective tax rate was 25.3% in
fiscal 1999 compared to 25.9% in fiscal 1998.
Income tax expense decreased 32.9% to Rs. 104 million (US$ 2 million) in
fiscal 1998 from Rs. 155 million (US$ 4 million) in fiscal 1997. Our effective
tax rate reduced to 25.9% in fiscal 1998 from 39.0% in fiscal 1997 primarily due
to a reduction in the marginal tax rate to 35.0% in fiscal 1998 from 43.0% in
fiscal 1997 and an increase in tax-exempt income from certain investments of our
treasury department.
FINANCIAL CONDITION
ASSETS
The following tables sets forth, for the periods indicated, the principal
components of our assets.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT DECEMBER 31, AT MARCH 31, -----------------------
1998 1999 1999 1999
--------------- ------------ ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. Rs. 15,298 Rs. 18,488 Rs. 18,590 US$ 427
Trading account assets(1).............. 11,599 15,822 28,606 657
Securities(2).......................... 2,912 3,963 4,402 101
Loans, net............................. 20,880 27,597 37,749 868
Acceptances(3)......................... 5,045 5,587 7,822 180
Property and equipment................. 1,605 1,761 1,902 44
Other assets(4)........................ 2,007 1,607 3,134 72
---------- ---------- ----------- ---------
Total assets........................... Rs. 59,346 Rs. 74,825 Rs. 102,205 US$ 2,349
========== ========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % CHANGE 1999 1999 % CHANGE
---------- ---------- --------- ---------- --------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.... Rs. 4,099 Rs. 8,728 112.9% Rs. 18,488 US$ 425 111.8%
Trading account assets(1).... 3 7,387 -- 15,822 364 114.2
Securities(2)................ 3,816 1,476 (61.3) 3,963 91 168.5
Loans, net................... 8,374 12,765 52.4 27,597 634 116.2
Acceptances(3)............... 2,510 2,866 14.2 5,587 128 94.9
Property and equipment....... 573 1,363 137.9 1,761 41 29.2
Other assets(4).............. 391 693 77.2 1,607 37 131.9
---------- ---------- ---------- ---------
Total assets................. Rs. 19,766 Rs. 35,278 78.5 Rs. 74,825 US$ 1,720 112.1
========== ========== ========== =========
</TABLE>
- ---------------
(1) Primarily includes government of India securities.
(2) Includes corporate debt securities, government of India securities and
mutual fund units.
(3) Primarily includes documentary credits that are non-funded facilities.
(4) Includes deferred tax asset, interest accrued, staff loans, deposits in
leased premises and pre-paid expenses.
Our total assets increased 36.6% at December 31, 1999 compared to at March
31, 1999. Net loans increased 36.8% in the nine months ended December 31, 1999
compared to at March 31, 1999. The growth was in corporate lending as working
capital loans increased 48.5% and term loans increased 22.2%. Our loan growth
was driven by additional clients referred to us by our parent, ICICI, as we
increased our focus on doing business with the large more highly rated clients
that are serviced by the ICICI group's Major Clients Group. Loans
117
<PAGE> 119
denominated in foreign currency were less than 5.0% of our total loans at
December 31, 1999. The growth in cash and cash equivalents and in trading
account assets was principally due to increased reserve requirements resulting
from a 40.0% increase in deposits in the nine months ended December 31, 1999.
Securities increased 11.1% in the nine months ended December 31, 1999 primarily
due to increased investments in mutual fund units as a result of buoyant equity
capital markets. Our marketing strategy helped us in increasing our acceptances
by 40.0% to Rs. 7.8 billion (US$ 180 million) at December 31, 1999 from Rs. 5.6
billion (US$ 128 million) at March 31, 1999.
Our total assets increased 112.1% at year-end fiscal 1999 compared to at
year-end fiscal 1998. The high growth in cash and cash equivalents was
principally due to increased reserve requirements resulting from a 131.0%
increase in deposits in fiscal 1999 and an increase in rupee funds swapped into
US dollars at attractive forward rates and placed in foreign currency
denominated deposits with banks outside India. Trading account assets increased
114.2% in fiscal 1999 principally due to increased investments in government of
India securities to meet the reserve requirements resulting from a 131.0%
increase in deposits in fiscal 1999. Securities increased 168.5% in fiscal 1999
primarily due to increased investments in corporate debt securities caused by
the rapid growth of our deposits in fiscal 1999 compared to fiscal 1998. In
fiscal 1999, our normal loan portfolio was not sufficient to cover these
liabilities so we invested in corporate debt securities as this type of
investment is the fastest way to deploy additional resources. Net loans
increased 116.2% in fiscal 1999 compared to at year-end fiscal 1998 reflecting
significant growth in corporate lending as working capital loans increased 89.2%
and term loans increased 194.8%. Our loan growth was largely due to additional
clients acquired through our joint marketing efforts with ICICI through the
Major Clients Group. Our acceptances increased 94.9% at year-end fiscal 1999
compared to at year-end fiscal 1998 as a result of increased marketing efforts.
Our total assets increased 78.5% at year-end fiscal 1998 compared to at
year-end fiscal 1997. The high growth in cash and cash equivalents was
principally due to the increased amount of cash required to be maintained in a
current account with the Reserve Bank of India due to its reserve requirements
resulting from a 95.1% increase in deposits in fiscal 1998. The growth was also
due to an increase in rupee funds swapped into US dollars at attractive forward
rates and placed in foreign currency denominated deposits with banks outside
India. Trading account assets increased from Rs. 3 million at year-end fiscal
1997 to Rs. 7,387 million at year-end fiscal 1998 as we shifted our focus
towards trading operations due to the Reserve Bank of India's monetary policy in
fiscal 1998 which reduced the cash reserve requirements of banks, thereby
reducing the market interest rates and creating better trading opportunities in
India. These primarily comprised investments in government of India securities
which increased to meet the reserve requirements resulting from a 95.1% increase
in deposits in fiscal 1998. This shift to treasury operations was also reflected
in the 61.3% decrease in securities in fiscal 1998. Net loans increased 52.4% in
fiscal 1998 compared to at year-end fiscal 1997 reflecting growth in corporate
lending as working capital loans increased 38.0% and term loans increased
126.4%. Acceptances increased 14.2% in fiscal 1998 to Rs. 2.9 billion (US$ 66
million) from Rs. 2.5 billion (US$ 58 million) at year-end fiscal 1997 as a
result of increased marketing efforts.
118
<PAGE> 120
LIABILITIES AND STOCKHOLDERS' EQUITY
The following tables set forth, for the periods indicated, the principal
components of our liabilities and stockholders' equity.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT DECEMBER 31, AT MARCH 31, -----------------------
1998 1999 1999 1999
--------------- ------------ ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Deposits............................. Rs.46,424 Rs.60,729 Rs. 85,002 US$ 1,953
Trading account liabilities(1)....... 2,207 418 1,797 41
Acceptances.......................... 5,045 5,587 7,822 180
Long-term debt....................... 1,110 1,764 1,734 40
Other liabilities(2)................. 1,917 3,497 2,181 50
--------- --------- ---------- ---------
Total liabilities.................... 56,703 71,995 98,536 2,264
--------- --------- ---------- ---------
Stockholders' equity................. 2,643 2,830 3,669 85
--------- --------- ---------- ---------
Total................................ Rs.59,346 Rs.74,825 Rs.102,205 US$ 2,349
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % CHANGE 1999 1999 % CHANGE
--------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Deposits.................. Rs.13,476 Rs.26,290 95.1% Rs.60,729 US$ 1,396 131.0%
Trading account
liabilities(1).......... 841 1,793 113.2 418 10 (76.7)
Acceptances............... 2,510 2,866 14.2 5,587 128 94.9
Long-term debt............ 89 129 44.9 1,764 41 --
Other liabilities(2)...... 1,100 1,729 57.2 3,497 80 102.3
--------- --------- --------- ---------
Total liabilities......... 18,016 32,807 82.1 71,995 1,655 119.5
--------- --------- --------- ---------
Stockholders' equity...... 1,750 2,471 41.2 2,830 65 14.5
--------- --------- --------- ---------
Total..................... Rs.19,766 Rs.35,278 78.5 Rs.74,825 US$ 1,720 112.1
========= ========= ========= =========
</TABLE>
- ---------------
(1) Trading account liabilities are inter-bank borrowings and short-term
borrowings from other institutions.
(2) Includes refinancing received from the Reserve Bank of India against our
export credit, interest accrued but not due on deposits and bills payable.
The following tables set forth, for the periods indicated, the components
of our total deposits.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT DECEMBER 31, AT MARCH 31, ----------------------
1998 1999 1999 1999
--------------- ------------ --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Savings deposits.................... Rs. 1,913 Rs. 2,271 Rs. 4,313 US$ 99
Time deposits....................... 39,788 52,692 72,674 1,670
Total interest-bearing deposits....... 41,701 54,963 76,987 1,769
Non interest bearing deposits:
Demand deposits..................... 4,723 5,766 8,015 184
--------- --------- --------- ---------
Total deposits........................ Rs.46,424 Rs.60,729 Rs.85,002 US$ 1,953
========= ========= ========= =========
</TABLE>
119
<PAGE> 121
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % CHANGE 1999 1999 % CHANGE
--------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Savings deposits........ Rs. 497 Rs. 1,037 108.6% Rs. 2,271 US$ 52 119.0%
Time deposits........... 9,816 21,621 120.3 52,692 1,211 143.7
Total interest-bearing
deposits................ 10,313 22,658 119.7 54,963 1,263 142.6
Non interest-bearing
deposits:
Demand deposits......... 3,163 3,632 14.8 5,766 133 58.8
--------- --------- --------- ---------
Total deposits............ Rs.13,476 Rs.26,290 95.1 Rs.60,729 US$ 1,396 131.0
========= ========= ========= =========
</TABLE>
Our total deposits increased 40.0% in the nine months ended December 31,
1999 compared to at March 31, 1999. Some of this increase is attributable to our
increased focus on deposit taking from retail customers by offering products
targeted at different segments of customers, such as customers of "Power Pay", a
direct deposit product designed to streamline the salary payment systems of our
corporate customers. This focus on retail deposit taking was reflected in the
67.9% growth in our retail deposits in the nine months ended December 31, 1999
compared to 30.7% growth in our corporate deposits in the same period. Our
savings account deposits increased 89.9% in the nine months ended December 31,
1999 as we continued our focus on building a strong retail depositor base. Our
time deposits increased 37.9% in the nine months ended December 31, 1999. Our
non-interest-bearing deposits increased 39.0% due to our specific thrust on this
segment particularly through the development and marketing of our key corporate
deposit products (described in "Business -Corporate Banking -- Corporate
Deposits") as it significantly reduces our cost of funds.
Our total deposits increased 131.0% in fiscal 1999 from those at year-end
fiscal 1998 as we focused on targeting different types of customers and offering
them deposit services specifically tailored to their needs. As a result, in
fiscal 1999, our corporate deposits increased 139.3% and our retail deposits
increased 109.1%. Our savings account deposits increased 119.0% in fiscal 1999
as we continued our focus on building a strong retail depositor base. Our time
deposits increased 143.7% in fiscal 1999 mainly from an increase in corporate
deposits. Our non-interest-bearing deposits and savings account deposits grew at
a lower rate than the time deposits, as customers appeared to prefer investing
in higher earning time deposits. Long-term debt increased to Rs. 1.8 billion
(US$ 41 million) at year-end fiscal 1999 from Rs. 129 million (US$3 million) at
year-end fiscal 1998, primarily due to our issuing unsecured redeemable
subordinated debentures of Rs. 1.7 billion (US$ 39 million) in fiscal 1999 to
augment our Tier 2 capital level.
Our total deposits increased 95.1% in fiscal 1998 compared to at year-end
fiscal 1997. In fiscal 1998, our corporate deposits increased 104.0% and our
retail deposits increased 74.9% primarily due to our increased marketing
efforts. Our savings account deposits increased 108.6% in fiscal 1988 as we
continued our focus on building a strong retail depositor base. Long-term debt
increased 44.9% in fiscal 1998 from compared to fiscal 1997 primarily because we
refinanced our term loans from the Small Industries Development Bank of India
and the Export Import Bank in order to increase our liquidity. Stockholders'
equity increased 41.2% in fiscal 1998 compared to fiscal 1997 as a result of our
issuance of 15 million equity shares to our parent, ICICI, at Rs. 35 per equity
share in June 1997.
FOREIGN EXCHANGE AND DERIVATIVE CONTRACTS
We enter into foreign exchange forward contracts, swap agreements and other
derivative products, which enable customers to transfer, modify or reduce their
foreign exchange and interest rate risks. Our foreign exchange contracts arise
out of foreign exchange transactions, forward foreign exchange transactions with
corporate and non-corporate customers and inter-bank foreign exchange
transactions. We earn profit by way of an exchange margin as a mark-up over the
exchange rate offer on customer transactions. We earn profit on inter-bank
foreign exchange transactions by way of differences between the purchase rate
and the sale rate. This income is booked as income from foreign exchange
transactions.
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<PAGE> 122
All our outstanding derivative contracts represent currency and interest
rate swaps for our corporate customers. We have started offering these types of
transactions only recently. The income earned by us on all such transactions is
booked as trading account revenue.
The following table sets forth, for the periods indicated, the notional
amount of our derivative contracts.
<TABLE>
<CAPTION>
NOTIONAL PRINCIPAL AMOUNTS BALANCE SHEET CREDIT EXPOSURE(1)
----------------------------------------- -----------------------------------
AT MARCH 31, AT DECEMBER 31, AT MARCH 31, AT DECEMBER 31,
----------------------- --------------- ----------------- ---------------
1998 1999 1999 1998 1999 1999
---------- ---------- --------------- ------- ------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate products:
Swap agreements........... -- -- Rs. 900 -- -- --
========== ========== ========== ======= ======= =======
Total interest rate
products................ -- -- Rs. 900 -- -- --
========== ========== ========== ======= ======= =======
Foreign exchange products:
Forward contracts......... Rs. 23,528 Rs. 36,705 Rs. 49,591 Rs. 77 Rs. 425 Rs. 341
Swap agreements........... -- 2,962 7,658 -- -- --
---------- ---------- ---------- ------- ------- -------
Total foreign exchange
Products................ Rs. 23,528 Rs. 39,667 Rs. 57,249 Rs. 77 Rs. 425 Rs. 341
========== ========== ========== ======= ======= =======
</TABLE>
- ---------------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products at the indicated periods.
CAPITAL
We are subject to the capital adequacy requirements of the Reserve Bank of
India, which are primarily based on the capital adequacy accord reached by the
Basle Committee of Banking Supervision, Bank of International Settlements in
1988. For a detailed description of the Reserve Bank of India's capital adequacy
guidelines, see "Supervision and Regulation -- Capital Adequacy Requirements".
We are required to maintain a minimum ratio of total capital to risk adjusted
assets as determined by a specified formula of 8.0%, at least half of which must
be Tier 1 capital generally stockholders' equity. The Reserve Bank of India has
increased the minimum requirement of the capital adequacy ratio to 9.0% from
year-end fiscal 2000.
The following tables set forth, for the periods indicated, our risk-based
capital, risk-weighted assets and risk-based capital adequacy ratios computed in
accordance with the applicable Reserve Bank of India guidelines and based on our
financial statements prepared in accordance with Indian GAAP.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1999/1998
1998 1999 1999 % CHANGE
---------- ---------- --------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Tier 1 capital............................ Rs. 3,109 Rs. 3,624 US$ 83 16.6%
Tier 2 capital............................ 820 1,543 36 88.2
---------- ---------- ---------
Total capital............................. Rs. 3,929 Rs. 5,167 US$ 119 31.5
========== ========== =========
On-balance sheet risk assets.............. 27,076 42,330 973 56.3
Off-balance sheet risk assets............. 6,780 12,610 290 86.0
---------- ---------- ---------
Total risk assets......................... Rs. 33,856 Rs. 54,940 US$ 1,263 62.3
========== ========== =========
Tier 1 capital adequacy ratio............. 9.12% 6.60%
Tier 2 capital adequacy ratio............. 2.48 2.81
---------- ----------
Total capital adequacy ratio.............. 11.60% 9.41%
========== ==========
</TABLE>
121
<PAGE> 123
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % CHANGE 1999 1999 % CHANGE
---------- ---------- --------- ---------- -------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital................. Rs. 1,819 Rs. 2,668 46.7% Rs. 3,035 US$ 70 13.8%
Tier 2 capital................. 47 20 (57.4) 1,549 35 --
---------- ---------- ---------- --------
Total capital.................. 1,866 2,688 44.0 4,584 105 70.6
========== ========== ========== ========
On-balance sheet risk assets... 10,698 15,801 47.7 33,646 773 112.9
Off-balance sheet risk
assets....................... 3,613 4,138 14.5 7,803 179 88.6
---------- ---------- ---------- --------
Total risk assets.............. Rs. 14,311 Rs. 19,939 39.3 Rs. 41,449 US$ 952 107.9
========== ========== ========== ========
Tier 1 capital adequacy
ratio........................ 12.71% 13.38% 7.32%
Tier 2 capital adequacy
ratio........................ 0.33 0.10 3.74
---------- ---------- ----------
Total capital adequacy ratio... 13.04% 13.48% 11.06%
========== ========== ==========
</TABLE>
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with Indian GAAP was 9.41% at December 31, 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.60% and our Tier 2 capital
adequacy ratio was 2.81% at December 31, 1999.
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with US GAAP was 9.08% at December 31, 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.69% and our Tier 2 capital
adequacy ratio was 2.39% at December 31, 1999.
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with US GAAP was 10.44% at year-end fiscal 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.92% and our Tier 2 capital
adequacy ratio was 3.52% at year-end fiscal 1999.
CAPITAL EXPENDITURES
The following table sets forth, for the periods indicated, the details of
our capital expenditures.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------ -------------------------
1997 1998 1999 1998 1999
------- ------- ---------------- ------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Premises:
Owned............................ Rs. 208 Rs. 765 Rs. 221 US$ 5 Rs. 180 Rs. 61 US$ 1
Leasehold........................ 46 14 27 1 3 15 1
Total premises................... 254 779 248 6 183 76 2
Computers and accessories........ 76 111 115 3 78 103 2
Other............................ 66 95 124 3 34 88 2
------- ------- ------- ------ ------- ------- -----
Total capital expenditures....... Rs. 396 Rs. 985 Rs. 487 US$ 11 Rs. 295 Rs. 267 US$ 6
======= ======= ======= ====== ======= ======= =====
</TABLE>
Capital expenditures decreased 9.5% in the nine months ended December 31,
1999 compared to the nine months ended December 31, 1998 primarily due to a
58.5% decrease in premises capital expenditures, offset in part by a 32.1%
increase in computers and accessories capital expenditures and a 158.8% increase
in other capital expenditures, including furniture, air-conditioning and office
equipment purchased for new branches opened in this period and expenditures
relating to renovations to our existing offices to better serve our increased
number of customers. Premises capital expenditures decreased in the nine months
ended December 31, 1999 largely as a result of the absence of the capital
expenditures incurred in the nine months ended December 31, 1998 for residential
premises for staff members. Capital expenditures decreased 50.6% in fiscal 1999
compared to fiscal
122
<PAGE> 124
1998 primarily due to a 68.2% decrease in premises capital expenditures caused
by the absence of the capital expenditures incurred in fiscal 1998 for the
purchase of office premises in Mumbai, Bangalore and Coimbatore. Capital
expenditures increased 148.7% in fiscal 1998 compared to fiscal 1997 primarily
due to a 206.7% increase in premises capital expenditures caused by the purchase
of office premises in Mumbai, Bangalore and Coimbatore during fiscal 1998.
We plan to spend approximately Rs. 1.6 billion (US$ 36 million) in capital
expenditures during fiscal 2001 and fiscal 2002 for the setting up of additional
branches and other delivery channels. The proposed capital expenditure includes
expenses on computers and accessories and other office equipment.
123
<PAGE> 125
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors, which consists of eight members, is responsible for
the management of our business. Our organizational documents provide for at
least three and no more than twelve directors. We may, subject to the provisions
of our organizational documents and the Indian Companies Act, change the minimum
or maximum number of directors by a resolution which is passed at a general
meeting by a majority of 75.0% of the present and voting shareholders.
The composition of our board of directors reflects the principal
shareholdings held by ICICI, the requirements of the Indian Banking Regulation
Act and the public ownership in India. Under the terms of our organizational
documents, ICICI is entitled to appoint one-third of the total number of
directors of our board. ICICI has nominated two directors to our board. Pursuant
to our organizational documents, to convene a board meeting, one of the two
ICICI directors on our board of directors must be present unless they waive this
requirement in writing. The Banking Regulation Act requires that not less than
51% of the board members have special knowledge or practical experience in areas
relevant to banking including accounting, finance, agriculture, banking and
small scale industry. Accordingly, all our directors are professionals with
special knowledge of accountancy, banking, economics, administration and
management. Of these, one director has expertise in the area of agriculture and
another director has experience in small scale industries, as required by the
Banking Regulation Act. In addition, under the Banking Regulation Act, the
Reserve Bank of India may require us to convene a meeting of our shareholders
for the purposes of appointing new directors to our board of directors.
Our organizational documents also provide that we may execute trust deeds
securing our debentures under which the trustee or trustees may appoint a
director, known as a debenture director. The debenture director is not subject
to retirement by rotation and may only be removed as provided in the relevant
trust deed. There is no debenture director on our board of directors.
Our organizational documents further provide that ICICI may appoint one of
their nominated directors to act as the Executive Chairman and Managing Director
of our board for terms not exceeding five years at a time. The board of
directors has powers to appoint one of the directors to be the Executive
Chairman or Managing Director, if ICICI has not appointed one of its nominee
directors. The board of directors has proposed Mr. K. V. Kamath to be the
non-executive Chairman of our board of directors, subject to approval of the
Reserve Bank of India. Application to the Reserve Bank of India seeking approval
for this appointment has been submitted. We are awaiting this approval. Mr. H.
N. Sinor has been appointed our Managing Director and Chief Executive Officer by
the shareholders with effect from June 1, 1998 for a period of five years.
At least two-thirds of the total number of directors, excluding the
debenture director and the directors nominated by ICICI, are subject to
retirement by rotation. One-third of these directors must retire from office at
each annual meeting of shareholders. A retiring director is eligible for
re-election. None of our directors other than the Chairman or executive
directors shall hold office continuously for a period exceeding eight years.
124
<PAGE> 126
Our board of directors at March 15, 2000 had the following members:
<TABLE>
<CAPTION>
NAME, DESIGNATION AND PROFESSION DATE OF APPOINTMENT OTHER APPOINTMENTS
- -------------------------------- ------------------- ------------------
<S> <C> <C>
Mr. Kundapur Vaman Kamath April 17, 1996 CHAIRMAN
Profession: Managing ICICI Infotech Services Limited
Director and Chief Executive ICICI Personal Financial Services
Officer of ICICI Limited
ICICI Securities and Finance
Company Limited
ICICI Venture Funds Management
Company Limited
ICICI Web Trade Limited
Prudential ICICI Asset Management
Company Limited
DIRECTOR
Indian Institute of Management,
Ahmedabad
National Development Bank, Sri Lanka
VICE CHAIRMAN
Indian Business School
MEMBER -- GOVERNING BOARD
Entrepreneurship Development
Institute of India
National Institute of Bank Management
MEMBER -- MANAGING COMMITTEE
The Associated Chambers of Commerce and
Industry of India (ASSOCHAM)
MEMBER -- GOVERNING COUNCIL
Manel Srinivas Nayak Institute of
Management
MEMBER -- ADVISORY BOARD
NCR Financial Solutions Group Limited,
London
The Economic Times Editorial
MEMBER -- BOARD OF MANAGEMENT
Manipal Academy of Higher Education
MEMBER
Confederation of Indian Industry
</TABLE>
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<TABLE>
<CAPTION>
NAME, DESIGNATION AND PROFESSION DATE OF APPOINTMENT OTHER APPOINTMENTS
- -------------------------------- ------------------- ------------------
<S> <C> <C>
Mrs. Lalita Dileep Gupte September 12, 1994 CHAIRPERSON
Profession: Joint Managing ICICI Capital Services Limited
Director and Chief Operating ICICI Home Finance Company Limited
Officer of ICICI
DIRECTOR
G. S. Mhaskar Private Limited
ICICI Personal Financial Services
Limited
ICICI Infotech Services Limited
ICICI Securities and Finance Company
Limited
ICICI Venture Funds Management Company
Limited
ICICI Web Trade Limited
National Stock Exchange of India
Limited
Prudential ICICI Asset Management
Company Limited
Dr. Satish Chandra Jha May 2, 1997 DIRECTOR -- GOVERNING BOARD
Profession: Development Delhi Stock Exchange
Economist
DIRECTOR
Phillips India Limited
SREI International Finance Limited
Walchand Capital Limited
Mr. Raghunathan Rajamani December 2, 1994 DIRECTOR
Profession: Retired CanBank Computer Service Limited
Government Official
TRUSTEE
Sundaram Mutual Fund
Mr. Bhupendranath V. Bhargava September 12, 1994 CHAIRMAN
Profession: Chairman, India Index Services and Products
Credit Rating and Limited
Information Services of India Limited
DIRECTOR
BPL Cellular Holdings Limited
Cosmo Films Limited
Grasim Industries Limited
HEG Limited
J. K. Corporation Limited
Raymond Limited
Supreme Industries Limited
TRUSTEE
Amarnath Vidya Ashram
Sri Shanmukhananda Fine Arts and
Sangeetha
Sabha
</TABLE>
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<TABLE>
<CAPTION>
NAME, DESIGNATION AND PROFESSION DATE OF APPOINTMENT OTHER APPOINTMENTS
- -------------------------------- ------------------- ------------------
<S> <C> <C>
Mr. Uday Madhav Chitale August 21, 1997 DIRECTOR
Profession: Partner, Crossdomain Solutions Private Limited
M.P Chitale & Company DFK Consulting Services (India) Private
(Chartered Accountants) Limited
Seahorse Industries Limited
PARTNER
M.P Chitale & Associates
CHAIRMAN OF EXECUTIVE COMMITTEE
Shishu Vihar Mandal
Mr. Somesh R Sathe January 29, 1998 MANAGING DIRECTOR
Profession: Managing Director, ESSP Meditek Private Limited
Arbes Tools Private Limited Sukeshan Equipments Private Limited
Mr. H.N. Sinor August 21, 1997
Profession: Managing Director
and Chief Executive Officer
</TABLE>
Our executive officers at March 15, 2000 were as follows:
<TABLE>
<CAPTION>
YEARS OF TOTAL
WORK REMUNERATION
NAME AGE POSITION EXPERIENCE IN FISCAL 1999 SHAREHOLDINGS STOCK OPTION
- ---- --- -------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. H.N. Sinor................. 55 Managing Director 34 Rs. 1,514,078 1,100 75,000(1)
and Chief
Executive Officer
Mr. P.H. Ravikumar............. 48 Senior Executive 27 1,057,087 1,000 31,250
Vice President
Mr. M.N. Gopinath.............. 51 Senior Executive 30 1,046,699 1,200 31,250
Vice President
Mr. Alladi Ashok............... 48 Senior Executive 28 867,374 100 18,750
Vice President
Mr. E.S. Mohan................. 49 Executive Vice 26 886,522 1,000 --
President
Mr. A.V.A. Subramaniam......... 57 Executive Vice 28 621,115 1,000 --
President
Mr. G. Venkatakrishnan......... 49 Executive Vice 25 469,085 -- 25,000
President and
Chief Financial
Officer
Mr. K.S. Harshan............... 48 Senior Vice 23 702,648 1,000 18,750
President
Mr. M.S. Annigeri.............. 46 Senior Vice 20 663,774 1,000 18,750
President
Mr. R.B. Nirantar.............. 46 Senior Vice 21 651,378 100 18,750
President
Mr. Bhashyam Seshan............ 43 Company Secretary 22 567,749 1,200 7,500
</TABLE>
- ---------------
(1) Subject to the approval of the Reserve Bank of India.
Mr. H. N. Sinor holds Bachelor's degrees in Commerce and Law. Mr. Sinor
started his career with the Central Bank of India in September 1965 and moved to
the Union Bank of India in 1969. He worked in various positions gaining
experience in working capital finance, branch banking, resources and corporate
planning. Mr. Sinor returned to Central Bank of India as its Executive Director
in December 1996. Mr. Sinor joined us on
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<PAGE> 129
July 1, 1997 and our board on August 21, 1997 and was appointed our Managing
Director and Chief Executive Officer with effect from June 1, 1998.
Mr. P. H. Ravikumar has a Bachelor of Commerce degree and is a Certified
Associate of the Institute of Bankers both of London and India. Mr. Ravikumar
joined the Bank of India in September 1972. In his 22 years with the Bank of
India, he has worked at various offices in India and in Paris, in the areas of
branch management, treasury, international banking, commercial advances and
planning. Mr. Ravikumar joined us in 1994 and is the Senior Executive Vice
President heading the Corporate Banking.
Mr. M. N. Gopinath holds a Bachelor's degree in Commerce, a Master's degree
in Business Administration and is a Certified Associate of the Indian Institute
of Bankers, Mumbai. He joined the Bank of India in 1970. In his 25 years with
Bank of India, he has worked at various offices in India and in the US. He has
gained experience in credit, international banking, training, branch management,
operations, treasury, leasing and housing finance. He was transferred by the
Bank of India to its merchant banking subsidiary, BOI Finance Limited, as
General Manager. Mr. Gopinath joined us in 1995 and is the Senior Executive Vice
President heading the Retail Banking.
Mr. Alladi Ashok has a Bachelor of Science degree. Mr. Ashok started his
career with the State Bank of India in 1972. He worked in different branches of
State Bank of India both in India and in the US. He has handled various
responsibilities including working capital financing, credit administration,
branch management, foreign exchange and treasury. He joined us in 1996 and is
the Senior Executive Vice President heading our Risk Management Department.
Mr. E. S. Mohan holds Master's degrees in Science and in Business
Administration. He is a Certified Associate of the Institute of Bankers of both
London and India. He joined the Bank of India in 1974. He was posted at various
offices of the Bank of India in India and U.K and gained exposure in treasury
management, foreign exchange, commercial loans and branch banking. Mr. Mohan
joined us in 1994. He is an Executive Vice President and is on secondment to
Inter Commercial Bank Limited, Trinidad and Tobago as the Advisor to the
Managing Director of that bank.
Mr. A. V. A. Subramaniam has a Bachelor of Arts degree, a diploma in
Systems Management and is a Certified Associate of the Indian Institute of
Bankers. He joined the State Bank of India in 1965. He has worked in various
areas including the audit and inspection of general banking and foreign exchange
businesses of large branches and foreign offices. Mr. Subramaniam joined us in
1995. He is the Executive Vice President heading our Audit Department.
Mr. G. Venkatakrishnan holds a Master's degree in Science and a post
graduate diploma in bank management. He is a graduate member of Cost and Works
Accountants of India and a Certified Associate of the Indian Institute of
Bankers, Mumbai. He began his career as an officer with the State Bank of India
in 1974. He has held various positions and worked in areas including
international banking, auditing, compliance and balance sheet management. Mr.
Venkatakrishnan joined us in 1997 and is the Executive Vice President and Chief
Financial Officer.
Mr. K. S. Harshan holds a Master's degree in Economics and a post graduate
diploma in Management. He began his career with the Union Bank of India in 1976.
In his 18 years with Union Bank of India, he has worked at various offices in
India and in London, in the areas of branch management, international trade
finance, foreign exchange and operations. Mr. Harshan joined us in 1994 and is a
Senior Vice President and head of Foreign Exchange and International Banking.
Mr. M. S. Annigeri holds a Bachelor's degree in Science. He joined the
State Bank of India in 1979. He was posted at various offices of the State Bank
of India and gained exposure in branch management and treasury management. Mr.
Annigeri joined us in 1996 and is a Senior Vice President and head of Domestic
Treasury.
Mr. R. B. Nirantar has a Bachelor's degree in Commerce, a diploma in
Industrial Relations and Personnel Management and is a Certified Associate of
the Indian Institute of Bankers. He also holds a degree in General Law. He
joined the Union Bank of India in 1974. He joined us in 1994 and is Senior Vice
President and heads our Human Resources Development department.
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<PAGE> 130
Mr. Bhashyam Seshan has a Bachelor's degree in Commerce. He is an Associate
Member of the Institute of Company Secretaries of India. He started his career
with State Bank of Travancore in 1978 and joined us in 1994. He is our Company
Secretary.
CORPORATE GOVERNANCE
Our corporate governance policies recognize the accountability of the board
and the importance of making the board transparent to all our constituents,
including employees, customers, investors and the regulatory authorities, and to
demonstrate that the shareholders are the ultimate beneficiaries of our economic
activities. We have taken a series of steps including the setting up of board
sub-committees to oversee the functions of executive management. All important
board committees consist mainly of non-executive directors. These board
committees meet regularly.
Our board's role, functions, responsibility and accountability are clearly
defined. In addition to its primary role of monitoring corporate performance,
the functions of the board include:
- approving corporate philosophy and mission;
- participating in the formulation of strategic and business plans;
- reviewing and approving financial plans and budgets;
- monitoring corporate performance against strategic and business plans,
including overseeing operations;
- ensuring ethical behavior and compliance with laws and regulations;
- reviewing and approving borrowing limits;
- formulating exposure limits; and
- keeping shareholders informed regarding plans, strategies and
performance.
To enable the board of directors to discharge these responsibilities
effectively, our executive management gives detailed reports on our performance
on a quarterly basis.
The board functions either as a full board or through committees. The
following committees have been formed to focus on specific issues.
AUDIT AND RISK COMMITTEE
The Audit and Risk Committee consists of five directors, all of which are
independent directors. It provides direction to and oversees the audit and risk
management function, reviews the financial accounts, interacts with statutory
auditors and reviews matters of special interest.
COMMITTEE OF DIRECTORS
The Committee of Directors consists of five directors, including the
Managing Director and Chief Executive Officer. This Committee has delegated
financial powers and approves loan proposals and expenditures within the broad
parameters of the delegated authority.
COMPENSATION COMMITTEE
The Compensation Committee consists of four directors including the
Managing Director and Chief Executive Officer. The functions of the committee
include considering and recommending to the board the amount of compensation
payable to the executive directors, fees payable to other directors and framing
the guidelines and management of the employee stock option scheme.
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<PAGE> 131
NOMINATION COMMITTEE
The Nomination Committee consists of four directors including the Managing
Director and Chief Executive Officer. The functions of this committee include
the submission of recommendations to the board to fill vacancies on the board or
in senior management positions.
SHARE TRANSFER COMMITTEE
The Share Transfer Committee consists of four directors including the
Managing Director and Chief Executive Officer. This committee reviews and
approves transfers of our equity shares and debentures.
COMPENSATION AND BENEFITS TO DIRECTORS AND OFFICERS
Under our organizational documents, each director, except directors
nominated by ICICI and the Managing Director and Chief Executive Officer, is
entitled to remuneration for attending each meeting of the board or of a board
committee. The amount of remuneration is set by the board from time to time in
accordance with limitations prescribed by the Indian Companies Act or the
government of India. Remuneration for attending a board meeting is Rs. 2,000
(US$ 46) and for a committee meeting Rs. 1,000 (US$ 23). At its meeting held on
March 14, 2000, the board of directors revised the remuneration to Rs. 5,000
(US$ 115) for attending a board meeting and Rs. 2,000 (US$ 46) for attending a
committee meeting. The revision is effective from April 1, 2000, but is subject
to the approval of shareholders and the Reserve Bank of India. We reimburse
directors for travel and related expenses in connection with board and committee
meetings and with related matters. If a director is required to perform services
for us beyond attending meetings, we may remunerate the director as determined
by the board of directors and this remuneration may be either in addition to or
as substitution for the remuneration discussed above.
At its meeting held on March 28, 1998, the board of directors decided to
revise the salary paid to the Managing Director and Chief Executive Officer,
effective June 1, 1998. This was approved at the annual meeting of the
shareholders on June 15, 1998. The board or the compensation committee may in
its exclusive discretion fix the salary payable within the range of Rs. 60,000
to Rs. 120,000 (US$ 1,379 to US$ 2,758) per month, exclusive of committed bonus
and special achievement bonus.
The total compensation paid by us to our directors and our executive
officers in fiscal 1999 was Rs. 9 million (US$ 207,000).
BONUS
Each year, our board of directors awards bonuses to our employees including
the Managing Director and Chief Executive Officer on the basis of performance
and seniority. The performance of each employee is judged by a management
appraisal system. The aggregate amount paid towards bonuses to all eligible
employees in fiscal 1999 was Rs. 48 million (US$ 1.1 million).
EMPLOYEE STOCK OPTION SCHEME
On January 24, 2000, our board approved an employee stock option scheme to
attract, encourage and retain high performing employees. Our shareholders
approved this scheme at the extraordinary general meeting on February 21, 2000.
Under this scheme, up to 5.0% of our issued equity shares after the completion
of the offering can be allocated to employee stock options. The stock options
will entitle our eligible employees and directors, and eligible employees and
directors of our subsidiary and holding companies to apply for equity shares. We
do not have any subsidiaries so only our eligible employees and directors and
ICICI's eligible employees and directors could apply for equity shares. Eligible
employees include those that are assistant managers or higher. The board of
directors and compensation committee will determine the eligibility of each
employee and director based on an individual evaluation, including an evaluation
of work performance, technical knowledge and leadership qualities. The
compensation committee will determine the eligibility of ICICI's employees based
on their contribution to its different areas of operations.
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<PAGE> 132
The grant date will be the date of the meeting of our board of directors or
our compensation committee approving the grant of the options. The vesting
period will begin one year after the grant date and may extend for up to three
years from that date. The options may vest in tranches subject to the conditions
stipulated by the compensation committee. The conditions may include
satisfactory performance and continued employment, unless the employment is
discontinued because of death, disability or retirement.
The options will be issued at an exercise price equal to the closing market
price on the stock exchange with the highest trading volume on the grant date,
or at a price determined by our board of directors or our compensation committee
on the grant date.
The exercise period will begin on the date of vesting and expire at the end
of five years from the date of vesting or ten years from the grant date,
whichever is later. The share option will be exercisable by submitting an
application form or an exercise notice to us. The maximum number of option
shares granted to any employee in a year will not exceed 0.05% of the issued
shares on the grant date.
ICICI has an employee stock option scheme. Under this scheme, eligible
employees of ICICI group, including our employees, may be granted options on
shares of ICICI. To date, ICICI has granted stock options to its employees only.
LOANS
Our bank has internal rules and regulations to grant loans to employees to
acquire certain assets such as property, vehicles and other consumer durables.
These loans are made at interest rates ranging from 3.5% to 6.0% per annum and
are repayable over fixed periods of time. The loans are generally secured by the
assets acquired by the employees. We have also given loans to our employees for
purchasing our shares in the offering made by ICICI in June 1997 at the public
offering price. At December 31, 1999, there were Rs. 197 million (US$ 5 million)
loans outstanding to employees. Pursuant to the Banking Regulation Act, our
non-executive directors are not eligible for any loans. At December 31, 1999,
there was no outstanding loan to our directors.
GRATUITY
Under Indian law, we are required to pay a gratuity to employees who after
at least five years of continuous service have resigned or retired. Our bank has
set up a gratuity fund administered by the Life Insurance Corporation of India.
In accordance with our gratuity fund's rules, actuarial valuation of gratuity
liability is made based on certain assumptions regarding rate of interest,
salary growth, mortality and staff turnover. The total corpus of the fund at
March 31, 1999 was Rs. 12 million (US$ 276,000).
SUPERANNUATION FUND
We contribute 15.0% of the total annual salary of each employee to a
superannuation fund, which is administered by the Life Insurance Corporation of
India. An employee gets 33.3% of the commuted value on retirement and a monthly
pension after that for life. In the event of a death of an employee, beneficiary
receives the accumulated balance of the commuted value of 66.7%.
PROVIDENT FUND
We are statutorily required to maintain a provident fund as a part of our
retirement benefits to our employees. Each employee contributes 12.0% of his or
her salary and we contribute an equal amount to the fund. This fund is managed
by in-house trustees. The investments of the fund are made according to rules
made by the government of India. The accounts of the fund are audited by
independent auditors. The corpus of the fund at March 31, 1999 was Rs. 52
million (US$ 1 million).
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Except as otherwise stated in this prospectus, no amount or benefit has
been paid or given to any of our directors or officers.
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<PAGE> 133
RELATED PARTY TRANSACTIONS
We have entered into several cost-sharing arrangements with ICICI and other
group companies, including:
LEASE AGREEMENTS WITH ICICI
We have entered into lease agreements with ICICI, as lessor, at market
rates for the lease of certain properties for both office and residential
purposes and for the lease of ATMs. We paid Rs. 92 million (US$ 2 million), Rs.
20 million (US$ 460,000) and Rs. 7 million (US$ 160,000) in fiscal 1997, 1998
and 1999, respectively, and Rs. 9 million (US$ 210,000) in the nine months ended
December 31, 1999 for the use of ICICI property for office and residential
purposes. We paid Rs. 4.4 million (US$ 102,000) in the nine months ended
December 31, 1999 for the lease of ATMs. We did not lease ATMs from ICICI before
this period. These lease agreements contain terms and conditions that are
standard for agreements of these types.
AGREEMENTS WITH ICICI PERSONAL FINANCIAL SERVICES LIMITED
On December 15, 1999, we entered into an agreement with ICICI Personal
Financial Services for the provision by them of services related to our
telephone banking call centers. The initial term of the agreement is one year.
Under this agreement, we will pay fees to ICICI Personal Financial Services
based on the number of calls handled by the call center.
On January 3, 2000, we entered into another agreement with ICICI Personal
Finance Services seconding 12 of their employees with skills in marketing and
credit processing activities relating to our credit card business. Under this
agreement, we will reimburse to ICICI Personal Financial Services the salaries
of their employees seconded to us.
On January 17, 2000, we entered into another agreement with ICICI Personal
Financial Services for the provision by them of credit card processing services.
Under this agreement, we will reimburse ICICI Personal Finance Services for all
costs incurred by them, including salaries and other operating costs, plus a
mark-up up to 10.0%.
AGREEMENTS WITH ICICI INFOTECH SERVICE LIMITED
On September 9, 1997, we entered into an agreement with ICICI Infotech for
the provision of services by them relating to the handling of share transfer
activities. This agreement expires on September 9, 2000. Under this agreement,
we pay fees to ICICI Infotech depending upon the volume of shares handled. In
fiscal 1998 and 1999, we paid Rs. 3 million (US$ 69,000) and Rs. 6 million (US$
138,000), respectively, to ICICI Infotech pursuant to this agreement.
On September 1, 1999, we entered into another agreement with ICICI Infotech
for seconding 33 of their employees for providing information technology
services. We reimburse the salaries of ICICI Infotech employees seconded to us.
In the nine months ended December 31, 1999, we paid ICICI Infotech Rs. 5 million
(US$ 115,000).
OTHER TRANSACTIONS WITH ICICI
We have generated fee and commission income from ICICI, as one of our
customers, for the provision of banking services to ICICI, including cash
management services, the management of ICICI bond issues, remittances and
collection. We provided these services to ICICI at market rates. ICICI paid a
total of Rs. 6 million (US$ 138,000), Rs. 15 million (US$ 345,000) and Rs. 12
million (US$ 276,000) to us in fiscal 1997, 1998 and 1999, respectively, for
these banking services.
We have generated fee and commission income since January 1999 from our
customers that hold depositary share accounts. We are able to offer this product
because ICICI is a depository participant with the National Securities
Depository Limited. ICICI does not charge us any fees for acting as the
depository participant on behalf of our customers. In the nine months ended
December 31, 1999, we generated fee and commission income related to our
depositary share account holders of Rs. 4 million (US$ 83,000).
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We paid Rs. 2 million (US$ 46,000), Rs. 1 million (US$ 23,000) and Rs. 1
million (US$ 23,000) to ICICI in fiscal 1997, 1998 and 1999, respectively, for
the secondment of ICICI employees to us.
We have paid to ICICI interest on deposits and borrowings in call money
markets in the amount of Rs. 27 million (US$ 631,000), Rs. 105 million (US$ 2.4
million) and Rs. 125 million (US$ 2.9 million) in fiscal 1997, 1998 and 1999,
respectively.
In addition, we have paid dividends to ICICI, as our shareholder, in the
amount of Rs. 113 million, (US$ 2.6 million) Rs. 120 million (US$ 2.8 million)
and Rs. 147 million (US$ 3.4 million) for fiscal 1997, 1998 and 1999,
respectively. We have paid the same dividend per share to ICICI as we have paid
to all our other shareholders.
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THE REPUBLIC OF INDIA
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from the
government of India and its various ministries, the Reserve Bank of India, the
Center for Monitoring Indian Economy, International Data Corporation and the
National Council for Applied Economic Research, and has not been prepared or
independently verified by us or the underwriters, or any of their respective
affiliates or advisors. This is the latest available information to our
knowledge.
TERRITORY AND POPULATION
India is located in southern Asia and covers a land area of 1.3 million
square miles. India's neighbors are Afghanistan, Bangladesh, Bhutan, Myanmar,
Nepal, Pakistan, People's Republic of China and Sri Lanka. India is the world's
second most populous country after China, with a population of approximately 975
million in mid-year 1998-99. India's poverty ratio improved to 36.0% in fiscal
1994 compared to 54.9% in fiscal 1974. English is the accepted business language
in India. India is the world's largest democracy.
GOVERNMENT AND POLITICAL SYSTEM
India achieved independence on August 15, 1947 and is a sovereign
democratic republic consisting of 26 states and six union territories. India's
Constitution provides for the separation of executive, legislative and judicial
powers. The legislative power of the central government is vested in a bicameral
legislature consisting of the Lok Sabha (House of People) and the Rajya Sabha
(Council of States). The Lok Sabha consists of 545 members, two of whom are
nominated by the President. The other members of the Lok Sabha are directly
elected for a term of five years on the basis of a popular vote.
The Indian Constitution provides that the Rajya Sabha can consist of not
more than 250 members, 12 of who are nominated by the President and the rest are
elected indirectly by the elected members of the legislatures of the States. The
Rajya Sabha is not subject to dissolution, but one-third of its members is
required to retire every two years.
The President of India is the constitutional head of the executive branch
of the government, exercising power under the Constitution generally upon the
advice of the council of ministers, headed by the Prime Minister. Executive
power essentially resides with the Prime Minister and the council of ministers
who are responsible to the Lok Sabha. The Prime Minister is elected by the
members of the Lok Sabha and appointed by the President who also appoints other
ministers on the advice of the Prime Minister.
The system of government in the states generally resembles that of the
central government with the states having a legislature, a governor, a chief
minister and a council of ministers. The union territories are administered by
the President. There is an extensive system of local government in India, which
is principally controlled through local corporations or municipalities. The
system of local self-government extends to the village level.
The Supreme Court of India consists of a Chief Justice and a maximum of 25
other judges appointed by the President.
The 13th Lok Sabha elections were completed in October 1999. A coalition
government led by the Bharatiya Janata Party was formed with A.B. Vajpayee as
the Prime Minister of India.
MEMBERSHIP OF INTERNATIONAL ORGANIZATIONS
India has the following international affiliations:
- charter member of the United Nations and its affiliated bodies;
- founding member of the International Monetary Fund ("IMF");
- founding member of the International Bank for Reconstruction and
Development ("World Bank");
- member of the Asian Development Bank;
- member of the African Development Bank; and
- member of the Commonwealth of Nations.
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THE INDIAN ECONOMY
The Indian economy was the eleventh largest in the world in terms of GNP
measured in US dollars, based on World Bank data for 1998. In terms of
purchasing power parity, however, the Indian economy was the fifth largest in
the world in 1998. Agriculture remains India's largest economic sub-sector and
employs approximately two-thirds of its workforce. The government of India has
played a dominant role in the economy in an effort to ensure social justice and
self-reliance while achieving economic growth. Economic policy has been
formulated in a series of successive five-year plans.
Economic performance in the period from fiscal 1951 to the early 1980s was
mixed. Growth in real gross domestic product or GDP averaged about 3.6% during
this period. Though the per capita GDP in this period grew at a lower rate of
1.2% a substantial middle class has emerged over the years.
India's five-year plans in this period followed policies that promoted:
- import substitution through quantitative trade restrictions and high
tariff barriers;
- extensive public ownership of productive capital; and
- a complex set of controls and regulations governing the activities of
the private sector.
In the 1980s, fiscal imbalances began to arise and the government of
India's gross fiscal deficit reached 8.3% of GDP in fiscal 1991. This was
primarily on account of:
- increased government expenditure;
- rapid expansion of subsidies which grew from about 1.5% of GDP in fiscal
1981 to more than 2.3% in fiscal 1991;
- rapid growth of interest expenses as a result of the expansion of public
debt;
- tax policies that discouraged compliance; and
- lower revenue contributions from the public sector.
There was also deterioration in India's balance of payments position.
Import payments increased consistently in the 1980s and more so after the
Persian Gulf conflict in fiscal 1991. India's external debt service obligations
rose significantly, reflecting a mounting external debt, which consisted
increasingly of more expensive commercial borrowings rather than concessional
official lending.
The fiscal and external payments problems reached a crisis point in 1991.
After the assassination of the former Prime Minister Rajiv Gandhi in 1991, the
Congress Party with P.V. Narasimha Rao as Prime Minister initiated a major
structural transformation in the economy.
ECONOMIC REFORMS
Confronted with a major economic crisis, the government of Prime Minister
Rao undertook a comprehensive economic reform program that has been continued by
all the successive governments. These reforms have primarily included:
- elimination of industrial licensing requirements for the majority of
industries, with only five items of health, strategic and security
considerations still remaining under the purview of licensing;
- lowering of tariff barriers and simplification of the trade regime;
- reduction in subsidies;
- substantial liberalization of the restrictions on foreign investment,
including limitations on foreign equity participation;
- reduction in the role of the public sector;
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- increased deregulation of interest rates and introduction of more
stringent standards for the financial sector;
- achievement of full convertibility of the rupee on current account;
- reduction in marginal tax rates and a simplification of tax procedures;
- introduction of a program to make prices in petroleum sector
market-determined; and
- several initiatives for developing the infrastructure sector.
Sectoral Composition
The Indian economy can be divided into three sectors:
- the primary sector including agriculture, forestry, fishing, mining and
quarrying;
- the secondary sector including manufacturing, construction and utilities
(such as electricity and gas supply); and
- the tertiary sector including transport, communications, financial,
information technology, government and other services.
The following table sets forth, for the periods indicated the sectoral
composition of the Indian economy.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1951 1961 1971 1981 1991 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(PERCENTAGE OF GDP)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Primary.................... 56.5% 52.1% 45.8% 39.6% 32.9% 33.0% 30.7% 31.1% 29.2% 29.2%
Secondary.................. 15.0 18.8 22.3 24.4 28.0 24.2 25.3 25.1 25.3 24.7
Tertiary................... 28.5 29.1 31.9 36.0 39.1 42.8 44.0 43.8 45.5 46.1
</TABLE>
- ---------------
Source:Government of India, Economic Survey 1999-2000.
Although manufacturing and services have grown to be major elements of the
Indian economy, agriculture remains the single largest sub-sector. In fiscal
1999, the primary sector was estimated to have contributed 29.2% of value added
in GDP. Weather conditions, in particular, the annual monsoons, are a critical
factor in the performance of agriculture each year. In the past decade, improved
irrigation, increased use of fertilizers and higher quality seeds have helped
reduce the wide fluctuations once seen. Agricultural exports have exhibited an
increasing trend. Agricultural exports have constituted 17-20.0% of India's
total exports in recent years.
The early development of India's manufacturing base was heavily focused on
the production of iron, steel, chemicals, paper and cement. Since the 1980s,
manufacturing industries in India have been expanded to include high value-added
production of petrochemicals, electrical equipment, transport equipment, power
generation and synthetic fibers. The secondary sector's contribution to GDP
amounted to 24.7% in fiscal 1999.
The services or tertiary sector has grown significantly. Its share in GDP
has increased from about 39.1% in fiscal 1991 to 46.1% in fiscal 1999. Within
the services sector, finance is one of the most important components.
Government-owned entities dominate India's financial sector.
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<PAGE> 138
TRENDS IN THE ECONOMY
The following table sets forth, for the periods indicated, the key
indicators of the Indian economy.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999(1)
---- ---- ----- ---- ---- ---- ---- ---- ---- -------
(ANNUAL PERCENTAGE CHANGE, EXCEPT FOREIGN EXCHANGE RESERVES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real GDP growth................... 6.9% 5.4% 0.8% 5.3% 6.2% 7.0% 7.3% 7.5% 5.0% 6.8%
Real per capital income........... 4.8 3.0 (2.1) 3.1 4.2 4.8 5.1 6.0 3.2 5.0
Agricultural production........... 2.1 3.8 (2.0) 4.2 3.8 5.0 (2.7) 9.3 (6.1) 7.4
Industrial production............. 8.6 8.2 0.6 2.3 6.0 8.4 12.8 5.6 6.6 4.0
Wholesale price index (average)... 7.5 10.3 13.7 10.1 8.4 10.9 7.7 6.4 4.8 6.9
Imports........................... 8.8 14.4 (24.5) 15.4 10.0 22.9 28.0 6.7 6.0 0.9
Exports........................... 18.9 9.0 (1.1) 3.3 20.2 18.4 20.8 5.3 4.6 (3.9)
Foreign exchange reserves
(including Gold) (in US$
billions)....................... 4.0 5.8 9.2 9.8 19.3 25.2 21.7 26.4 29.4 32.5
</TABLE>
- ---------------
(1) Provisional figures.
Source:Government of India: Economic Survey, various issues and Reserve Bank of
India: Reserve Bank of India Annual Report 1998-99.
Real GDP growth in the 1980s averaged approximately 5.7%. The economy
experienced a sharp downturn in fiscal 1992, when the real growth was just 0.8%.
The economy recovered considerably from fiscal 1993 onwards primarily due to the
liberalization initiatives of the early 1990s. Real GDP growth decreased to 5.0%
in fiscal 1998 primarily due to reduced growth in agriculture, caused by a
prolonged cold and wet spell in November 1997. Real GDP growth recovered to 6.8%
in fiscal 1999. The recovery has continued in fiscal 2000. See "-- The Indian
Economy -- Economic Scenario in Fiscal 2000" for further discussion.
Although good agricultural performance has been a critical contributor to
the rising production trend, industrial output has also picked up since fiscal
1994 and peaked in fiscal 1996 to 12.8%. However, there was a slowdown in
India's industrial growth which began in the second half of 1997 due to domestic
corporate restructuring, a decline in global commodity prices and a slowdown in
world trade. Exports grew at an average rate of 19.8% between fiscal 1994 and
fiscal 1996. However, growth in exports slowed down from fiscal 1997 through
fiscal 1999 primarily due to a softening in international demand. Industrial
growth and exports have recovered significantly in fiscal 2000. See "-- The
Indian Economy -- Economic Scenario in Fiscal 2000" for further discussion.
INFLATION
India's inflation rate has varied significantly in the past 10 years. As a
result of increasing fiscal imbalances and sharp fluctuations in oil and other
world commodity prices, average inflation as measured by the wholesale price
index rose and reached a peak rate of 13.7% in fiscal 1992. Between fiscal 1992
and fiscal 1998, inflation generally declined except in fiscal 1995 when there
was a sudden increase in the inflation rate, due to excess liquidity and an
increase in the prices of primary goods. However, the trend was reversed in the
following year. The average inflation rate in fiscal 1999 was 6.9%. The decline
in inflation rate has continued in fiscal 2000. See "-- The Indian Economy --
Economic Scenario in Fiscal 2000" for further discussion.
FOREIGN TRADE AND BALANCE OF PAYMENTS
FOREIGN TRADE
Efforts in recent years to expand the export orientation of the economy
have been successful. Merchandise exports have increased from 6.2% of GDP in
fiscal 1991 to 8.2% in fiscal 1999, while imports have risen from 9.4% to 11.4%.
India's major trade partners are the United States, developing countries in
Asia, Germany, Japan and the United Kingdom.
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<PAGE> 139
Exports have increased in diversity, with manufactured goods constituting a
rising proportion of the total, as compared to primary commodities. Provisional
data indicates that two industry groups, handicrafts (including gems and
jewellery) and textiles, accounted for about 44.3% of total exports and 57.8% of
manufactured exports in fiscal 1999. In recent years, capital goods imports have
been dominating total imports. Petroleum and petroleum products are the single
largest import items. Although the share of petrol and petroleum product imports
had fallen from 25.6% in fiscal 1997 to 15.4% in fiscal 1999 primarily due to
the decrease in oil prices, it has begun to rise again since April 1999 due to
major increases in the price of crude oil in the world market. In the past five
fiscal years, India's trade deficit has ranged between 2.8% to 3.9% of GDP.
However, the strong growth in invisible receipts, which includes receipts from
tourism, other services including software exports, and remittances, has
financed a large part of the trade deficit. Consequently, India's current
account deficit has remained at manageable levels. In the past five fiscal
years, the current account deficit as a percentage of GDP has been in the range
of 1.0% to 1.7%.
The following table sets forth, for the periods indicated, trade deficit
and current account deficit as a percentage of GDP.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- -------- -------- --------
(IN PERCENTAGES, EXCEPT FOREIGN EXCHANGE RESERVES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trade deficit as
percentage of GDP..... 1.0% 2.2% 1.5% 2.8% 3.2% 3.9% 3.8% 3.1%
Current account deficit
as Percentage of
GDP................... 0.3 1.7 0.4 1.0 1.7 1.2 1.4 1.0
Foreign exchange
reserves (including
gold) (in billions)... US$ 9.2 US$ 9.8 US$ 19.3 US$ 25.2 US$ 21.7 US$ 26.4 US$ 29.4 US$ 32.5
</TABLE>
- ---------------
Source:Economic Survey, various issues.
FOREIGN INVESTMENT INFLOWS
India has experienced a surge in foreign investment inflows from fiscal
1994. Foreign investment inflows were a mere US$ 103 million in fiscal 1991.
Between fiscal 1994 and fiscal 1999, foreign investment inflows have ranged
between US$ 2.4 billion and US$ 6.1 billion. The share of foreign direct
investment as a percentage of total foreign investment inflows has been rising
consistently in the recent years. There had been a slowdown in foreign portfolio
investment inflows in the last two years, largely due to the south-east Asian
and Russian economic crisis. However, foreign portfolio investment inflows have
improved substantially in fiscal 2000. See "-- The Indian Economy -- Economic
Scenario in Fiscal 2000" for further discussion.
The following table sets forth, for the periods indicated, the inflows from
foreign direct investment and portfolio investment.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ----- ----- ----- ----- ----- -----
(IN US$ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct investment........... 97 129 315 586 1,314 2,144 2,821 3,557 2,462
Portfolio investment........ 6 4 244 3,567 3,824 2,748 3,312 1,828 (61)
--- --- --- ----- ----- ----- ----- ----- -----
Total....................... 103 133 559 4,153 5,138 4,892 6,133 5,385 2,401
=== === === ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
Source:Reserve Bank of India Bulletin, August 1999
India's foreign exchange reserves reached a low of US$ 5.8 billion in
fiscal 1991. Since then, the foreign exchange reserves have grown consistently
to reach a comfortable level of US$ 35.2 billion at February 18, 2000. This
level of foreign exchange reserves provides India an import cover of over seven
months. This increase in foreign exchange reserves has been primarily due to
foreign investment inflows.
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<PAGE> 140
EXCHANGE RATE
Since March 1993, the exchange rate of the rupee has been
market-determined, with transactions on trade account being fully convertible.
In February 1994, the Reserve Bank of India announced relaxations in payments
restrictions in the case of many invisible transactions, and the final step
towards current account convertibility was taken in August 1994 by further
liberalization of invisible payments.
According to the Reserve Bank of India reference rate, the exchange rate of
the rupee (monthly average) has moved from Rs. 31.53 per US$ 1.00 in March 1993
to Rs. 42.45 per US$ 1.00 in March 1999. On March 1, 2000, the exchange rate was
Rs. 43.61 per US$ 1.00.
The rupee was stable around Rs. 31.40 per US$ 1.00 from March 1993 to
August 1995. Between August 1995 and March 1996, the rupee depreciated sharply
against the dollar. However, this was the same period that the dollar
appreciated strongly against other currencies. In real terms, the rupee had
appreciated in comparison to other currencies and a depreciation was required to
maintain a real exchange rate parity.
Between August 19, 1997 and September 8, 1997 the rupee depreciated by
2.7%, in part due to the south-east Asian crisis. In August 1998, the rupee
became volatile in the wake of the Russian crisis. Between August 5, 1998 and
August 19, 1998, the rupee depreciated by 2.2%. However, unlike the south-east
Asian currencies, the rupee has not experienced a precipitous decline. The rupee
was largely stable between September 1998 and March 1999. The rupee then
depreciated from Rs. 42.51 per US$ 1.00 at 6 April 1999 to Rs. 43.60 per US$
1.00 in October 1999 due to hostilities and tensions with Pakistan caused by
armed conflicts over parts of Kashmir. Since October 1999, the rupee has largely
been stable.
The following chart sets forth the month-end rupee/dollar exchange rates
expressed in rupees per US dollar.
[CHART]
- ---------------
Source:Report on Currency and Finance, the Reserve Bank of India (various
issues)
EXTERNAL DEBT
Total external debt (non-defense) grew by about US$ 6.2 billion annually
between fiscal 1986 and fiscal 1991. Growth in external debt slowed sharply
thereafter. As a proportion of GDP, external debt declined from 37.7% in fiscal
1992 to 23.7% in fiscal 1999.
Total external debt was estimated to be US$ 98.9 billion at the end of
September 1999. Short-term debt was only 4.7% of total external debt, and
concessional debt was 38.7% of total external debt.
The debt service ratio, which refers to debt service payments as a
percentage of current receipts excluding official transfers, declined from 30.2%
in fiscal 1992 to 18.0% in fiscal 1999.
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<PAGE> 141
The following table sets forth, for the periods indicated, certain
information regarding external debt and debt service payments.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
(IN US$ BILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period-end outstanding stock.............. 83.8 85.3 90.0 92.7 99.0 93.7 93.5 93.5 97.7
Debt service payments..................... 9.0 8.3 7.7 8.6 11.0 12.0 11.7 11.2 10.7
Total debt as a percentage of GDP......... 30.4% 41.0% 39.8% 33.8% 30.9% 27.1% 24.7% 24.4% 23.5%
Total debt service as a percentage of
current receipts........................ 35.3 30.2 27.5 25.6 26.2 24.3 21.2 19.1 18.0
</TABLE>
- ---------------
Source:India's External Debt -- A Status Report, Ministry of Finance, June 1999,
Economic Survey, 1999-2000. Reserve Bank of India Annual Report, 1998-99.
INVESTMENT TRENDS
A major achievement of the economic liberalization since 1991 has been the
improvement in the investment climate in India. The amount of capital raised in
the primary market has risen from Rs. 109.6 billion in fiscal 1991 to Rs. 432.0
billion in fiscal 1999. Simultaneously, there has been an increase in foreign
investment inflows. See "-- The Indian Economy -- Foreign Trade and Balance of
Payments" for further discussion.
Gross domestic savings as a percentage of GDP rose from 22.5% in fiscal
1994 to 24.7% in fiscal 1998 before falling to 22.3% in fiscal 1999. Similarly,
gross domestic investment rose from 23.1% of GDP in fiscal 1994 to 26.2% of GDP
in fiscal 1998 before falling to 23.4% in fiscal 1999. The savings-investment
gap has increased from negative 0.6% in fiscal 1994 to negative 1.1% in fiscal
1999.
The following table sets forth, for the periods indicated, certain
information relating to savings, investment and capital raised in the domestic
market.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -------
(IN PERCENTAGES, EXCEPT RS. IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Gross domestic savings as a
percentage of GDP.......... 22.5% 25.0% 25.5% 23.3% 24.7% 22.3%
Gross domestic investment as
a percentage of GDP........ 23.1 26.1 27.2 24.6 26.2 23.4%
Capital raised in the
domestic market............ Rs. 398 Rs. 480 Rs. 309 Rs. 289 Rs. 490 Rs. 432
</TABLE>
- ---------------
Source:Economic Survey 1999-2000, Government of India, Center for Monitoring
Indian Economy.
In recent years, industry has raised around one-half of the funds for
capital formation from its own savings and depreciation provisions. The balance
has been raised from equity share issues in India, borrowings from financial
institutions and the domestic market and equity share issues or borrowings in
overseas markets.
INCOME DISTRIBUTION: THE GROWTH OF THE MIDDLE CLASS
One of the outcomes of the growth of the Indian economy in recent years has
been the rapid growth of the Indian middle class. In the last decade, an
increasing proportion of India's population has moved from the low-income
brackets to the middle-income group as shown in the table below.
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<PAGE> 142
The following table sets forth, for the periods indicated, the distribution
of households and the annual income at fiscal 1996 prices by income group.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1990 1996(1)
ANNUAL INCOME AT --------------------- -----------------------
INCOME GROUP FISCAL 1996 PRICES URBAN RURAL TOTAL URBAN RURAL TOTAL
- ------------ ------------------------ ----- ----- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Low............................ Rs. 25,000 or less 37.1% 67.3% 58.8% 27.9% 57.2% 48.9%
Lower Middle................... Rs. 25,001 - 50,000 34.8 23.9 26.9 34.9 29.0 30.7
Middle......................... Rs. 50,001 - 77,000 17.9 7.1 10.1 20.3 8.6 11.9
Upper Middle................... Rs. 77,001 - 106,000 6.5 1.2 2.7 9.6 3.1 5.0
High........................... Greater than Rs. 106,000 3.8 0.5 1.4 7.3 2.0 3.5
</TABLE>
- ---------------
(1) Total number of households at year-end 1995-96 was estimated at 164.9
million.
Source:National Council of Applied Economic Research, India Market Demographics
Report, 1998.
Households in the low-income group have decreased by 3.2 million between
fiscal 1990 and fiscal 1996 (the latest year for which consumer statistics are
available), while they have increased by 12.1 million in the lower middle income
group, 5.3 million in the middle income group and 4.4 million in the upper
middle income group. Both rural and urban areas have exhibited similar trends,
though the movement towards the middle income groups seems more pronounced in
the urban regions.
A LARGE AND SIGNIFICANT CONSUMER MARKET
The recent growth in the middle class has created the possibility of a
large and significant consumer market.
A study conducted by the National Council of Applied Economic Research
("NCAER") in India on consumer classes, based on ownership and consumption
trends rather than household incomes, revealed that the structure of the Indian
market has changed significantly over the last few years, with the top three
population groups, the "very rich", the "consuming class" and the "climbers",
growing at nearly five times the average for the population as a whole. The
study also revealed that Indian consumption patterns have changed in the last
two decades.
The NCAER estimates that if India's GDP were to grow by an average of 6.4%
a year, by fiscal 2007, up to 70.0% of the Indian population, or about 140
million households, would be in the three middle income brackets. This would
certainly make India one of the largest consumer markets in the world. Most of
this shift is likely to come from the urban areas, where the share of households
in the lower income category would drop by a dramatic 90.0%. Corresponding to
these income groups, there is likely to be a significant shift in the
consumption classes in the economy as well, with the "climbers" together with
the "consuming class" projected to form the bulk (about 80%) of the Indian
population by fiscal 2007.
We cannot be sure that growth will occur as predicted by NCAER estimates
and investors should not assume that these estimates will, in fact, predict the
future.
TELECOMMUNICATIONS IN INDIA
The Indian telecommunications network is one of the largest networks in the
world and has been in operation since 1851. At December 31, 1999, there were
23.8 million direct exchange lines in India, translating into a tele-density of
about 2.44 per hundred population as against a world average of 11. The
telecommunications infrastructure in India historically has been controlled by
government-controlled telecommunications providers. The resulting service has
been inferior to service in developed countries. Recognizing the business need
for a reliable communications network, the government of India decided in 1994
to deregulate the telecommunications sector and open it up to competition.
The privatization process for the telecommunications sector commenced in
1994 with the announcement of National Telecom Policy and the subsequent opening
up of cellular telephony and fixed line telephony to private
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<PAGE> 143
operators. Licences have been awarded to private fixed line and cellular
operators. At November 30, 1999, there were about 1.5 million cellular
subscribers in the country.
The government announced the New Telecom Policy 1999 in March 1999 with a
view to further facilitate development of telecommunications in the country. The
key features of this policy include:
- multiple operators in cellular and fixed line services subject to
certain conditions;
- licensing of operators based on a revenue sharing structure with a fixed
entry fees;
- provision of telephony through cable and any other media except internet
telephony;
- opening up of national long distance operations from January 1, 2000;
- free interconnection between all fixed line, cellular and other
telecommunicaitions service operators at mutually determined terms
without obligations to the Department of Telecommunications, the
government service provider;
- corporatization of the Department of Telecommunications by the year
2001; and
- opening of international long distance will be reviewed by 2004.
There has been significant growth in the telecommunications network in the
past few years. The telephone lines over the past five years have been added at
a growth rate of 20% per annum. At December 31, 1999, out of 607,491 villages in
India, 349,931 villages had public telephones. The above telecommunications
network was supported by about 122,124 kilometers of optic fibre and 154,067
kilometers of microwave backbone at December 31, 1999.
INTERNET IN INDIA
Internet services were commercially introduced in India in August 1995,
with the Videsh Sanchar Nigam Limited or VSNL as the sole provider of Internet
connectivity. The services which were initially offered in the four metros of
New Delhi, Mumbai, Chennai and Calcutta have been expanded to cover a network of
42 nodes throughout the country. In November 1998, the Internet Service
Providers Policy was announced which envisaged entry of unlimited private
Internet service providers with negligible license fees. At October 1997, 175
licenses were issued to service providers which include cable operators.
Although the market for electronic commerce is at an early stage of
development in India, it is expanding rapidly. International Data Corporation
report estimates that:
- the personal and network computer base in India will grow at a rate that
averages 44% annually from 1.9 million in 1998 to 8.2 million in 2002;
- Internet users will grow at a rate that averages 76% annually from 0.5
million in 1998 to 4.5 million in 2002 and 12.3 million in 2005; and
Internet commerce revenues in India will grow at a rate that averages 260%
annually from US$ 3.5 million in 1998 to US$ 593.6 million in 2002.
We believe that the fundamentals for Internet growth exist in India in
terms of income, education, and demographics but the growth has been inhibited
by relatively high costs and poor user experience caused by inadequate
telecommunications infrastructure and slow network connection speeds. Internet
usage is expected to grow rapidly with continuing deregulation, availability of
bandwidth at cheaper rates, a bigger base of personal and network computers,
advances in network design, increased availability of alternative Internet
delivery channels, such as cable, satellite and wireless, increased availability
of Internet-based software and applications and emergence of useful content and
electronic commerce technologies. As the Internet is becoming more developed and
reliable, businesses are increasingly using the Internet for functions critical
to their core business strategies such as sales and marketing, customer service
and project coordination as it enables them to reduce operating costs, access
valuable information and reach new markets.
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<PAGE> 144
The government of India is in the process of introducing legislation to
facilitate the development of a secure environment for electronic commerce. In
1999, the Information Technology Bill was referred to a committee of the
parliament. This bill seeks to establish a regulatory authority for electronic
commerce, provide legal validity to information in the form of electronic
records and permit, unless otherwise agreed, an acceptance of contract to be
expressed by electronic means of communication. It seeks to facilitate
electronic intercourse in trade and commerce by providing the legal framework
for authentication and origin of electronic record/communication through digital
signature and eliminate uncertainties over writing and signature requirements.
The passage of the bill is expected to spur growth of electronic commerce.
IMPACT OF POLITICAL ENVIRONMENT ON ECONOMIC REFORMS
The present government was formed by a coalition of a number of parties led
by the Bhartiya Janata Party in October 1999. Since economic reforms were
introduced in fiscal 1992, successive governments in India formed by different
political parties have continued the economic reform process despite their
varying ideologies. This focus on economic reforms points to the broad political
consensus in India on the need for economic reforms. Therefore, we believe that
the political environment is unlikely to impact economic policy making in the
economy and the process of reforms. However, we cannot guarantee that this will
continue to be the case and investors should form their own views regarding the
political situation.
ECONOMIC SCENARIO IN FISCAL 2000
The Indian economy grew at 5.9% in the first quarter and 6.0% in the second
quarter of fiscal 2000. Inflation has remained low throughout the current fiscal
year. On a point to point basis, the inflation rate measured by the wholesale
price index was 2.4% for the week ended February 12, 2000. During fiscal 2000 up
to February 11, 2000 total flow of funds from commercial banks to the commercial
sector increased to Rs. 505.2 billion from Rs. 348.2 billion in the
corresponding period in fiscal 1999. During the period April 1999 to January
2000, industrial production recorded a 7.2% growth compared to a growth of 3.8%
in the corresponding period in fiscal 1999. Exports during the period from April
1999 to January 2000 have grown by 11.3% reflecting an increased world demand
for Indian goods in the current fiscal year. Software exports for the period
April 1999 to September 1999 were 58% higher than that for the period April 1998
to September 1998. Foreign investment inflows, which were at US$ 2,401 million
for the full year in fiscal 1999, have reached US$ 2,671 million in the first
eight months of the current fiscal year. Foreign exchange reserves were at US$
35.2 billion at February 18, 2000.
UNION BUDGET FISCAL 2000
In the Union Budget fiscal 2000, the Ministry of Finance modified the
method of estimating the fiscal deficit of the central government. Under this
modified method, it excluded from capital expenditure the proportion of small
savings that are given as loans to States and Union Territories. Further, the
revised GDP series released by the Central Statistical Organization was used for
calculating various deficit ratios. With these modifications, fiscal deficit
estimates worked out to be 4.7% of GDP in fiscal 1998 and 4.5% in fiscal 1999.
In fiscal 2000, fiscal deficit was budgeted to decline further to 4.0% of GDP.
However, the actual deficit is now estimated at 5.6% of GDP.
The major steps taken and proposals made in the Union Budget were:
- The indirect tax structure was rationalized. The number of excise duty
rates was brought down from 11 to three and the number of customs duty
rates was reduced from seven to five;
- Several measures were introduced to encourage the flow of investment to
the housing sector;
- The tax rate on long-term capital gains on transfer of listed securities
was fixed at the lower of 20.0% with adjustment for cost inflation
index, or 10.0% without adjustment for cost inflation index;
- Tax on dividend income from mutual funds was abolished. However, mutual
funds are required to pay a 10.0% tax on distributions, except in the
case of equity oriented mutual funds that are exempt from this tax for a
period of three years;
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<PAGE> 145
- Stamp duty was proposed to be removed on transfer of debt instruments in
dematerialized form;
- Investment by non-resident Indians up to 100.0% was proposed in almost
all sectors; and
- Corporate restructuring was generally made tax neutral.
UNION BUDGET FOR FISCAL 2001
The Union Budget for fiscal 2001, tabled in the Lok Sabha on February 29,
2000, proposes to introduce several measures to improve the state of government
finances. These include implementation of zero-base budgeting in all government
departments, reassessment of the manpower requirements of various departments,
redeployment of surplus staff and introduction of a voluntary retirement scheme,
review of subsidies and retirement of government debt using a part of proceeds
from divestment of public sector units. Greater emphasis has also been accorded
to agricultural and rural development. The Budget provides fiscal incentives for
the venture capital industry as this sector is expected to promote the growth of
knowledge-based industries in the country. The significance of growth of the
information technology has been recognized. Liberal tax treatment is given for
imports of computer components to promote the growth of the information
technology industry and telecommunications equipment as the telecommunications
industry acts as the backbone of the information technology sector.
The fiscal deficit is budgeted at 5.1% of GDP for fiscal 2001. The
proposals contained in the Union Budget will come into force once approved and
notified by the Indian government.
The major steps taken and proposals made in the Union Budget were:
- The limit for portfolio investment by foreign institutional investors
has now been increased to 40% from the existing 30%;
- The limit on the overseas acquisitions by Indian companies under the
automatic route has been increased from the existing US$ 15 million to
US$ 50 million;
- The Reserve Bank of India Act is to be amended in order to provide
greater operational flexibility to the Reserve Bank of India in monetary
policy;
- The governments stake in public sector banks is to be reduced to 33% and
weak public sector banks are to be recapitalised;
- Tax rate for dividends distributed by companies has been increased from
10% to 20%;
- The government proposes to set up additional Debt Recovery Tribunals;
and
- The government proposes to set up a Credit Information Bureau for
sharing of credit information on borrowers and potential borrowers among
banks and financial institutions.
RATIONALIZATION OF SALES TAX
All states and union territories of India have agreed in principle to
introduce a system of tax on value added from April 1, 2001. Further, to reduce
the severe competition among Indian states in attracting business by fixing very
low tax rates which was not in the general economic interest, the states have
agreed to introduce floor rates of sales tax.
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<PAGE> 146
LEGISLATIVE FRAMEWORK FOR RESTRUCTURING SICK COMPANIES
The Sick Industrial Companies (Special Provisions) Act, 1985 established
the Board for Industrial and Financial Reconstruction and the Appellate
Authority for Industrial and Financial Reconstruction to secure timely detection
of sick and potentially sick companies, and for speedy determination and
enforcement of preventive and remedial measures to be taken in respect of such
companies. The Board for Industrial and Financial Reconstruction makes necessary
inquiries into the working of a company and appoints an agency to formulate a
scheme for recovery. The Board for Industrial and Financial Reconstruction is
empowered to appoint banks or financial institutions as its agents to assist it
in discharging its functions. In the event of an application for relief to the
Board for Industrial and Financial Reconstruction, no legal proceedings
pertaining to the properties of the company or any proceedings for the
liquidation of the company may be brought except with the consent of the Board
for Industrial and Financial Reconstruction.
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REFORMS IN SOME KEY SECTORS OF THE INDIAN ECONOMY
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
government of India and its various ministries, the Reserve Bank of India and
the Center for Monitoring Indian Economy, and has not been prepared or
independently verified by us or the underwriters, or any of their respective
affiliates or advisors. This is the latest available information to our
knowledge.
INFRASTRUCTURE SECTOR
The Expert Group on the Commercialization of Infrastructure Projects
appointed by the government of India estimated that the annual level of
investment in infrastructure (at fiscal 1996 prices) would rise from Rs. 600
billion in fiscal 1996 to approximately Rs. 1.8 trillion by fiscal 2006. This
group also estimated that infrastructure investment could rise from 5.5% of GDP
to 7.0% of GDP by fiscal year 2001 and to 8.0% of GDP by fiscal 2006. The
financial resources required between 1996 and 2006 was estimated at Rs. 6.2
billion for the power generation sector and Rs. 1.9 billion for the
telecommunications sector, both at fiscal 1996 prices.
Until 1991, the development of the infrastructure in India was entrusted
predominantly to the public sector. Given the quantum of investment required in
this sector, the government of India issued policy guidelines to encourage the
involvement of the private sector, including foreign private investment, in
infrastructure development. To give a boost to investment in the infrastructure
sector, the government took the following steps:
- It introduced tax incentives for financing and developing infrastructure
activities in the 1996-97 budget;
- Telecommunications, oil exploration and industrial parks were included
in infrastructure to enable them to take advantage of the tax benefits;
- Holding companies' promoters were allowed to raise external commercial
borrowings up to US$ 50 million to finance equity in a subsidiary or
joint venture company implementing infrastructure projects;
- Provident funds have been allowed to invest up to 10.0% of incremental
funds in private infrastructure projects;
- Private investment including foreign equity participation up to 100.0%,
subject to certain conditions, has been permitted in electricity
generation, transmission and distribution, construction and maintenance
of roads, highways, vehicular tunnels and bridges and ports; and
- The Telecom Regulatory Authority of India and the Tariff Authority for
Major Ports were set up in 1997.
INSURANCE
The R.N. Malhotra Committee was set up in April 1993 to recommend reforms
in the insurance industry. This committee submitted its report on January 7,
1994 and its major recommendations were as follows:
- The entry of the private sector in the insurance industry should be
allowed;
- India's two insurance corporations, the Life Insurance Corporation of
India and General Insurance Corporation of India should be privatized,
with the government retaining a 50.0% stake;
- The licensing system for surveyors should be abolished;
- The tariff regime in general insurance must continue;
- Contributions to pension schemes must be exempt from tax;
- Settlement of claims must be expedited; and
- High priority should be given to activating the regulatory apparatus.
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As a first step towards implementation of the recommendations of the
Malhotra Committee on Reforms in the Insurance Sector, the budget for fiscal
1996 indicated that an independent regulatory authority would be set up for the
insurance industry, and the Insurance Regulatory Authority was set up in 1996.
In December 1999, the parliament approved the Insurance Regulatory and
Development Authority Bill, 1999. This bill has opened up the Indian insurance
sector for foreign and private investors. This bill allows foreign equity
participation in new insurance companies of up to 26.0%. The new company should
have a minimum paid up equity capital of Rs. 1.0 billion to carry out the
business of life insurance or general insurance or Rs. 2.0 billion to carry out
exclusively the business of reinsurance. An Insurance Regulatory and Development
Authority has been set up to regulate, promote and ensure orderly growth of the
insurance industry.
The Reserve Bank of India recently has circulated draft guidelines
governing the entry of banks and financial institutions into the insurance
business. The objective of the guidelines is to allow only financially strong
banks and financial institutions to enter the insurance business. The draft
guidelines permit banks and financial institutions to enter the business of
underwriting insurance through joint ventures if they meet the stipulated
criteria relating to their net worth, capital adequacy ratio, profitability
track record and level of non-performing loans and the performance of their
existing subsidiary companies. The draft guidelines specify the maximum
percentage of the paid up capital and of the net worth of the bank or financial
institution that can be invested in the joint venture. To keep the risks
associated with each of the businesses distinct, the guidelines envisage an
"arms length" relationship between the bank or financial institution and the
insurance company. The Reserve Bank of India has released these draft guidelines
for public discussion.
EXTERNAL SECTOR
TRADE POLICY
The export-import policy for the fiscal years 1997-2000 initiated the
process of import liberalization by substantially decreasing the number of items
on the restricted list of imports and increasing the number of items that can be
imported under the special import license and the open general license. Items
under the restricted list face quantitative restrictions on import while items
under open general license can be imported freely without any quantitative
restrictions. The special import licenses are freely transferable import
licenses which are granted to export houses and trading houses for the import of
goods. In a major revision of the policy on March 31, 1999, an additional 894
items were moved from the restricted list to the open general license and
another 414 items were permitted to be imported against a special import
license.
In September 1998, the government of India allowed Indian companies to
access international commodity exchanges to hedge their commodity price risks by
entering into standard exchange-traded futures and options contracts. Companies
with genuine underlying exposure will now be allowed to hedge these risks.
EXTERNAL COMMERCIAL BORROWINGS
Since 1991, the government of India has announced various measures with
respect to external commercial borrowings. Generally, the approval of the
Ministry of Finance and the Reserve Bank of India is required for external
commercial borrowings. The government has initiated reforms in this respect to
encourage the inflow of long term funds for infrastructure. The major reforms
with respect to external commercial borrowings are as follows:
- Exporters can raise up to three times their average annual exports of
the preceding three years subject to a ceiling of US$ 200 million, and
subject to various applicable average maturity conditions. All exporters
are permitted to have foreign currency exposure up to 60.0% of the
project cost.
- The maximum eligibility for external commercial borrowings under the
long-term external commercial borrowings scheme has been raised to US$
200 million for borrowings with an average maturity of eight years and
US$ 400 million for borrowings with an average maturity of 16 years.
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- Holding companies and promoters will be permitted to raise external
commercial borrowings up to a maximum of US$ 200 million to finance
equity investments in a subsidiary or joint venture company implementing
infrastructure projects.
- External commercial borrowings can be used for any purpose except
investment in real estate and capital markets.
Prepayment of external commercial borrowings is permitted if these
borrowings are met out of inflows of foreign equity. In addition, prepayment is
allowed, subject to government approval, of all commercial borrowings with a
residual maturity of one year. Alternatively, a one-time prepayment of up to
10.0% of the outstanding external commercial borrowing during the life of the
loan is permitted. In addition, prepayment of 100.0% of outstanding external
commercial borrowings is permitted if the source of funds is from "Exchange
Earners" Foreign Currency Accounts". While there are end-use restrictions under
the guidelines for external commercial borrowings, financial institutions are
permitted to provide loans for project-related expenditure in rupees.
FOREIGN EXCHANGE MANAGEMENT ACT
In India, payments and dealings affecting foreign exchange are governed by
the Foreign Exchange Regulation Act. In December 1999, parliament passed the new
Foreign Exchange Management Act, which when effective, will replace the Foreign
Exchange Regulation Act. This new legislation indicates a major shift in the
policy of the government with regard to foreign exchange management in India.
While the Foreign Exchange Regulation Act was aimed at the conservation of
foreign exchange and its utilization for the economic development of the
country, the objective of the Foreign Exchange Management Act is to facilitate
external trade and promote the orderly development and maintenance of foreign
exchange market in India.
CAPITAL ACCOUNT CONVERTIBILITY
A committee, which was set up by the Reserve Bank of India to look into the
various aspects of capital account convertibility, submitted its report on June
3, 1997. The committee in its report had laid out a road map for introducing
various measures relating to making the rupee convertible on the capital
account. At the same time, it had also specified the pre-conditions to be
achieved. Implementation of these recommendations and movement towards capital
account convertibility has been gradual, particularly in the wake of the
south-east Asian crisis.
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OVERVIEW OF THE INDIAN FINANCIAL SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from the
government of India and its various ministries and the Reserve Bank of India,
and has not been prepared or independently verified by us or the underwriters,
or any of their respective affiliates or advisors. This is the latest available
information to our knowledge.
The Reserve Bank of India, the central banking and monetary authority of
India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sector participate in India's financial sector, including the following:
- commercial banks;
- long-term lending financial institutions;
- non-bank finance companies, including housing finance companies; and
- other specialized financial institutions, and state-level financial
institutions.
Until the early 1990s, the Indian financial system was strictly controlled.
Interest rates were administered, formal and informal parameters governed the
asset allocation, and strict controls limited entry into and expansion within
the financial sector. The government of India's economic reform program, which
began in 1991, encompassed the financial sector. The first phase of the reform
process began with the implementation of the recommendations of the Committee on
the Financial System, the Narasimham Committee I. The reform process has now
entered into its second phase. See "-- Banking Sector Reform -- The Committee on
Banking Sector Reforms (Narasimham Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants in the Indian
financial system, with a focus on the commercial banks and the long-term lending
institutions. This is followed by a brief summary of the banking reform process
along with the recommendations of various committees which have played a key
role in the reform process. We then present a brief discussion on the impact of
the liberalization process on long-term lending institutions and commercial
banks. Finally, reforms in the non-banking financial sector are briefly
reviewed.
RESERVE BANK OF INDIA
The Reserve Bank of India, established in 1935, is the central banking and
monetary authority in India. The Reserve Bank of India manages the country's
money supply and foreign exchange and also serves as a bank for the government
of India and for the country's commercial banks. In addition to these
traditional central banking roles, the Reserve Bank of India undertakes certain
developmental and promotional roles.
The Reserve Bank of India requires financial entities regulated by it to
furnish information relating to their businesses to it on a regular basis. The
Department of Financial Supervision of the Reserve Bank of India is authorized
to make requests for information from or undertake both on-site inspection and
off-site surveillance of financial institutions. The Reserve Bank of India also
issues guidelines on exposure standards, income recognition, asset
classification, provisioning for non-performing assets and capital adequacy
standards for commercial banks, long-term lending institutions and non-bank
finance companies.
For further discussion regarding Reserve Bank of India's role as the
regulatory and supervisory authority, of India's financial system and its impact
on us, see "Supervision and Regulation".
COMMERCIAL BANKS
Commercial banks in India have traditionally focused only on meeting the
short-term financial needs of industry, trade and agriculture. On September 30,
1999, there were 298 scheduled commercial banks in the country, with a network
of 65,294 branches serving approximately Rs. 7.4 trillion in deposit accounts.
Scheduled commercial banks are banks which are listed in the schedule to the
Reserve Bank of India Act, 1934, and may further be classified as public sector
banks, private sector banks and foreign banks.
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Commercial banks have a presence throughout India, with nearly 72.0% of
bank branches located in rural or semi-urban areas of the country. A large
number of these branches belong to the public sector banks.
PUBLIC SECTOR BANKS
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its associate banks, 19
nationalized banks and 196 regional rural banks. Excluding the regional rural
banks, the remaining public sector banks have 45,761 branches, and account for
77.8% of the outstanding gross bank credit and 79.5% of the aggregate deposits
of the scheduled commercial banks. The public sector banks' large network of
branches enables them to fund themselves out of low cost deposits.
The State Bank of India is the largest public sector bank in India. At
September 30, 1999, the State Bank of India and its seven associate banks had
13,334 branches. They accounted for 24.7% of aggregate deposits and 29.0% of
outstanding gross bank credit of all scheduled commercial banks.
Regional rural banks were established from 1976 to 1987 by the central
government, state governments and sponsoring commercial banks jointly with a
view to develop the rural economy. Regional rural banks provide credit to small
farmers, artisans, small entrepreneurs and agricultural laborers. There were 196
regional rural banks at September 30, 1999 with 14,481 branches, accounting for
3.8% of aggregate deposits and 3.0% of gross bank credit outstanding of
scheduled commercial banks.
PRIVATE SECTOR BANKS
After the first phase of bank nationalization was completed in 1969, public
sector banks made up the largest portion of Indian banking. The focus on public
sector banks was maintained throughout the 1970s and 1980s. Furthermore,
existing private sector banks which showed signs of an eventual default were
merged with state-owned banks. In July 1993, as part of the banking reform
process and as a measure to induce competition in the banking sector, the
Reserve Bank of India permitted entry by the private sector into the banking
system. This resulted in the introduction of nine private sector banks,
including us. These banks are collectively known as the "new" private sector
banks. In addition, 25 private sector banks existing prior to July 1993 are
operating.
At September 30, 1999, private sector banks accounted for approximately
10.2% of aggregate deposits and 11.3% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 4,883 branches accounted for 7.5%
of the total branch network of scheduled commercial banks in the country.
FOREIGN BANKS
At March 31, 1999, there were 44 foreign banks with 192 branches operating
in India. At September 30, 1999, foreign banks accounted for 6.0% of aggregate
deposits and 7.9% of outstanding gross bank credit of scheduled commercial
banks. As part of the liberalization process, the Reserve Bank of India has
permitted foreign banks to operate more freely, subject to requirements largely
similar to those imposed on domestic banks. This has led to increased foreign
banking activity.
The primary activity of most foreign banks in India has been in the
wholesale segment. However, in recent years, some of the larger foreign banks
have started to make consumer financing a larger part of their portfolios based
on the growth opportunities in this area in India. These banks are offering
products such as automobile finance, home loans, credit cards and household
consumer finance.
COOPERATIVE BANKS
Cooperative banks cater to the financial needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks provide
long-term credit for agriculture.
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FINANCIAL INSTITUTIONS
The financial institutions were established to provide medium-term and
long-term financial assistance to various industries for setting up new projects
and for the expansion and modernization of existing facilities. These
institutions provide fund-based and non-fund-based assistance to industry in the
form of loans, underwriting, direct subscription to shares, debentures and
guarantees. The primary financial institutions include ICICI Limited, the
Industrial Development Bank of India, IFCI Limited and the Industrial Investment
Bank of India.
The financial institutions were expected to play a critical role in Indian
industrial growth and accordingly, had access to concessional government
funding. However, in recent years, the operating environment of the financial
institutions has changed substantially. Although the initial role of these
institutions was largely limited to providing a channel for government funding
to industry, the reform process has required them to expand the scope of their
business activities. Their new activities include:
- fee-based activities like investment banking and advisory services; and
- short-term lending activity including issuing corporate finance and
working capital loans.
In addition, there are three other investment institutions at the national
level, Life Insurance Corporation of India, General Insurance Corporation of
India and its subsidiaries and Unit Trust of India, which also provide long-term
financial assistance to the industrial sector.
NON-BANK FINANCE COMPANIES
There are over 10,000 non-bank finance companies in India, mostly in the
private sector. All non-bank finance companies are required to register with the
Reserve Bank of India. The non-bank finance companies may be categorized into
entities which take public deposits and those which do not. The companies which
accept public deposits are subject to strict supervision and capital adequacy
requirements of the Reserve Bank of India.
The scope and activities of non-bank finance companies have grown
significantly over the years. The primary activities of the non-bank finance
companies are consumer credit, including automobile finance, home finance and
consumer durable products finance, wholesale finance products to small and
medium-sized companies such as bills discounting, and fee-based services such as
investment banking and underwriting.
Over the last few years, certain non-bank finance companies have defaulted
to investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are pending.
HOUSING FINANCE COMPANIES
Housing finance companies form a distinct sub-group of the non-bank finance
companies. As a result of the various incentives given to investing in the
housing sector by the government in recent years, the scope of this business has
grown substantially. Housing Development Finance Corporation Limited is a
premier institution providing housing finance in India. In addition, insurance
institutions like Life Insurance Corporation of India and several commercial
banks have also established housing finance subsidiaries. National Housing Bank
and Housing and Urban Development Corporation Limited are the two
government-controlled financial institutions created to improve the availability
of housing finance in India.
OTHER FINANCIAL INSTITUTIONS
SPECIALIZED FINANCIAL INSTITUTIONS
In addition to the long-term lending financial institutions, there are
various specialized financial institutions which cater to the specific needs of
different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, the Small Industries Development Bank
of India, ICICI Venture Funds Management Company Limited, Risk Capital and
Technology Finance Corporation Limited, Tourism Finance Corporation of India
Limited, Power Finance Corporation Limited and the Infrastructure Development
Finance Corporation Limited.
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STATE LEVEL FINANCIAL INSTITUTIONS
State financial corporations operate at the state level and form an
integral part of the institutional financing system. State financial
corporations were set up to finance and promote small and medium-sized
enterprises. The state financial institutions are expected to achieve balanced
regional socio-economic growth by generating employment opportunities and
widening the ownership base of industry. At the state level, there are also
state industrial development corporations, which provide finance primarily to
medium-sized and large-sized enterprises.
IMPACT OF LIBERALIZATION ON THE INDIAN FINANCIAL SECTOR
Until 1991, the financial sector in India was heavily controlled and
commercial banks and long-term lending institutions, the two dominant financial
intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition.
The focus of commercial banks was primarily to mobilize household savings
through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, commercial banks provided a range of banking services to individuals
and business entities.
Long-term lending institutions were focused on the achievement of the
Indian government's various socio-economic objectives, including balanced
industrial growth and employment creation, especially in areas requiring
development.
However, since 1991, there have been comprehensive changes in the Indian
financial system. Various financial sector reforms, implemented since 1991, have
transformed the operating environment of the banks and long-term lending
institutions. In particular, the deregulation of interest rates, emergence of a
liberalized domestic capital market, and entry of new private sector banks,
along with the broadening of long-term lending institutions' product portfolios,
have progressively intensified the competition between banks and long-term
lending institutions.
All of these factors are leading to a gradual disappearance of the
traditional boundaries between banks and long-term lending institutions.
Long-term lending institutions now compete directly with banks in several areas
of business. At the same time, since 1992, the long-term lending institutions'
access to subsidized domestic sources of long-term funds has diminished and they
now primarily depend upon market borrowings. They do not have complete access to
retail savings and demand deposits and have certain restrictions on the short
maturity funds that they are able to raise from the market.
BANKING SECTOR REFORM
Most large banks in India were nationalized in 1969 and thereafter were
subject to a high degree of control until reform began in 1991. All of the major
reforms since 1991 are described below.
COMMITTEE ON THE FINANCIAL SYSTEM (NARASIMHAM COMMITTEE I)
The Committee on the Financial System (The Narasimham Committee-I) was set
up in August 1991 to recommend measures for reforming the financial sector. Many
of the recommendations made by the committee, which addressed organizational
issues, accounting practices and operating procedures, were implemented by the
government of India. The major recommendations that were implemented included
the following:
- With fiscal stabilization and the government increasingly resorting to
market borrowing to raise resources, the statutory liquidity ratio or
the proportion of the banks' net demand and time liabilities that were
required to be invested in government securities was reduced from 38.5%
in the pre-reform period to 25.0% in October 1997. This meant that the
significance of the statutory liquidity ratio shifted from being a major
instrument for financing the public sector in the pre-reform era to
becoming a prudential requirement;
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- Similarly, the cash reserve ratio or the proportion of the bank's net
demand and time liabilities that were required to be deposited with the
Reserve Bank of India was reduced from 15.0% in the pre-reform period to
9.5% in November 1997. At present, the level of cash reserve ratio to be
maintained by banks is at 9.0%.
- Special tribunals were created to resolve bad debt problems;
- Almost all restrictions on interest rates for deposits were removed.
Commercial banks were allowed to set their own level of interest rates
for all deposits except savings bank deposits;
- Substantial capital infusion to several state-owned banks was approved
in order to bring their capital adequacy closer to internationally
accepted standards. By the end of fiscal 1999, aggregate
recapitalization amounted to Rs. 204.5 billion. The stronger public
sector banks were given permission to issue equity to further increase
capital; and
- Banks were granted the freedom to open or close branches.
COMMITTEE ON BANKING SECTOR REFORM (NARASIMHAM COMMITTEE II)
The second Committee on Banking Sector Reform (Narasimham Committee II)
submitted its report in April 1998. The major recommendations of the committee
were as follows:
- Capital adequacy requirements should take into account market risk in
addition to credit risk. Accordingly, this committee suggested that
government securities and other approved securities should carry risk
weights;
- Risk weight on a government guaranteed advance should be the same as for
other advances;
- Foreign exchange open positions should carry a 100.0% risk weight;
- The minimum capital to risk assets ratio should be increased from 8.0%
to 10.0% and a general provision of 1.0% for standard assets should be
introduced;
- There should be stricter standards for asset classification;
- For resolution of non-performing assets, this committee proposed the
establishment of an asset reconstruction company. Alternatively, banks
in difficulty could issue Tier 2 bonds guaranteed by the government of
India and these bonds could be made eligible for statutory liquidity
ratio investments;
- The shareholdings of the government of India and the Reserve Bank of
India in public sector banks should be reduced;
- Banks should introduce risk management, asset-liability management and
efficient treasury management policies;
- Decisions to merge public sector banks should originate from the
management of the relevant banks, with the government of India as the
common shareholder playing a supportive role; and
- Mergers should not be seen as a means of bailing out weak banks. Rather,
weak banks should be strengthened by slowing down their expansion and
eliminating their high cost funds and borrowings.
The Reserve Bank of India accepted and began implementing many of these
recommendations in October 1998.
WORKING GROUP ON ROLE OF BANKS AND FINANCIAL INSTITUTIONS
In December 1997, the Reserve Bank of India created a working group under
the chairmanship of S. H. Khan to harmonize the role and operations of long-term
lending institutions and banks. In its report submitted in April 1998, the Khan
Working Group recommended that banks and long-term lending institutions
progressively move towards universal banking and encouraged the development of a
regulatory framework for this purpose.
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Based on the recommendations of the Khan Working Group and the Narasimham
Committee II, the Reserve Bank of India, in January 1999, issued a discussion
paper entitled "Harmonizing the Role and Operations of Development Financial
Institutions and Banks". The paper described the future of the financial system:
- The provision of diversified services both by banks and long-term
lending institutions should continue, subject to appropriate regulation
by the Reserve Bank of India;
- Ultimately there should be only banks and restructured non-bank finance
companies;
- The special role of long-term lending institutions being noted, a
transitional path was envisioned for them to become either full-fledged
non-bank finance companies or banks. This transitory arrangement should
be worked out in consultation with the Reserve Bank of India;
- If a long-term lending institution chooses to provide commercial banking
services directly, permission to create a 100.0% owned banking
subsidiary would be considered by the Reserve Bank of India;
- A corporate form of organization under the Companies Act was recommended
to provide the financial intermediaries with the necessary flexibility
for mergers and acquisitions and the diversification to meet the needs
of the evolving situation;
- Any conglomerate in which a bank is present should be subject to
supervision and regulation on a consolidated basis; and Supervisory
functions should be isolated and brought under a consistent supervisory
framework; and
- Ownership of financial intermediaries should be transferred from the
Reserve Bank of India to the government of India. This would help ensure
that the Reserve Bank of India focused on its supervisory and regulatory
functions.
RECENT STRUCTURAL REFORMS
LEGISLATIVE FRAMEWORK FOR RECOVERY OF DEBTS DUE TO BANKS
Following the recommendations of the Narasimham Committee -- I, the
Recovery of Debts due to Banks and Financial Institutions Act, 1993 was enacted.
The purpose of this legislation is to provide for the establishment of tribunal
for speedy resolution of litigation and recovery of debts owed to banks of
financial institutions. This act creates tribunals before which the banks for
the financial institutions can file a suit for recovery of the amounts due to
them. However, if a scheme of reconstruction is pending before the Board for
Industrial and Financial Reconstruction, under the Sick Industrial Companies
(Special Provision) Act, 1985, no proceeding for recovery can be initiated or
continued before the tribunals.
As part of their effort to continue bank reform, the Reserve Bank of India
announced a series of measures in the credit policy for fiscal 1999 and fiscal
2000 aimed at deregulating and strengthening the financial system.
CREDIT POLICY FOR FISCAL 1999
In the monetary and credit policy for fiscal 1999, the following major
changes regarding banks were announced:
- The minimum maturity of term deposits was reduced from 30 days to 15
days; and
- Differential interest rates were permitted on term deposits of different
sizes, but of the same maturity. However, the lending rates for loans
below Rs. 200,000 were not to exceed the prime lending rate.
The major changes regarding banks and long-term lending institutions
announced in the mid-term review of the monetary and credit policy for fiscal
1999 included:
- Regulations were tightened to require provisioning for investment in
government securities and government-guaranteed loans and for general
provisioning for standard assets;
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- Effective from fiscal 2000, risk weights of 2.5% for central government
securities and other approved securities and 20.0% for advances
guaranteed by state governments which remained in default were
stipulated;
- Effective from fiscal 1999, foreign exchange open positions carry a
100.0% risk weight;
- Effective from fiscal 2000, provisioning of a minimum of 0.25% will be
introduced for standard assets;
- Minimum capital to risk assets ratio for banks will be raised from 8.0%
to 9.0% by fiscal 2000; and
- The period for classifying assets in the sub-standard category as
doubtful will be reduced from 24 months to 18 months by March 31, 2001.
CREDIT POLICY FOR FISCAL 2000
In the monetary and credit policy for fiscal 2000, the Reserve Bank of
India reduced the cash reserve ratio to 10.0%. In addition, several structural
reform measures in the banking sector were introduced including:
- the introduction of differential prime lending rates for various
maturities;
- permission for banks to provide fixed rate loans;
- permission for long-term lending institutions to enter the repo market
for short-term liquidity management before making the call-money market
a purely inter-bank market; and
- the introduction of a cap on the subscription to Tier 2 bonds of a
financial intermediary by another financial intermediary.
The mid-term review of the monetary and credit policy for fiscal 2000
introduced the following major changes applicable to the financial sector:
- The cash reserve ratio has been reduced from 10.0% to 9.0% for banks;
- A market risk weight of 2.5% has been introduced in respect of all bank
investments in government securities (on other bank investments also
from fiscal 2001);
- The exposure limit in respect of a single borrower has been reduced from
25.0% to 20.0% of the capital funds of banks and financial institutions;
and
- Money market mutual funds, which previously were regulated by the
Reserve Bank of India, have now been brought under the supervision and
regulation of the Securities and Exchange Board of India.
RECOMMENDATIONS OF THE WORKING GROUP ON RESTRUCTURING WEAK PUBLIC SECTOR
BANKS
The Reserve Bank of India constituted a working group on restructuring weak
public sector banks which submitted its report in October 1999. The group has
suggested a restructuring program which covers the following:
- operational restructuring involving
-- changes in the method of operations;
-- adoption of modern technology;
-- resolution of the problem of high non-performing loans; and
-- reduction in cost of operations;
- organizational restructuring aimed at improved governance and increased
management involvement and efficiency;
- financial restructuring including the investment of funds by the
government on fulfillment of certain conditions; and
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- restructuring providing for legal changes and institution building for
supporting the restructuring process.
WORKING GROUP TO REVIEW DEPOSIT INSURANCE IN INDIA
The working group constituted by the Reserve Bank of India to review the
role of deposit insurance in India submitted its report in October 1999. The
group has recommended changes with respect to the following in the existing
system of deposit coverage:
- institutions to be brought within the ambit of deposit insurance;
- regulatory systems to be set up;
- introduction of a risk-based premium;
- parameters for the assessment of risk; and
- parameters for the capital of a deposit insurance agency.
The Reserve Bank of India has released the report for public discussion.
REFORMS OF THE NON-BANK FINANCE COMPANIES
The standards relating to income recognition, provisioning and capital
adequacy were prescribed for non-bank finance companies in June 1994. The
registered non-bank finance companies were required to achieve a minimum capital
adequacy of 6.0% by March 31, 1995 and 8.0% by March 31, 1996 and to obtain a
minimum credit rating. To encourage the companies complying with the regulatory
framework, the Reserve Bank of India announced in July 1996 certain
liberalization measures under which the non-bank finance companies registered
with it and complying with the prudential norms and credit rating requirements
were granted freedom from the ceiling on interest rates on deposits and amount
of deposits. A new set of regulatory measures were announced by the Reserve Bank
of India in January 1998. The Reserve Bank of India has stipulated a cap of
16.0% on interest rates on the deposits raised from the public by the non-bank
finance companies.
Efforts have also been made to integrate non-bank finance companies into
the mainstream financial sector. The first phase of this integration covered
measures relating to registrations and standards. These include requiring
non-bank finance companies to register and to have minimum net owned funds of
Rs. 2.5 million. Other measures introduced include requiring non-bank finance
companies to maintain a certain percentage of liquid assets and to create a
reserve fund. The percentage of liquid assets to be maintained by non-bank
finance companies has been revised uniformly upwards and beginning in April
1999, 15.0% of public deposits must be maintained.
The focus of supervision has now shifted to non-bank finance companies
accepting public deposits. This is because these companies will be subject to
deposit regulations and standards. A task force on non-bank finance companies
set up by the government of India submitted its report in October 1998, and
recommended several steps to rationalize the regulation of non-bank finance
companies. Accepting these recommendations, Reserve Bank of India issued new
guidelines for non-bank finance companies, which were as follows:
- A minimum net owned fund of Rs. 2.5 million is mandatory before existing
non-bank finance companies may accept public deposits;
- A minimum investment grade rating is compulsory for loan and investment
companies accepting public deposits, even if they have the minimum net
owned funds;
- Permission to accept public deposits was also linked to the level of
capital to risk assets ratio. Different capital to risk assets ratio
levels for non-bank finance companies with different ratings were
specified; and
- Non-bank finance companies were advised to restrict their investments in
real estate to 10.0% of their net owned funds.
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Recently, in the Reserve Bank of India's Monetary and Credit Policy for
fiscal 2000, the Reserve Bank of India stipulated a minimum capital base of Rs.
20 million for all new non-bank finance companies.
REGULATIONS REVIEW AUTHORITY
In March 1999, the Reserve Bank of India set up a Regulations Review
Authority to provide an opportunity to the public at large to seek justification
for and suggest deletion or modification of any regulation, circular or return
issued, or required by the Reserve Bank of India. This authority is neither a
forum for grievance redressal nor a policy-making forum. This authority will,
however, convey its views on an application to the relevant department of the
Reserve Bank of India.
Based on the recommendations of this authority, some of the existing
regulations may come under review in course of time.
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SUPERVISION AND REGULATION
The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important legislations include the Reserve Bank of India
Act, the Negotiable Instruments Act and the Banker's Books Evidence Act.
Additionally, the Reserve Bank of India, from time to time, issues guidelines,
to be followed by the banks.
RESERVE BANK OF INDIA REGULATIONS
Commercial banks in India are required under the Banking Regulation Act to
obtain a license from the Reserve Bank of India to carry on banking business in
India. Before granting the license, the Reserve Bank of India must be satisfied
that certain conditions are complied with, including (i) that the bank has the
ability to pay its present and future depositors in full as their claims accrue;
(ii) that the affairs of the bank will not be or are not likely to be conducted
in a manner detrimental to the interests of present or future depositors; (iii)
that the bank has adequate capital and earnings prospects; and (iv) that the
public interest will be served if such license is granted to the bank. The
Reserve Bank of India can cancel the license if the bank fails to meet the above
conditions or if the bank ceases to carry on banking operations in India.
We, being licensed as a banking company, are regulated and supervised by
the Reserve Bank of India. The Reserve Bank of India requires us to furnish
statements, information and certain details relating to our business. It has
issued guidelines for commercial banks on recognition of income, assets,
maintenance of capital adequacy and provisioning for non-performing assets. The
Reserve Bank of India has set up a Board for Financial Supervision, under the
chairmanship of the Governor of the Reserve Bank of India. This Board is
assisted by the Department of Financial Supervision of the Reserve Bank of India
in supervising commercial banks and financial institutions. The appointment of
the auditors of the banks is subject to the approval of the Reserve Bank of
India. The Reserve Bank of India can direct a special audit in the interest of
the depositors or in the public interest.
REGULATIONS RELATING TO THE OPENING OF BRANCHES
Banks are required to obtain licenses from the Reserve Bank of India to
open new branches. Permission is granted based on factors such as the financial
condition and history of the company, its management, adequacy of capital
structure and earning prospects and the public interest. The Reserve Bank of
India may cancel the license for isolations of the conditions under which its
granted. Under the banking license granted to us by the Reserve Bank of India,
we are required to have at least 25.0% of our branches located in rural and
semi-urban areas. A rural area is defined as a center with a population of less
than 10,000. A semi-urban area is defined as a center with population of greater
than 10,000 but less than 100,000. These population figures relate to the 1991
census conducted by the government of India.
CAPITAL ADEQUACY REQUIREMENTS
The Reserve Bank of India has laid down minimum capital adequacy standards
for banks based on the guidelines of the Basle Committee on Banking Regulations
and Supervisory Practices, 1988. Under these guidelines, we are required to
maintain a minimum ratio of capital to risk adjusted assets and off-balance
sheet items of 8.0%, at least half of which must be Tier 1 capital. The Reserve
Bank of India, in its credit policy announced in October 1998, has proposed to
increase the minimum capital adequacy ratio to 9.0% effective March 31, 2000.
The total capital of a banking company is classified into Tier 1 and Tier 2
capital. Tier 1 capital, the core capital, provides the most permanent and
readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves and
capital reserve in terms of Indian Income Tax Act as reduced by equity
investments in subsidiaries, intangible assets, gap in provisioning and losses
in the current period and those brought forward from the previous period.
Tier 2 capital consists of undisclosed reserves, revaluation reserves (at a
discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of weighted risk assets), hybrid debt capital
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instruments (which combine certain features of both equity and debt securities)
and subordinated debt and redeemable cumulative non-convertible preferred equity
with an initial maturity of not less than five years. Any subordinated debt is
subject to progressive discounts each year for inclusion in Tier 2 capital and
total subordinated debt considered as Tier 2 capital cannot exceed 50.0% of Tier
1 capital. A bank's investment in Tier 2 bonds issued by other banks is subject
to a ceiling of 10.0% of the bank's total capital. Tier 2 capital cannot exceed
Tier 1 capital. The Banking Regulation Act does not allow banks established on
or after January 15, 1937 to issue preferred equity.
Risk adjusted assets and off-balance sheet items considered for determining
the capital adequacy ratio are the risk weighted total of specified funded and
non-funded exposures. Degrees of credit risk expressed as percentage weighting
have been assigned to various balance sheet asset items and conversion factors
to off-balance sheet items. The value of each item is multiplied by the relevant
weight or conversion factor to produce risk-adjusted values of assets and
off-balance-sheet items. Guarantees and documentary credits are treated as
similar to funded exposure and are subject to similar risk weight. All foreign
exchange open position limits of the bank carry a 100.0% risk weight. Capital
requirements have also been prescribed for open foreign currency exposures and
open positions in gold. Starting March 31, 2000, investment in government and
approved securities will also be assigned a risk weight for fluctuation in
prices. The aggregate risk weighted assets are taken into account for
determining the capital adequacy ratio.
LOAN LOSS PROVISIONS AND NON-PERFORMING ASSETS
In March 1994, the Reserve Bank of India issued formal guidelines on
recognition of income, classification of asset, provisioning against assets and
valuation of investments applicable to banks, which are revised from time to
time. These guidelines are applied for the calculation of non-performing assets
under Indian GAAP. The discussion of asset quality in this prospectus is under
US GAAP and the US GAAP standards applied are set forth in "Business -- Risk
Management -- Loan Portfolio."
The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to our loans, debentures, lease assets and
bills, are set forth below.
NON-PERFORMING ASSETS
A non-performing asset is an asset in respect of which any amount of
interest or principal has remained past due for more than two quarters. In
particular, loans are not classified as non-performing until the borrower has
missed two interest payments (180 days) or two principal payments (180 days).
Interest in respect of non-performing assets is not recognized or credited to
the income account unless collected.
ASSET CLASSIFICATION
Assets are classified as described below:
- Standard Assets. Assets that do not have any problems or do not carry
more than normal risk attached to the business.
- Sub-Standard Assets. Assets that are non-performing assets for a period
not exceeding two years (18 months by March 31, 2001).
- Doubtful Assets. Assets that are non-performing assets for more than
two years and have not been written off, either wholly or partially (18
months by March 31, 2001)
- Loss Assets. Assets that are considered uncollectible and identified as
a loss by us, the Reserve Bank of India or our external auditors.
Renegotiated or rescheduled loans must have no past due amounts for one
year after renegotiation or rescheduling for the loan to be upgraded.
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PROVISIONING AND WRITE-OFFS
Provisions are based on guidelines specific to the classification of the
assets. The following guidelines apply to the various asset classifications:
- Standard Assets. No provision required until fiscal 1999. From fiscal
2000, a general provision of 0.25% is required.
- Sub-Standard Assets. A general provision of 10.0% is required.
- Doubtful Assets. A 100.0% write-off is required to be taken against the
unsecured portion of the doubtful asset and charged against income. The
value assigned to the collateral securing a loan is the amount reflected
on the borrower's books or the realizable value determined by third
party appraisers. In cases where there is a secured portion of the
asset, depending upon the period for which the asset remains doubtful, a
20.0% to 50.0% provision is required to be made against the secured
asset as follows:
-- Up to one year: 20.0% provision
-- One to three years: 30.0% provision
-- More than three years: 50.0% provision
- Loss Assets. The entire asset is required to be written off or provided
for.
While the provisions as indicated above are mandatory, a higher provision
in a loan account would be required if the auditors considered it necessary.
REGULATIONS RELATING TO MAKING LOANS
The provisions of the Banking Regulation Act govern making loans by banks
in India. The Reserve Bank of India issues directions covering the loan
activities of banks. Some of the major guidelines of Reserve Bank of India,
which are now in effect, are as follows:
- The Reserve Bank of India has prescribed norms for bank lending to
non-bank financial companies.
- Banks are free to determine their own lending rates but each bank must
declare its Prime Lending Rate as approved by the board of directors.
Prime lending rate is the minimum rate of interest charged by banks on
advances of over Rs. 200,000. Separate Prime Lending Rates can be fixed
for short-term and long-term credit. Each bank should also indicate the
maximum spread over the Prime Lending Rate for all credit exposures
other than consumer credit. The interest charged by banks on advances up
to Rs. 200,000 to any one entity (other than most personal banking
loans) must not exceed the Prime Lending Rate. Interest rates in certain
categories of advances are regulated by the Reserve Bank of India.
The Reserve Bank of India, however, does not require interest rates to be
linked to the bank's Prime Lending Rate in respect of the following
categories:
-- loans covered by refinance scheme of financial institutions;
-- interest rates on bank lending to intermediary agencies including
housing finance intermediary agencies;
-- bill discounting by banks; and advances or overdrafts against domestic
and non-resident deposits.
- With respect to cash credit facilities (revolving asset-backed overdraft
facilities for meeting working capital needs), up to 80.0% of the
facility can be in the form of a demand loan.
- Penalty interest represents additional interest charged over and above
the base rate of interest on certain events, including default in the
repayment of loans. Penalty interest is not chargeable for loans up to
Rs. 25,000. For loans over Rs. 25,000, penalty interest cannot exceed
2.0%.
There are guidelines on loans against equity shares in respect of amount,
margin and purpose.
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DIRECTED LENDING
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend a minimum of 40.0% of their net bank credit (total domestic loans less
marketable debt instruments and certain exemptions permitted by the Reserve Bank
of India from time to time. Presently specified categories of deposits from
non-resident Indians are exempted) to certain specified sectors called priority
sectors. Priority sectors include small-scale industries, the agricultural
sector, food and agro-based industries, small business enterprises and weaker
sections of society.
The Reserve Bank of India also has set out the minimum percentage of net
bank credit that banks may direct to the priority sectors. The minimum
percentage of credit to agriculture sector is 18.0% of which at least 25% should
be directed towards indirect agriculture. The balance can be lent to the
following:
- Credit to small scale industrial units which are entities engaged in
manufacturing, processing and providing services and whose investment in
plant and machinery does not exceed Rs. 10 million;
- Credit to small businesses including small road and water transport
operators, retail traders and professional and other self employed
persons;
- Educational and other loans to the weaker sections of society; and
- Direct home loans up to Rs. 1 million disbursed in urban and
metropolitan areas and investment in bonds of National Housing Bank and
Housing and Urban Development Corporation exclusively for the financing
of housing;
Any shortfall in the amount required to be lent to the priority sectors may
be required to be deposited with developmental banks like National Bank for
Agriculture and Rural Development and Small Industries Development Bank of
India. These deposits can be for a period of one year or five years and
presently carry interest at 8.0% per annum and 11.5% per annum, respectively.
The Reserve Bank of India requires banks to lend up to 3.0% of our
incremental deposits in the previous fiscal year towards housing finance. This
can be in the form of home loans to individuals or subscription to the
debentures and bonds of National Housing Bank and housing development
institutions recognized by the government of India.
Export Credit
The Reserve Bank of India also requires us to make loans to exporters at
concessional rates of interest. This enables exporters to have access to an
internationally competitive financing option. Pursuant to existing guidelines,
12.0% of our net bank credit is required to be in the form of export credit. We
provide export credit for pre-shipment and post-shipment requirements of
exporter borrowers in rupees and foreign currencies.
REGULATION RELATING TO BRIDGE LOANS
Banks may consider approval of bridge loan or interim finance for a maximum
period of four months against commitment made by financial institutions or other
banks only in cases, where the lending institution faces temporary liquidity
constraint. These loans are subject to conditions specified by the Reserve Bank
of India.
- The bank extending bridge loan or interim finance must obtain prior
approval of other banks and financial institutions, which have approved
the term loans; and
- The approving bank must obtain a commitment from other banks and
financial institutions that the latter would directly remit the amount
of term loan to it at the time of disbursement.
CREDIT EXPOSURE LIMITS
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks in respect of their lending to individual borrowers
and borrower groups.
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The limits set by the Reserve Bank of India are as follows:
- exposure to individual borrowers must not exceed 25.0% of capital funds
of the bank (20.0% by April 1, 2000);
- exposure to a borrower group must not exceed 50.0% of capital funds of
the bank. In the case of infrastructure projects, such as power,
telecommunications, road and port projects, an additional exposure of
10.0% of capital funds is allowed; and
- exposure to individuals against shares or debentures cannot exceed Rs. 2
million if the shares or debentures are in book-entry form and Rs. 1
million if they are in physical form.
Exposure is the aggregate of:
- all approved fund-based limits;
- investments in shares, debentures and commercial papers of companies and
public sector undertakings; and
- 50.0% of approved non-fund-based limits, underwriting and similar
commitments.
Capital funds include paid-up capital and free reserves excluding
revaluation reserves pursuant to accounts audited and published under Indian
GAAP.
Our loan exposures to individual borrowers and borrower groups are within
the above limits, except in some cases where we have obtained the approval of
Reserve Bank of India for exceeding the above limits.
To ensure that exposures are evenly spread, the Reserve Bank of India
requires banks to fix internal limits of exposure to specific sectors. These
limits are subject to periodical review by the banks. We have fixed a ceiling of
15.0% on our exposure to any one industry and monitor our exposures accordingly.
Where financial fundamentals and sponsors' backing are strong, our exposures
have exceeded these limits. However, these exposures are within the individual
and borrower group limits specified by the Reserve Bank of India.
REGULATIONS RELATING TO INVESTMENTS
There are no limits on the amount of investments by banks in
non-convertible debt instruments. However, credit exposure limits specified by
the Reserve Bank of India in respect of a bank's lending to individual borrowers
and borrower groups apply in respect of these investments. The Reserve Bank of
India requires that the net incremental investment by banks in equity securities
in a fiscal year cannot exceed 5.0% of the incremental deposits in the previous
fiscal year. Investments in debentures convertible into equity and equity
related mutual funds are included in this 5.0% limit. In April 1999, the Reserve
Bank of India, in its monetary and credit policy stated that the investment by a
bank in subordinated debt instruments, representing Tier 2 capital, issued by
other banks and financial institutions should not exceed 10.0% of the investing
bank's capital including Tier 2 capital and free reserves. The Reserve Bank of
India has permitted banks to comply with this requirement by March 31, 2000.
RESTRICTIONS ON INVESTMENTS IN A SINGLE COMPANY
No bank may hold shares in any company exceeding 30.0% of the paid up share
capital of that company or 30.0% of its own paid up share capital and reserves,
whichever is less.
LIMIT ON TRANSACTIONS THROUGH INDIVIDUAL BROKERS
The guidelines issued by the Reserve Bank of India require banks to empanel
brokers for transactions in securities. The guidelines also require that a
disproportionate part of the bank's business should not be transacted only
through one broker or a few brokers. The Reserve Bank of India specifies that
not more than 5.0% of the total transactions through empanelled brokers can be
transacted through one broker. If for any reason this limit is breached, the
Reserve Bank of India has stipulated that the board of directors of the bank
concerned should ratify such action.
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PROHIBITION ON SHORT SELLING
The Reserve Bank of India does not permit short selling of securities by
banks.
VALUATION OF INVESTMENTS
In terms of the Reserve Bank of India guidelines, new private sector banks
like us are required to mark-to-market their entire investment portfolio each
year. Securities, for which market quotes are not available, are valued as
follows:
- fixed income securities are valued on the basis of yield to maturity of
or linked to government of India securities except that debentures
issued by corporations are valued at cost if interest is serviced
regularly and treated as non-performing loans if not so serviced;
- equity shares are valued at book value as per the latest balance sheet
of the investee company except that the holding is valued at Rupee. 1 if
the balance sheet is not available; and
- mutual funds are valued at their latest net asset value declared by the
fund.
Short-term instruments like treasury bills and commercial paper are to be
valued at cost.
A committee of the Reserve Bank of India has proposed new guidelines for
the valuation of investments from the next fiscal year. These guidelines, if
implemented by the Reserve Bank of India, would require banks to classify their
entire portfolio of approved securities under three categories namely "held for
trading", "available for sale" and "permanent". The permanent component would be
required not to exceed 25.0% of the total investment in approved securities.
Securities held in the "permanent" category would have to be valued at cost and
any premium paid over face value would be amortized over the period of maturity
of the instrument. The other two components would have to be marked to market on
the basis of the bank's own yield curve subject to the satisfaction of auditors.
Any gain or loss on the revaluation of investments in the "held for trading"
category would have to be recognized in the income account. Depreciation should
be recognized in the income account. However, the appreciation, being
unrealized, would be appropriated to an investment fluctuation reserve through
the income account. The gain or loss on revaluation of investments in the
"available for sale" category would have to be taken to the investment
fluctuation reserve account without routing through the income account. If the
balance in the reserve account is insufficient to provide for any loss on
revaluation, provision for such loss would have to be made in the income
account. Banks would be able to shift investments from one category to another
category only with the approval of their board of directors.
REGULATIONS RELATING TO DEPOSITS
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on fixed deposits. However, no bank is permitted to
pay interest on current account deposits. Further, banks can pay interest of
4.5% per annum on savings deposits. In respect of savings and time deposits
accepted from employees, we are permitted by the Reserve Bank of India to pay an
additional interest of 1.0% over the interest payable on deposits from the
public.
Domestic time deposits can have a minimum maturity of 15 days and maximum
maturity of 10 years. Time deposits from non-resident Indians denominated in
foreign currency can have a minimum maturity of one year and maximum maturity of
three years. Rupee time deposits from non-resident Indians can have a minimum
maturity of six months and maximum maturity of three years.
Starting April 1998, the Reserve Bank of India has permitted banks the
flexibility to offer varying rates of interests on domestic deposits of the same
maturity subject to the following conditions:
- Time deposits are of Rs. 1.5 million and above; and
- Interest is paid in accordance with the schedule of interest rates
disclosed in advance by the bank and not pursuant to negotiation between
the depositor and the bank.
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INSURANCE OF DEPOSITS
Demand and time deposits of up to Rs. 100,000 (US$2,300) accepted by Indian
banks have to be mandatorily insured with the Deposit Insurance and Credit
Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of India.
Banks are required to pay the insurance premium for the eligible amount to the
Deposit Insurance and Credit Guarantee Corporation on a semi-annual basis. The
cost of the insurance premium cannot be passed on to the customer.
REGULATIONS RELATING TO KNOWING THE CUSTOMER
The Reserve Bank of India requires banks to open accounts only after
verifying the identity of customers as to their name, residence and other
details to ensure that the account is being opened by the customer in his own
name. To open an account, a prospective customer requires an introduction by:
- an existing customer who has had his own account with the bank for at
least six months duration and has satisfactorily conducted that account;
or
- a well known person in the local area where the prospective customer is
residing
If the prospective customer does not have an introducer, documents of the
prospective customer, like his identity card, passport or details of bank
accounts with other banks, are required to be submitted.
LEGAL RESERVE REQUIREMENTS
CASH RESERVE RATIO
A banking company like us is required to maintain a specified percentage of
its demand and time liabilities by way of a balance in a current account with
the Reserve Bank of India. This is to maintain the solvency of the banking
system. In October 1999, the Reserve Bank of India, in its midterm review of
credit and monetary policy, fixed the cash reserve ratio at 9.0%. For this
purpose, the following liabilities are not considered:
- inter-bank liabilities;
- liabilities to primary dealers;
- repatriable and non-repatriable deposits from non-resident Indians;
- foreign currency deposits from non-resident Indians; and
- refinance from Reserve Bank of India and other institutions permitted to
offer refinance to banks.
The Reserve Bank of India pays no interest on the cash reserves up to 3.0%
of the demand and time liabilities and pays 4.0% on the balance.
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not fall below 85.0% of the required cash reserve
ratio on any particular day except the last business date of the fortnight. On
the last business day of the fortnight, no restrictions apply.
Ever since the Reserve Bank of India introduced the financial sector
reforms, the goal has been to reduce the cash reserve ratio. It has been
indicated by the Reserve Bank of India that the ratio would ultimately be
reduced to the statutory minimum of 3.0%.
STATUTORY LIQUIDITY RATIO
In addition to the cash reserve ratio, a banking company like us is
required to maintain in India a specified percentage of its total demand and
time liabilities by way of liquid assets like cash, gold or approved securities,
such as government of India securities and state government securities. This is
to maintain liquidity in the banking system. The percentage of this liquidity
ratio is fixed by the Reserve Bank of India from time to time. Currently, the
Reserve Bank of India requires banks to maintain a liquidity ratio of 25.0% on
its total demand and time liabilities. For this purpose the following
liabilities are not considered:
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- any advance taken from the Reserve Bank of India or from institutions
notified in this regard; and
- interbank liabilities to the extent of interbank assets.
REGULATIONS FOR ASSET LIABILITY MANAGEMENT
At present, Reserve Bank of India regulations for asset liability
management require banks to draw up two types of asset-liability gap statements
separately for rupee and for four major foreign currencies. These gap statements
are prepared by scheduling all assets and liabilities according to the stated or
anticipated re-pricing date, or maturity date. These statements have to be
submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank of
India has advised banks to actively monitor the difference in the amount of
assets and liabilities maturing or being re-priced in a particular period and
place internal prudential limits on the gaps in each time period, as a risk
control mechanism. Additionally, the Reserve Bank of India has asked banks to
manage their asset-liability structure such that the negative liquidity gap in
the 1-14 day and 15-28 day time periods does not exceed 20.0% of the cash
outflows in these time periods. The Reserve Bank of India intends to make this
20.0% limit on negative liquidity gaps mandatory with effect from April 1, 2000.
FOREIGN CURRENCY DEALERSHIP
Reserve Bank of India has granted us a full-fledged authorized dealers'
license to deal in foreign exchange through our designated branches. Under this
license, we have been granted permission to:
- engage in foreign exchange transactions in all currencies;
- open and maintain foreign currency accounts abroad;
- raise foreign currency and rupee denominated deposits from non resident
Indians;
- grant foreign currency loans to on-shore and off-shore corporations;
- open documentary credits;
- grant import and export loans;
- handle collection of bills, funds transfer services;
- issue guarantees; and
- enter into derivative transactions and risk management activities that
are incidental to our normal functions authorized under our
organizational documents.
Our foreign exchange operations are subject to the guidelines specified by
the Reserve Bank of India in the exchange control manual. As an authorized
dealer, we are required to enroll as a member of the Foreign Exchange Dealers
Association of India, which prescribes the ground rules relating to foreign
exchange business in India.
Authorized dealers like us are required to determine our limits on open
positions and maturity gaps in accordance with Reserve Bank of India guidelines
and these limits are approved by the Reserve Bank of India. At present, the
limit for our over-night open positions is Rs. 460 million. Further, we are
permitted to hedge foreign currency loan exposures of Indian corporations in the
form of interest rate swaps, currency swaps and forward rate agreements, subject
to certain conditions.
STATUTES GOVERNING FOREIGN EXCHANGE AND CROSS BORDER BUSINESS TRANSACTIONS
The foreign exchange and cross border transactions undertaken by banks are
subject to the provisions of Foreign Exchange Regulation Act. All branches
should monitor all non-resident accounts to prevent money laundering. These
transactions will be regulated by the Foreign Exchange Management Act and the
Prevention of Money Laundering Act, once they are put in force.
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REQUIREMENTS OF BANKING REGULATION ACT
PROHIBITED BUSINESS
The Banking Regulation Act specifies the business activities in which a
bank may engage. Business activities other than the specified activities are
prohibited to be undertaken by a bank.
RESERVE FUND
Any bank incorporated in India is required to create a reserve fund to
which not less than 20.0% of the profits of each year before dividends must be
transferred. If there is an appropriation from this account, the bank is
required to report the same to the Reserve Bank of India within 21 days,
explaining the circumstances leading to such appropriation.
RESTRICTIONS ON PAYMENT OF DIVIDEND
The Banking Regulation Act requires that a bank shall pay dividend on its
shares only after all its capitalized expenses (including preliminary expenses,
organization expenses, share selling commission, brokerage, amounts of losses
and any other item of expenditure not represented by tangible assets) have been
completely written off.
Prior approval of the Reserve Bank of India is required for a dividend
payment above 25.0% of par value of a company's shares or for an interim
dividend payment.
The government of India may, on recommendation of the Reserve Bank of
India, exempt a bank from requirements relating to its reserve fund and the
restrictions on dividend payment.
RESTRICTION ON SHARE CAPITAL AND VOTING RIGHTS
Banks can issue only ordinary shares. Banks incorporated before January
15, 1937 can also issue preferential shares. The Banking Regulation Act
specifies that no shareholder in a banking company can exercise voting rights on
poll in excess of 10.0% of total voting rights of all the shareholders of the
banking company.
RESTRICTION ON TRANSFER OF SHARES
Reserve Bank of India approval is required to obtain its approval before we
can register the transfer of shares for an individual or group which acquires
5.0% or more of our total paid up capital.
REGULATORY REPORTING AND EXAMINATION PROCEDURES
The Reserve Bank of India is empowered under the Banking Regulation Act to
inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, the banks are required to report to
the Reserve Bank of India on aspects such as:
- assets, liabilities and off-balance sheet exposures;
- the risk weighting of these exposures, the capital base and the capital
adequacy ratio;
- the unaudited operating results for each quarter;
- asset quality;
- concentration of exposures;
- connected and related lending and the profile of ownership, control and
management; and
- other prudential parameters.
The Reserve Bank of India also conducts periodical on-site inspections on
matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging from
one to three years. We have been subject to the on-site inspection by the
Reserve Bank of India at
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yearly intervals. The inspection report, along with the report on actions taken
by us, has to be placed before our board of directors. On approval by our board
of directors, we are required to submit the report on actions taken by us to the
Reserve Bank of India. The Reserve Bank of India also discusses the report with
our management team including our chief executive officer.
The Reserve Bank of India also conducts on-site supervision of our selected
branches with respect to their general operations and foreign exchange related
transactions.
PENALTIES
The Reserve Bank of India can impose penalties on banks and its employees
in case of infringement of regulations under the Banking Regulation Act. The
penalty can be a fixed amount or be related to the amount involved in any
contravention of the regulations. The penalty may also include imprisonment.
ASSETS TO BE MAINTAINED IN INDIA
Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and Reserve Bank of India approved
securities, even if the bills and the securities are held outside India) are not
less than 75.0% of its demand and time liabilities in India.
SECRECY OBLIGATIONS
Our obligations relating to maintaining secrecy arise out of common law
principles governing our relationship with our customers. We cannot disclose any
information to third parties except under clearly defined circumstances. The
following are the exceptions to this general rule:
- where disclosure is required to be made under any law;
- where there is an obligation to disclose to the public;
- where we need to disclose information in our interest; and
- where disclosure is made with the express or implied consent of the
customer.
We are required to comply with the above in furnishing any information to
any parties. We are also required to disclose information if ordered to do so by
a court The Reserve Bank of India may, in the public interest, publish the
information obtained from the bank. Under the provisions of the Banker's Books
Evidence Act, a copy of any entry in a bankers' book, such as ledgers, day
books, cash books and account books certified by an officer of the bank may be
treated as prima facie evidence of the transaction in any legal proceedings.
APPOINTMENT AND REMUNERATION OF OUR CHAIRMAN, MANAGING DIRECTOR AND OTHER
DIRECTORS
We require prior approval of the Reserve Bank of India to appoint our
chairman and managing director and any other directors and to fix their
remuneration. The Reserve Bank of India is empowered to remove such an appointee
on the grounds of public interest, interest of depositors or to ensure the
proper management of the bank. Further, the Reserve Bank of India may order
meetings of the bank's board of directors to discuss any matter in relation to
the bank, appoint observers to such meetings and in general may make such
changes to the management as it may deem necessary and can also order the
convening of a general meeting of the company to elect new directors.
SECURITIES AND EXCHANGE BOARD OF INDIA REGULATIONS AND GUIDELINES
The Securities and Exchange Board of India was established to protect the
interests of public investors in securities and to promote the development of,
and to regulate, the Indian securities market. We are subject to Securities and
Exchange Board of India regulations in respect of our activities as underwriters
and agents for collecting subscriptions to public offerings of securities made
by other companies. These regulations provide for registration with the
Securities and Exchange Board of India for each of these activities, the
functions, responsibilities and a code of conduct applicable for these
activities.
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EXCHANGE CONTROLS
RESTRICTIONS ON CONVERSION OF RUPEES
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign exchange
received on trade or current account at a market-determined rate and the
remaining 40.0% at the official rate. All importers were, however, required to
buy foreign exchange at the market rate except for certain specified priority
imports. In March 1993, the exchange rate was unified and allowed to float. In
February 1994 and again in August 1994, the Reserve Bank of India announced
relaxations in payment restrictions in the case of a number of transactions.
Since August 1994, the government of India has substantially complied with its
obligations owed to the IMF, under which India is committed to refrain from
using exchange restrictions on current international transactions as an
instrument in managing the balance of payments. Effective July 1995, the process
of current account convertibility was advanced by relaxing restrictions on
foreign exchange for various purposes, such as foreign travel and medical
treatment.
RESTRICTIONS ON SALE OF THE EQUITY SHARES UNDERLYING THE ADSS AND FOR
REPATRIATION OF SALE PROCEEDS
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the Reserve Bank of India is required for the sale of equity shares underlying
the ADSs (other than a sale on a stock exchange or in connection with an offer
made under the takeover regulations) by a non-resident of India to a resident of
India as well as for renunciation of rights to a resident of India. Further, the
depositary cannot accept deposits of outstanding equity shares and issue ADRs
evidencing ADSs representing such equity shares. Therefore, an investor in the
ADSs who surrenders ADSs and withdraws equity shares is not permitted
subsequently to deposit such equity shares and obtain ADSs. Nor would a holder
to whom such equity shares are transferred be permitted to deposit such equity
shares. Investors who seek to sell in India any equity shares (other than a sale
on a stock exchange or in connection with an offer made under the takeover
regulations) withdrawn from the depositary facility and to convert the rupee
proceeds from such sale into foreign currency and repatriate such foreign
currency from India will, subject to the foregoing, have to obtain Reserve Bank
of India approval for each such transaction.
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NATURE OF THE INDIAN SECURITIES TRADING MARKET
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from the
Securities and Exchange Board of India, the BSE and the NSE, and has not been
prepared or independently verified by us or the underwriters, or any of their
respective affiliates or advisors. This is the latest available information to
our knowledge.
MARKET PRICE INFORMATION
EQUITY SHARES
Our outstanding equity shares are listed and traded on the Calcutta, Delhi,
Madras and Vadodara Stock Exchanges, the BSE and the NSE. The equity shares were
first listed on the Vadodara Stock Exchange in 1997. The prices for equity
shares as quoted in the official list of each of the Indian stock exchanges are
in Indian Rupees. We have applied to list the ADSs, each representing two equity
shares, for quotation on the New York Stock Exchange. The equity shares
underlying the ADSs will be listed on each of these Indian stock exchanges
within six weeks of the offering.
The following table shows:
- the reported high and low closing prices quoted in rupees for the equity
shares on the NSE;
- the reported high and low closing prices for the equity shares,
translated into U.S. dollars, based on the noon buying rate on the last
date of each period presented; and
- the average trading volume for the equity shares on the NSE.
<TABLE>
<CAPTION>
AVERAGE DAILY
PRICE PER PRICE PER EQUITY
EQUITY SHARE(1) EQUITY SHARE SHARE TRADING
----------------------- -------------------- VOLUME(2)
HIGH LOW HIGH LOW -------------
---------- --------- -------- -------- (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FISCAL 1998
Third Quarter (from
September 29, 1997)......... Rs. 54.50 Rs. 35.00 US$ 1.39 US$ 0.89 Rs. 41.7
Fourth Quarter................ 52.25 36.40 1.32 0.92 10.1
Fiscal 1999
First Quarter................. 65.00 32.00 1.53 0.75 17.4
Second Quarter................ 44.00 32.10 1.04 0.76 3.6
Third Quarter................. 35.00 21.55 0.82 0.51 2.9
Fourth Quarter................ 33.60 20.75 0.79 0.49 6.1
Fiscal 2000
First Quarter................. 38.60 22.70 0.89 0.52 2.6
Second Quarter................ 45.45 32.00 1.04 0.73 3.4
Third Quarter................. 75.00 32.15 1.72 0.74 9.7
Fourth Quarter (through
March 15, 2000)............. 250.00 66.00 5.75 1.52 46.3
</TABLE>
- ---------------
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
(2) Data from the NSE. The average daily trading volumes reported on the BSE
and other stock exchanges may be different.
On March 16, 2000, the closing price of equity shares on the NSE was Rs.
203.95, equivalent to US$ 4.68 per equity share (US$ 1.00 per ADS on an imputed
basis) translated at the noon buying rate of Rs. 43.58 per US$ 1.00 on March 16,
2000.
At March 15, 2000, there were approximately 124,779 holders of record of
our equity shares, of which 19 had registered addresses in the United States and
held an aggregate of approximately 6,200 equity shares.
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THE INDIAN SECURITIES MARKET
India has a long history of organized securities trading. In 1875, the
first stock exchange was established in Mumbai.
STOCK EXCHANGE REGULATION
India's stock exchanges are regulated primarily by the Securities and
Exchange Board of India, as well as by the government of India acting through
the Ministry of Finance, Stock Exchange Division, under the Securities Contracts
(Regulation) Act, 1956 and the Securities Contracts (Regulation) Rules, 1957.
The Securities Contracts (Regulation) Rules regulate the recognition of stock
exchanges, the qualifications for membership and the manner in which contracts
are entered into and enforced between members.
The main objective of the Securities and Exchange Board of India, which was
established by the government of India in February 1992, is to promote the
development of and regulate the Indian securities markets and protect the
interests of investors. The Securities and Exchange Board of India may make or
amend an exchange's by-laws and rules, overrule an exchange's governing body and
withdraw recognition of an exchange. In the past, the Securities and Exchange
Board of India's regulation of market practices was limited. The Securities and
Exchange Board of India Act, 1992 granted the Securities and Exchange Board of
India powers to regulate the business of Indian securities markets, including
stock exchanges and other financial intermediaries, promote and monitor
self-regulatory organizations, prohibit fraudulent and unfair trade practices
and insider trading, and regulate substantial acquisitions of shares and
takeovers of companies. The Securities and Exchange Board of India has also
issued guidelines concerning minimum disclosure requirements by public
companies, rules and regulations concerning investor protection, insider
trading, substantial acquisitions of shares and takeovers of companies, buybacks
of securities, employee stock option schemes, stockbrokers, merchant bankers,
mutual funds, credit rating agencies and other capital market participants.
Recently, the Securities Contracts (Regulation) Act has been amended to
include derivatives of securities and instruments of collective investment in
the definition of "securities". This has been done with a view to develop and
regulate the markets for derivatives. Trading in derivatives is expected to
commence in the near future. The Securities and Exchange Board of India also set
up a committee for the review of Indian securities laws, which has proposed a
draft Securities Bill. The draft Securities Bill, if accepted, will result in a
substantial revision in the laws relating to securities in India. Recently, the
Indian Companies Act, 1956 was amended to introduce significant changes such as
allowing buyback of securities, issuance of sweat equity shares, making
accounting standards issued by the Institute of Chartered Accountants of India
mandatory and relaxing restrictions on inter-corporate investment and loans.
PUBLIC ISSUANCE OF SECURITIES
Under the Companies Act, a public offering of securities in India must
generally be made by means of a prospectus, which must contain information
specified in the Companies Act and be filed with the Registrar of Companies
having jurisdiction over the place where a company's registered office is
situated. A company's directors and promoters may be subject to civil and
criminal liability for misstatements in a prospectus. The Companies Act also
sets forth procedures for the acceptance of subscriptions and the allotment of
securities among subscribers and establishes maximum commission rates for the
sale of securities.
The Securities and Exchange Board of India has issued detailed guidelines
concerning disclosures by public companies and investor protection. Prior to the
repeal of certain rules in mid-1992, the Controller of Capital Issues of the
government of India regulated the prices at which companies could issue
securities. The Securities and Exchange Board of India guidelines now permit
existing listed companies to price freely their issues of securities, though the
pricing of initial public offerings is subject to certain restrictions. All new
issues governed by the Securities and Exchange Board of India guidelines are
conditional upon a minimum subscription requirement of 90.0% of the securities
being issued. However, such minimum subscription clause is not applicable to
Development Financial Institutions. In July 1996, Securities and Exchange Board
of India relaxed the foregoing minimum subscription requirement in the case of
"offer for sale" of securities, but introduced regulations which require that
there be a minimum of ten shareholders for every Rs. 100,000 (US$ 2,298) of the
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nominal value of shares offered to the public. In the case of public issues, the
requirement is for a minimum of five shareholders for every Rs. 100,000 (US$
2,298) of the nominal value of shares offered to the public. Promoters of
companies are required to retain a certain minimum certified holding of equity
share capital, which is subject to a lock-in for three years. No issuance of
bonus shares is permitted within 12 months of any public issue or rights issue.
Public limited companies are required under the Companies Act to prepare,
file with the Registrar of Companies and circulate to their shareholders audited
annual accounts, which comply with the Companies Act's disclosure requirements
and regulations governing their manner of presentation. In addition, a listed
company is subject to continuing disclosure requirements pursuant to the terms
of its listing agreement with the relevant stock exchange. The Securities and
Exchange Board of India has recently notified amendments to the listing
agreement tightening the continual disclosure standards by corporations.
Accordingly, companies are now required to publish unaudited financial
statements on a quarterly basis and are required to inform stock exchanges
immediately regarding any stock-price sensitive information.
LISTING
The listing of securities on a recognized Indian stock exchange is
regulated by the Securities Contract Rules.
Under the standard terms of stock exchange listing agreements, the
governing body of each stock exchange is empowered to suspend trading of or
dealing in a listed security for breach of the company's obligations under such
agreement, subject to the company receiving prior notice of the intent of the
exchange. A listed company can also be delisted after a notice period of six
months if the number of public shareholders falls below five for every Rs.
100,000 nominal value of shares offered to the public, the public shareholding
falls below 20.0% of the number of shares offered to the public or the listed
company fails to pay annual listing fees to the relevant stock exchange. The
Securities and Exchange Board of India has recently issued guidelines for
standardizing listing agreements and by-laws of stock exchanges in India. The
Securities and Exchange Board of India proposes to issue additional guidelines,
which set out basic listing standards for all stock exchanges in India. In the
event that a suspension of a company's securities continues for a period in
excess of three months, the company may appeal to the Securities and Exchange
Board of India to set aside the suspension. The Securities and Exchange Board of
India has the power to veto stock exchange decisions in this regard.
INDIAN STOCK EXCHANGES
There are 24 stock exchanges in India. At December 31, 1999, these stock
exchanges were served by over 9,000 brokers dispersed across India. Most of the
stock exchanges have their governing board for self-regulation.
It is estimated that the six major exchanges, the BSE, the stock exchanges
at Ahmedabad, Calcutta, Chennai and Delhi, and the NSE, account for more than
90.0% of the market capitalization of listed Indian companies. The BSE and the
NSE account for a majority of trading volumes of securities in India. The BSE
and NSE together hold a dominant position among the stock exchanges in terms of
number of listed companies, market capitalization and trading activity.
The Securities and Exchange Board of India had prescribed certain
guidelines for the pricing and reporting of negotiated deals. A negotiated deal
refers to a transaction executed at a price not determined through stock
exchange pricing and involving a value of not less than Rs. 2.5 million or a
volume of not less than 10,000 shares. Earlier, a negotiated deal had to be
reported to the stock exchange within 15 minutes from the time the trade was
negotiated or, if such transaction occurs after trading hours, on the next day
when the market opens.
However, for greater transparency, the Securities and Exchange Board of
India has decided that negotiated deals will not be permitted in the existing
manner and they have to be executed on the screens of the exchanges just like
any other normal trade.
There are generally no restrictions on price movements of any security on
any given day. However, to restrict abnormal price volatility, the Securities
and Exchange Board of India has instructed stock exchanges to apply daily
circuit breakers which do not allow transactions at prices different by more
than 8.0% of the previous closing price for shares quoted at Rs. 20 or more. The
Securities and Exchange Board of India has recently
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instructed stock exchanges to relax the circuit breakers by a further 4.0% after
half an hour from the time prices reach the limit of 8.0%. It has allowed stock
exchanges to fix circuit breakers for shares quoted at prices up to Rs. 20.
Further, margin requirements are also imposed by stock exchanges that are
required to be paid at rates fixed by the stock exchanges. The Indian stock
exchanges can also exercise the power to suspend trading during periods of
market volatility.
A settlement cycle is an account period for the securities traded on a
stock exchange. At the end of the period, obligations are settled, i.e., buyers
of securities pay for and receive securities while sellers give securities and
receive payment for them. The obligations are settled on a net basis, i.e., if
some security is both purchased and sold in the same settlement cycle then only
the net quantity of securities is delivered or received and the net amount of
funds paid or received. Typically, the length of the settlement period is five
business days. The Securities and Exchange Board of India has specified 10
shares that were to be settled by rolling settlement from January 10, 2000.
Under rolling settlement, the length of the settlement period is one day.
In December 1993, the Securities and Exchange Board of India announced a
ban on forward trading on the Ahmedabad, Calcutta and Delhi stock exchanges and
the BSE in order to contain excessive speculation, protect the interests of
investors and regulate the stock market. All transactions thereafter were
required to be for payment and delivery.
In October 1995, the Securities and Exchange Board of India announced the
introduction of a modified forward trading system to enable buyers and sellers
to defer the settlement of their obligations to the following settlement cycle.
This system began on the BSE in January 1996 for select shares. The new system
segregates trades into different categories, namely, carry-forward, delivery and
jobbing, with different identification numbers of the various trades. Other
features of the new system are: flat margins of 15.0%; compulsory online trading
(which means that only computerized exchanges will be allowed to use the
system); a maximum 90-day period for carry-over of transactions and capital
adequacy standards of 3.0% for individual brokers and 6.0% for corporate
brokers. The Securities and Exchange Board of India has appointed a committee to
recommend modalities for a carry forward mechanism under the rolling settlement.
Once the revised carry forward mechanism is approved, rolling settlement would
will be applicable also for shares in the carry forward list.
In 1992, the Securities and Exchange Board of India promulgated rules and
regulations that prescribe conditions for registration of stockbrokers. A
stockbroker may not buy, sell or deal in securities except pursuant to a
certificate granted by the Securities and Exchange Board of India. The
regulations also prescribe a broker code of conduct and rules for the fair
treatment of investors by brokers, the procedures for registration, the payment
of registration fees, maintenance of appropriate books and records and the right
of inspection of the books of the stockbrokers by the Securities and Exchange
Board of India. Broker liability in cases of default extends to suspension or
cancellation of the broker's registration. The Securities and Exchange Board of
India has issued registration certificates to over 9,000 stockbrokers who are
members of various stock exchanges in India. Before these regulations,
stockbrokers were required to be registered only with the stock exchanges of
which they were members. The Securities and Exchange Board of India regulations
introduced the concept of dual registration of stockbrokers with the Securities
and Exchange Board of India and the stock exchanges, and brought the brokers
under regulation for the first time.
The Securities and Exchange Board of India has enforcement powers over
secondary market participants for violation of any provisions of the Securities
and Exchange Board of India Act, 1992, or breach of the rules and regulations of
the Securities and Exchange Board of India. The Securities and Exchange Board of
India may also take enforcement actions for violations of the Securities
Contract Act or rules made thereunder and rules, regulations and by-laws of the
stock exchanges.
NSE
In April 1993, the government of India gave the final clearance for the
setting up of the NSE at Mumbai. The NSE was established by financial
institutions and banks, with the Industrial Development Bank of India as the
coordinating agency. The NSE serves as a national exchange, providing nationwide
online satellite-linked screen-based trading facilities with market makers and
electronic clearing and settlement. The principal aim of the NSE is to enable
investors to buy or sell securities from anywhere in India, serving as a
national market for
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securities, including government securities, debentures, public sector bonds and
units. The NSE does not categorize shares into groups. Deliveries for trades
executed "on-market" are exchanged through the National Securities Clearing
Corporation Limited. Screen-based paperless trading and settlement is possible
through the NSE from more than 291 cities in India. At November 25, 1999, the
NSE had 6,839 trading terminals across the country.
Government securities, public sector bonds and units commenced trading on
the NSE in July 1994 and trading in equities of 200 large companies started in
November 1994. The average daily traded value of the capital market segment rose
from approximately Rs. 70 million in November 1994 to Rs. 44.8 billion in
December 1999. The NSE has 890 trading members on the capital market segment and
96 trading members on the wholesale debt market segment. At October 31, 1999,
685 securities were listed and 572 securities were permitted to trade on the
capital market segment. On the wholesale debt market segment, 797 securities
were listed and 517 securities were permitted to trade at October 31, 1999. The
NSE launched the NSE 50 Index, now known as S&P CNX NIFTY, on April 22, 1996 and
the Mid-cap index on January 1, 1996. The securities in the NSE 50 Index are
highly liquid. In May 1998, India Index Services and Products Limited (IISL) was
launched as a joint venture between the NSE and Credit Rating and Information
Services of India Limited with the objective of providing index-related services
and products for the capital markets. IISL has a consulting agreement with
Standard & Poor's, the world's leading provider of equity indices, for
co-branding IISL's equity indices. The market capitalization of the NSE at
December 31, 1999 was approximately Rs. 8,529.9 billion. With a wide network in
major metropolitan cities, screen-based trading, central monitoring system and
greater transparency, the NSE has lately recorded high volumes of trading. The
volume of trading on the NSE now generally exceeds that on the BSE.
The NSE has set up a disaster recovery site at Pune to enable it to
commence normal business operations within a very short time frame should a
disaster occur.
The clearing and settlement operations of the NSE are managed by its wholly
owned subsidiary, the National Securities Clearing Corporation. A key factor in
the growth of the NSE has been the short and tight settlement cycles that have
operated since its commencement. The National Securities Clearing Corporation
Limited operates a well-defined settlement cycle and there has been no deviation
or deferment from this cycle. The NSE provides a facility for multiple
settlement mechanisms including an account period settlement in regular market
sub-segment dealing in physical securities and rolling settlement -- normal (lot
size one) and rolling settlement -- normal (marketable lots) in book-entry
sub-segment.
The account period cycle starts every Wednesday and ends on a Tuesday with
the pay in of securities on the next Monday, pay-in of funds on the next Tuesday
and pay-out of funds and securities on the next Wednesday. The settlement in the
book-entry sub-segment is conducted on the next Tuesday. The settlement is
completed within eight days of the last day of the trading cycle. The rolling
settlement is typically on a T+5 working day basis, trades taking place on
Monday will be settled on the next Monday. All settlements for securities are
through the clearing house in the case of physical settlement and through the
depositary in the case of book entry sub-segment. Funds settlement takes place
through designated clearing banks. The National Securities Clearing Corporation
Limited interfaces with the depositary on the one hand and the clearing banks on
the other to provide delivery versus payment settlement for depositary enabled
trades.
BSE
The BSE, the oldest stock exchange in India, was established in 1875. It
has evolved over the years into its present status as the premier stock exchange
of India. The BSE switched over to online trading (BOLT) since May 1995. At
December 31, 1999, the BSE had 639 members, comprising 243 individual members,
375 Indian companies, 20 foreign brokers and one composite corporate member.
Only a member of the BSE has the right to trade in the stocks listed on the BSE.
At December 31, 1999, there were 5,863 listed companies trading on the BSE.
At December 31, 1999, the estimated market capitalization of stocks trading on
the BSE was Rs. 8.0 trillion. The average daily turnover on the BSE has also
shown a significant increase from approximately Rs. 67 million in January 1987
to approximately Rs. 35.7 billion in December 1999. At December 31, 1999, the
BSE had over 1,000 trading work-
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stations in 246 cities across the country. The BSE has SEBI approval to expand
its BOLT online trading network to 424 cities.
TRADING HOURS
Trading on the BSE is from 10:00 a.m. to 3:30 p.m. on weekdays. The BSE is
closed on public holidays. Special trade sessions are held outside normal
trading hours simultaneously with the annual government budget announcement and
on Diwali, a religious festival.
TRADING PROCEDURE
Until 1995, brokers and members of the BSE received individual orders from
which any cross-orders were matched and taken off. The balance of the orders was
transmitted to the trading floor for execution in an open outcry system. The BSE
has now introduced its BOLT online trading system on the exchange. The enhanced
transparency in dealings due to implementation of BOLT has assisted considerably
in smoothening settlement cycles and improving efficiency in back office work.
From July 3, 1995, all listed shares were transferred to BOLT.
CLASSIFICATION OF SHARES
On the BSE, shares are classified into A, B1, B2, C and Z groups. All
groups settle funds and securities through the BSE clearing house. For the A
group of shares, forward trading is permitted. The Z group includes those
companies who have not fulfilled the listing guidelines or have not paid listing
fees. The C group covers odd lot securities in other groups and rights
renunciations. Our equity shares are in the A group. At December 31, 1999, there
were 140 A group, 1,124 B1 group, 4,521 B2 group and 544 Z group shares and 682
debentures listed on the BSE.
SETTLEMENT
The trading period for all group shares lasts from Monday to Friday. The
trades are normally settled by the broker's net payment to the BSE clearing
house for securities on the following Thursday and the broker's delivery of
securities to the BSE clearing house on the same Thursday and, in the case of
overflow of securities, on Friday. The BSE clearing house then delivers
securities to the brokers on Friday and makes payments to the brokers on
Saturday. All shortages in delivery are compulsorily auctioned by the clearing
house. The auction system is fully computerized and has been following a
closed-bid system. For payments, the bank accounts of the brokers are maintained
with the designated clearing banks which are debited or credited on the
specified days.
COMMISSIONS
The maximum commission charged by brokers for trading equities is 2.5% of
the transaction value but, in practice, commissions are normally in the range of
0.5% to 2.0%. The 1994 budget imposed a 5.0% service tax on brokerage
commissions.
STOCK MARKET INDICES
The following two indices are generally used in tracking the aggregate
price movements on the BSE.
- The BSE Sensitive Index (Sensex) consists of listed shares of 30 large
market capitalization companies representing 15 industries from 'A'
group, including ICICI. The companies were selected on the basis of
market capitalization, liquidity and the need for sectoral
representation. The BSE Sensitive Index was first compiled in 1986 (and
revised in 1996) with the financial year ended March 31, 1979 as its
base year. This is the most commonly used index in India. On October 12,
1998 the BSE Index Committee revised the composition of the Index to
include the representation of the information technology sector and
increase the representation of the oil and gas, and pharmaceutical
sectors. The
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revised index, the changes in the calculation of which became effective
from November 16, 1998, represented approximately 34.9% of the BSE market
capitalization at December 31, 1999.
- The BSE 100 Index (formerly the BSE National Index) contains listed
shares of 100 companies including the 30 in the BSE Sensitive Index, and
was based in March 1984 at a stated value of 100. The BSE 100 Index was
introduced in January 1986. On January 15, 1998, the BSE Index Committee
revised the composition of the BSE 100 Index. The index represented
approximately 67.0% of the BSE market capitalization at December 31,
1999.
INTERNET-BASED SECURITIES TRADING AND SERVICES
The Securities and Exchange Board of India has recently allowed
Internet-based securities trading under the existing legal framework. The
regulations seek to allow the Internet to be used as an order routing system
through stock brokers registered with the Securities and Exchange Board of India
on behalf of clients for executing trades on a recognized stock exchange in
India. Stock brokers interested in providing this service are required to apply
for permission to the respective stock exchange and also have to comply with
certain minimum conditions stipulated by the Securities and Exchange Board of
India. Given the limited life of these new regulations to date, it is possible
that these regulations will continue to evolve in the future.
TAKEOVER CODE
Disclosure and mandatory bid obligations under Indian law are governed by
the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (the "Takeover Code") which prescribes certain
thresholds or trigger points that give rise to these obligations. The Takeover
Code is under constant review by the Securities and Exchange Board of India and
was recently amended.
The most important features of the Takeover Code, as amended, are as
follows:
Any acquirer (meaning a person who, directly or indirectly, acquires or
agrees to acquire shares or voting rights in a company, either by himself or
with any person acting in concert) who acquires shares or voting rights that
would entitle him to more than 5.0% of the shares or voting rights in a company
is required to disclose the aggregate of his shareholding or voting rights in
that company to the company (which in turn is required to disclose the same to
each of the stock exchanges on which the company's shares are listed) within
four working days of (a) the receipt of allotment information; or (b) the
acquisitions of shares or voting rights, as the case may be.
- A person who holds more than 15.0% of the shares or voting rights in any
company is required to make annual disclosure of his holdings to that
company (which in turn is required to disclose the same to each of the
stock exchanges on which the company's shares are listed).
- Promoters or persons in control of a company are also required to make
annual disclosure of their holdings in the same manner.
- An acquirer cannot acquire shares or voting rights which (taken together
with existing shares or voting rights, if any, held by him or by persons
acting in concert with him) would entitle such acquirer to exercise 15.0%
or more of the voting rights in a company, unless such acquirer makes a
public announcement offering to acquire a further 20.0% of the shares of
the company.
- An acquirer who, together with persons acting in concert with him, holds
between 15.0% and 75.0% of the shares cannot acquire additional shares or
voting rights that would entitle him to exercise a further 5.0% of the
voting rights in any period of 12 months unless such acquirer makes a
public announcement offering to acquire a further 20.0% of the shares of
the company.
- Any further acquisition of shares or voting rights by an acquirer who
holds 75.0% of the shares or voting rights in a company triggers the same
public announcement requirements.
- In addition, regardless of whether there has been any acquisition of
shares or voting rights in a company, an acquirer acting in concert
cannot directly or indirectly acquire control over a company (for
example,
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by way of acquiring the right to appoint a majority of the directors or
to control the management or the policy decisions of the company) unless
such acquirer makes a public announcement offering to acquire a minimum
of 20.0% of the shares of the company.
The Takeover Code sets out the contents of the required public
announcements as well as the minimum offer price.
The Takeover Code permits conditional offers as well as the acquisition and
subsequent delisting of all shares of a company and provides specific guidelines
for the gradual acquisition of shares or voting rights. Specific obligations of
the acquirer and the board of directors of the target company in the offer
process have also been set out. Acquirers making a public offer are also
required to deposit in an escrow account a percentage of the total consideration
which amount will be forfeited in the event that the acquirer does not fulfill
his obligations. In addition, the Takeover Code introduces the "chain principle"
by which the acquisition of a holding company will obligate the acquirer to make
a public offer to the shareholders of each subsidiary company which is listed.
The general requirements to make such a public announcement do not,
however, apply entirely to bail-out takeovers when a promoter (i.e., a person or
persons in control of the company, persons named in any offer document as
promoters and certain specified corporate bodies and individuals) is taking over
a financially weak company but not a "sick industrial company" pursuant to a
rehabilitation scheme approved by a public financial institution or a scheduled
bank. A "financially weak company" is a company which has at the end of the
previous financial year accumulated losses, which have resulted in erosion of
more than 50.0% but less than 100.0% of the total sum of its paid up capital and
free reserves at the end of the previous financial year. A "sick industrial
company" is a company registered for more than five years which has at the end
of any financial year accumulated losses equal to or exceeding its entire net
worth.
The Takeover Code does not apply to certain specified acquisitions
including the acquisition of shares (i) by allotment in a public, rights and
preferential issue, (ii) pursuant to an underwriting agreement, (iii) by
registered stockbrokers in the ordinary course of business on behalf of clients,
(iv) in unlisted companies, (v) pursuant to a scheme of reconstruction or
amalgamation or (vi) pursuant to a scheme under Section 18 of the Sick
Industrial Companies (Special Provisions) Act, 1985. The Takeover Code does not
apply to acquisitions in the ordinary course of business by public financial
institutions such as ICICI either on their own account or as a pledgee. In
addition, the Takeover Code does not apply to the acquisition of ADSs so long as
they are not converted into equity shares.
DEPOSITARIES
In August 1996, the Indian Parliament enacted the Depositaries Act, 1996
which provides a legal framework for the establishment of depositaries to record
ownership details and effectuate transfers in book-entry form. The Securities
and Exchange Board of India passed the Securities and Exchange Board of India
(Depositories and Participants) Regulations, 1996 which provides for the
formation of such depositaries, the registration of participants as well as the
rights and obligations of the depositaries, participants and the issuers. Every
depositary has to register with the Securities and Exchange Board of India.
Pursuant to the Depositories Act, the National Securities Depository Limited was
established by the Unit Trust of India, the Industrial Development Bank of India
and the NSE in 1996 to provide electronic depositary facilities for trading in
equity and debt securities. The National Securities Depository Limited, which
commenced operations in November 1996, was the first depositary in India.
Another depositary, the Central Depository Services (India) Limited, established
by the BSE has commenced operations since July 15, 1999. The depositary system
has significantly improved the operations of the Indian securities markets.
Trading of securities in book-entry form commenced in December 1996 and was
available for securities of more than 472 companies at August 1999. In order to
encourage "dematerialization" of securities, the Securities and Exchange Board
of India has set up a working group on dematerialization of securities
comprising foreign institutional investors, custodians, stock exchanges, mutual
funds and the National Securities Depository Limited to review the progress of
securities and trading in dematerialized form and to recommend scrips for
compulsory dematerialized trading in a phased manner. Accordingly, commencing
January 1998, the Securities and
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Exchange Board of India has notified scrips of various companies for compulsory
dematerialized trading by certain categories of investors such as foreign
institutional investors and other institutional investors and has also notified
compulsory dematerialized trading in specified scrips for all retail investors.
The Securities and Exchange Board of India proposes to increase the number of
scrips in which dematerialized trading is compulsory for all investors
significantly in the near future. The Securities and Exchange Board of India has
also provided that the issue and allotment of shares in public, rights or offer
for sale after a specified date to be notified by the Securities and Exchange
Board of India) shall only be in dematerialized form and an investor shall be
compulsorily required to open a depository account with a participant.
However, even in case of scrips notified for compulsory dematerialized
trading, investors, other than institutional investors, are permitted to trade
in physical shares on transactions outside the stock exchange where there are no
requirements of reporting such transactions to the stock exchange and on
transactions on the stock exchange involving lots less than 500 securities.
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RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
The government of India regulates ownership of Indian companies by
foreigners. Foreign investment in Indian securities, including the equity shares
represented by the ADSs, is generally regulated by the Foreign Exchange
Regulation Act, 1973. The Foreign Exchange Regulation Act will be replaced by
the Foreign Exchange Management Act, 1999 once it is notified by the government
of India in the Official Gazette. The Foreign Exchange Management Act, 1999
contains similar provisions to the Foreign Exchange Regulation Act regarding the
restrictions on foreign ownership of Indian securities and the Reserve Bank of
India will continue to regulate foreign investment in Indian securities.
The Reserve Bank of India has recently issued a notification under the
provisions of the Foreign Exchange Regulation Act relaxing the requirement of
prior approval for an Indian company making an ADS issue provided that the
issuer is eligible to issue ADSs pursuant to the guidelines issued by the
Ministry of Finance and has the necessary approval from the Foreign Investment
Promotion Board. We have sought the approval of the Foreign Investment Promotion
Board and will not be required to obtain the prior approval of the Reserve Bank
of India for this offering. The Reserve Bank of India has also granted general
permission for foreign investors to acquire our ADSs.
Under the foreign investment rules, the following restrictions are
applicable on foreign ownership:
- Under the foreign direct investment route, foreign investors may own our
equity shares only with the approval of the Foreign Investment Promotion
Board; this approval is granted on a case-by-case basis;
- Under the Issue of Foreign Currency Convertible Bonds and Equity Shares
(through Depositary Receipt Mechanism) Scheme, 1993, foreign investors
may purchase ADSs or GDRs, subject to the receipt of all necessary
government approvals at the time the depositary receipt program is set
up. Recently, with a view to liberalize the operational procedures, the
government of India's Ministry of Finance and the Reserve Bank of India
have granted a general approval to ADS or GDR issues, subject to certain
restrictions;
- Under the portfolio investment route, foreign institutional investors,
subject to registration with the Securities and Exchange Board of India
and the Reserve Bank of India, may be permitted to own in the aggregate
up to an additional 24.0% of our equity shares that are not represented
by ADSs or GDRs; no single foreign institutional investor may own more
than 10.0% of our equity shares; and
- Under the portfolio investment route, non-resident Indians and corporate
bodies predominantly owned by non-resident Indians may own up to 10.0%
of our equity shares; no single non-resident Indian or corporate body
predominantly owned by non-resident Indian's may own more than 5.0% of
our total equity shares.
We have obtained the approval of the Foreign Investment Promotion Board for
this offering which is a foreign direct investment. Under the guidelines issued
by the Indian government relating to foreign direct investment in a banking
company, non-resident Indians, inclusive of foreign investors, are allowed to
invest up to 40.0% of the bank's equity capital. Out of this 40.0%, foreign
investment of up to 20.0% is permitted by foreign banking companies or finance
companies. The Reserve Bank of India has confirmed to us that portfolio
investment in the secondary market in India by foreign institutional investors
and non-resident Indians described above is not included in the above limit of
40.0%.
Assuming the underwriters' over-allotment option is exercised in full,
foreign direct investment through this offering will be -- % of our equity
shares.
As an investor in ADSs, you do not need to seek the specific approval from
the government of India to purchase, hold or dispose of your ADSs. In the
offering, we are also required to obtain the approval of the Department of
Company Affairs and the relevant stock exchanges. We have sought these
approvals.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person. However, you may
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not receive sufficient advance notice of shareholder meetings to enable you to
withdraw the underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions, including the 10-24.0%
portfolio investment limitations, and the 5-10.0% non-resident Indian
limitation. The application of these limitations, however, is not clear.
Secondary purchases of securities of Indian companies in India by foreign direct
investors or investments by non-resident Indians, persons of Indian origin,
overseas corporate bodies and foreign institutional investors above the
ownership levels set forth above require government of India approval on a
case-by-case basis. It is unclear whether similar case-by-case approvals of
ownership of equity shares withdrawn from the depositary facility by foreign
institutional investors, non-resident Indians and overseas corporate bodies
would be required.
Further, if you withdraw your equity shares from the ADS program and your
direct or indirect holding in us exceeds 15.0% of our total equity (under the
Takeover Code), you would be required to make a public offer to the remaining
shareholders. If you withdraw your equity shares from the depositary facility,
you will not be able to redeposit them with the depositary.
If you wish to sell the equity shares withdrawn from the depositary
facility, you will be required to receive the prior approval of the Reserve Bank
of India, unless the sale is on a stock exchange or in connection with an offer
under the Takeover Code.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our equity shares, at March 15, 2000 and adjusted to give effect to the
offering (including the equity shares to be issued in the event the
underwriters' over-allotment option is exercised in full).
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
EQUITY SHARES NUMBER OF EQUITY
OUTSTANDING SHARES SOLD
------------------- ----------------------
ACTUAL ADJUSTED ACTUAL ADJUSTED
------- --------- ----------- --------
<S> <C> <C> <C> <C>
ICICI(1)............................................. 74.2% --% 122,505,800 --
Unit Trust of India.................................. 4.0 -- 6,537,049 --
Other Indian institutional investors and corporate
bodies............................................. 5.4 -- 8,962,715 --
Individual domestic investors(2)..................... 12.8 -- 21,078,508 --
Foreign institutional investors, foreign banks,
overseas corporate bodies and non-resident Indians
excluding Bankers Trust Company, as depositary..... 3.6 -- 5,916,628 --
Bankers Trust Company, as depositary................. -- -- -- --
----- ----- ----------- -----
100.0% 100.0% 165,000,700 --
===== ===== =========== =====
</TABLE>
- ---------------
(1) Under the Indian Banking Regulation Act, no person holding shares in a
banking company can vote more than 10.0% of the outstanding equity shares.
This means that while ICICI owns 74.2% of our equity shares, it can only
vote 10.0% of our equity shares. Due to this voting restriction, and the
fact that no other shareholder owns 10.0% or more of our outstanding equity
shares, ICICI effectively controls 28.0% of the voting power of our
outstanding equity shares. After the completion of the offering, ICICI's
effective voting power may decrease.
(2) Executive officers and directors as a group held less than 0.01% of our
equity shares at March 15, 2000.
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DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each fiscal
year. The shareholders have the right to decrease but not increase the dividend
amount recommended by the board of directors. Dividends may be paid out of
company profits for the fiscal year in which the dividend is declared. We have
paid dividends consistently every year since fiscal 1996, the second year of our
operations.
The following table sets forth, for the periods indicated, the dividend per
equity share and the total amount of dividends paid on the equity shares, both
exclusive of dividend tax.
<TABLE>
<CAPTION>
DIVIDEND PER TOTAL AMOUNT OF
EQUITY SHARE DIVIDENDS PAID
------------ ---------------
(IN MILLIONS)
<S> <C> <C>
FOR FISCAL YEAR
1995........................................................ -- --
1996........................................................ Rs.0.80 Rs.117
1997........................................................ 1.00 150
1998........................................................ 1.00 162
1999........................................................ 1.20 198
</TABLE>
Until fiscal 1997, investors were required to pay tax on dividend income.
From fiscal 1998, dividend income was made tax-exempt. However, all companies
were required to pay a 10% tax on distributed profits. From fiscal 1999, this
tax rate rose to 11% because of a 10% surcharge imposed on all taxes by the
government. The government of India's budget for fiscal 2001 proposes to raise
this tax to 22.0% (including surcharge).
Future dividends will depend upon our revenues, cash flow, financial
condition and other factors. As an owner of ADSs, you will be entitled to
receive dividends payable in respect of the equity shares represented by such
ADSs. The equity shares represented by ADSs will rank pari passu with existing
equity shares. At present, we have equity shares issued in India. See
"Description of the American Depositary Shares -- Share Dividends and Other
Distributions" for payment and distribution of dividends.
With respect to equity shares issued by us during a particular fiscal year,
dividends declared and paid for such fiscal year generally are prorated from the
date of issuance to the end of such fiscal year. As an owner of ADSs, you will
be entitled to full dividends for fiscal 2001 and will not be entitled to any
dividends for fiscal 2000. The equity shares in this offering will be issued on
March -- , 2000, the -- day of fiscal 2000.
Before paying any dividend on our shares, we are required under the Indian
Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). Before declaring dividends, we are required to
transfer at least 20.0% of the balance of profits of each year to a reserve
fund. The government of India may, however, on recommendation of the Reserve
Bank of India, exempt us from such requirement. We require prior approval from
the Reserve Bank of India to pay a dividend of more than 25.0% of the par value
of our shares. We also require prior approval from the Reserve Bank of India to
pay an interim dividend.
We have no agreement with ICICI regarding the payment of dividends by us to
ICICI or the contribution of capital by ICICI to us for maintenance of our
minimum capital adequacy ratio. Any declaration or payment of a dividend by us
to ICICI would have to be approved by our board of directors and shareholders,
and if the dividend is in excess of 25.0% of the par value of our shares, we
would have to obtain prior approval from the Reserve Bank of India. Pursuant to
the Banking Regulation Act, ICICI, though holding more than 10.0% of our share
capital, has voting power equal to only 10.0% of our outstanding equity shares.
For a description of the tax consequences of dividends paid to our
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
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DILUTION
Our net tangible book value at December 31, 1999, under US GAAP was Rs. 3.7
billion (US$ 85 million) or Rs. 44.47 (US$ 1.02) per ADS. "Net tangible book
value per ADS" represents the amount of total tangible assets less total
liabilities, divided by the number of equity shares outstanding, adjusting for
the ratio of two equity shares per ADS.
After giving effect to the gross proceeds from the sale of -- ADSs
representing -- equity shares offered hereby (including the equity shares to be
issued in the event the underwriters' over-allotment option is exercised in
full) at the public offering price of Rs. -- (US$ -- ) per ADS, net tangible
book value at December 31, 1999 would have been Rs. -- billion (US$ -- billion)
or Rs. -- (US$ -- ) per ADS. This represents an immediate increase in the net
tangible book value of Rs. -- (US$ -- ) per ADS to existing shareholders and an
immediate dilution of Rs. -- (US$ -- ) per ADS to new investors purchasing ADSs.
The following table illustrates the per ADS dilution:
<TABLE>
<S> <C>
Public offering price per ADS............................... Rs. --
Net tangible book value per ADS before the offering......... 44.47
Increase per ADS to existing shareholders................... --
Pro forma net tangible book value per ADS after the
offering.................................................. --
Dilution per ADS to new investors........................... --
</TABLE>
The following table sets forth, for the period indicated, the number of
ADSs purchased from us, the total consideration and the average price per ADS
paid by the existing holders of equity shares and the price to be paid by the
new investors (before deducting the underwriting discount and commissions and
the estimated offering expenses payable by us) on an adjusted basis:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------------------------
ADS PURCHASED(1) TOTAL CONSIDERATION(1)
---------------- ------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER ADS(1)
------ ------- --------------------- ------- ---------------------
(IN MILLIONS, EXCEPT AVERAGE PRICE)
<S> <C> <C> <C> <C> <C> <C> <C>
Existing shareholders.... 82.5 --% Rs.2,025 US$ 47 --% Rs.24.55 US$ 0.56
New investors............ -- -- -- -- -- -- --
Total.................... -- --% Rs. -- US$ -- --% Rs. -- US$ --
</TABLE>
- ---------------
(1) Equity shares purchased, have been converted into ADS equivalents for
comparison purposes.
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DESCRIPTION OF EQUITY SHARES
DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each fiscal
year. The shareholders have the right to decrease but not increase the dividend
amount recommended by the board of directors. Dividends are generally declared
as a percentage of par value and distributed and paid to shareholders in
proportion to the paid up value of their equity shares, and pro rata for the
period for which the equity shares are paid up. It is customary in India to pay
to holders of newly issued shares only a portion of the annual dividend based on
a pro rata basis. The Indian Companies Act provides that shares of a company of
the same class must receive equal dividend treatment.
These distributions and payments are required to be made within six weeks
of the declaration by the shareholders at the annual general meeting where our
balance sheet and profit and loss account are approved by the shareholders. The
Indian Companies Act states that any dividends that remain unpaid or unclaimed
after that period are to be transferred to a special bank account. Any money,
which remains unclaimed for seven years from the date of the transfer is to be
transferred by us to a fund created by the Indian government. No claims for the
payment of dividends unpaid or unclaimed for a period of seven years shall lie
against the fund of the Indian government or against us.
Our Articles of Association authorize our board of directors to declare and
pay interim dividends with prior approval of the Reserve Bank of India.
Under the Indian Companies Act, dividends payable can be paid only in cash
to the registered shareholder to his order or to the order of his banker at a
record date fixed prior to the relevant annual general meeting.
Before paying any dividend on our shares, we are required under the Indian
Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). We require prior approval from the Reserve Bank
of India to pay a dividend of more than 25.0% of the par value of our shares. We
also require prior approval from the Reserve Bank of India to pay an interim
dividend.
Dividends may only be paid out of our profits for the relevant year. Before
declaring dividends, we are required to transfer at least 20.0% of the balance
of profits of each year to a reserve fund. The government of India may, however,
on recommendation of the Reserve Bank of India, exempt us from such requirement.
BONUS SHARES
In addition to permitting dividends to be paid out of current or retained
earnings, the Indian Companies Act permits our board of directors to distribute
to the shareholders, in the form of fully paid-up bonus equity shares, an amount
transferred from the capital surplus reserve or legal reserve to stated capital.
Bonus equity shares can be distributed only with the prior approval of the
Reserve Bank of India. These bonus equity shares must be distributed to
shareholders in proportion to the number of equity shares owned by them.
PREEMPTIVE RIGHTS AND ISSUE OF ADDITIONAL SHARES
The Indian Companies Act gives shareholders the right to subscribe for new
shares in proportion to their existing shareholdings unless otherwise determined
by a resolution passed by three-fourths of the shareholders present and voting
at a general meeting. Under the Indian Companies Act and our Articles of
Association, in the event of an issuance of securities, subject to the
limitations set forth above, we must first offer the new shares to the holders
of equity shares on a fixed record date. The offer, required to be made by
notice, must include:
- the right, exercisable by the shareholders of record, to renounce the
shares offered in favor of any other person;
- the number of shares offered; and
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- the period of the offer, which may not be less than 15 days from the
date of offer. If the offer is not accepted, it is deemed to have been
declined.
Our board of directors is permitted to distribute equity shares not
accepted by existing shareholders in the manner it deems beneficial for us in
accordance with our Articles of Association.
GENERAL MEETINGS OF SHAREHOLDERS
There are two types of general meetings of shareholders: annual general
meetings and extraordinary general meetings. We are required to convene our
annual general meeting within six months after the end of each fiscal year. We
may convene an extraordinary general meeting when necessary or at the request of
a shareholder or shareholders holding on the date of the request at least 10.0%
of our paid up capital. A general meeting is generally convened by our Secretary
in accordance with a resolution of the board of directors. Written notice
stating the agenda of the meeting must be given at least 21 days prior to the
date set for the general meeting to the shareholders whose names are in the
register at the record date. Those shareholders who are not registered at the
record date do not receive notice of this meeting and are not entitled to attend
or vote at this meeting.
The annual general meeting is held in Vadodara, the city in which our
registered office is located. General meetings other than the annual general
meeting may be held at any location if so determined by a resolution of our
board of directors.
VOTING RIGHTS
A shareholder has one vote for each equity share and voting may be by a
show of hands or on a poll. However, under the Indian Banking Regulation Act, on
poll, a shareholder cannot exercise voting rights in excess of 10.0% of the
total voting rights of all shareholders. Resolutions are adopted at a general
meeting by a majority of the shareholders having voting rights present or
represented. The quorum for a general meeting is five members personally
present. Generally, resolutions may be passed by simple majority of the
shareholders present and voting at any general meeting. However, certain
resolutions, such as an amendment to the organizational documents, commencement
of a new line of business, an issue of additional equity shares without
preemptive rights and reductions of share capital, require that the votes cast
in favor of the resolution (whether by show of hands or on a poll) are not less
than three times the number of votes, if any, cast against the resolution. As
provided in our Articles of Association, a shareholder may exercise his voting
rights by proxy to be given in the form prescribed by us. This proxy, however,
is required to be lodged with us at least 48 hours before the time of the
relevant meeting. A shareholder may, by a single power of attorney, grant
general power of representation covering several general meetings. A corporate
shareholder is also entitled to nominate a representative to attend and vote on
its behalf at all general meetings.
ADS holders have no voting rights with respect to the deposited shares. For
a discussion of the voting rights, see "Description of the American Depositary
Shares -- Voting Rights".
ANNUAL REPORT
At least 21 days before an annual general meeting, we must circulate either
a detailed or abridged version of our audited financial accounts, together with
the Directors' Report and the Auditor's Report, to the shareholders along with a
notice convening the annual general meeting. We are also required under the
Indian Companies Act to make available upon request of any shareholder our
complete balance sheet and profit and loss account.
Under the Companies Act, we must file with the Registrar of Companies our
balance sheet and profit and loss account within 30 days of the conclusion of
the annual general meeting and our annual return within 60 days of the
conclusion of that meeting.
REGISTER OF SHAREHOLDERS AND RECORD DATES
The equity shares are in registered form. We maintain a register of our
shareholders in Vadodara. We register transfers of equity shares on the register
of shareholders upon presentation of certificates in respect of the
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transfer of equity shares held in physical form together with a transfer deed
duly executed by the transferor and transferee. Such transfer deeds attract
stamp duty, which has been fixed at 0.5% of the transfer price.
For the purpose of determining equity shares entitled to annual dividends,
the register of shareholders is closed for a notified period prior to the annual
general meeting. The Indian Companies Act and our listing agreements with the
stock exchanges permit us, pursuant to a resolution of our board of directors
and upon at least thirty days' advance notice to the stock exchanges, to set the
record date and close the register of shareholders after seven days' public
notice for not more than 30 days at a time, and for not more than 45 days in a
year, in order for us to determine which shareholders are entitled to certain
rights pertaining to the equity shares. Trading of equity shares and delivery of
certificates in respect of the equity shares may, however, continue after the
register of shareholders is closed.
TRANSFER OF SHARES
Shares held through depositaries are transferred in the form of book
entries or in electronic form in accordance with the regulations laid down by
the Securities and Exchange Board of India. These regulations provide the regime
for the functioning of the depositaries and the participants and set out the
manner in which the records are to be kept and maintained and the safeguards to
be followed in this system. Transfers of beneficial ownership of shares held
through a depositary are exempt from stamp duty.
The Securities and Exchange Board of India requires that our equity shares
for trading and settlement purposes be in book-entry form for all investors,
except for transactions that are not made on a stock exchange and transactions
that are not required to be reported to the stock exchange. However, up to 500
equity shares may be traded and settled in physical form. Transfers of equity
shares in book-entry form require both the seller and the purchaser of the
equity shares to establish accounts with depositary participants appointed by
depositaries established under the Depositaries Act, 1996. Charges for opening
an account with a depositary participant, transaction charges for each trade and
custodian charges for securities held in each account vary depending upon the
practice of each depositary participant. Upon delivery, the equity shares shall
be registered in the name of the relevant depositary on our books and this
depositary shall enter the name of the investor in its records as the beneficial
owner. The transfer of beneficial ownership shall be effected through the
records of the depositary. The beneficial owner shall be entitled to all rights
and benefits and subject to all liabilities in respect of his securities held by
a depositary.
The requirement to hold the equity shares in book-entry form will apply to
the ADS holders when the equity shares are withdrawn from the depositary
facility upon surrender of the ADSs. In order to trade the equity shares in the
Indian market, the withdrawing ADS holder will be required to comply with the
procedures described above.
Our equity shares are freely transferable, subject only to the provisions
of the Indian Companies Act under which, if a transfer of equity shares
contravenes the Securities and Exchange Board of India Act, 1992 or the
regulations issued under it or the Sick Industrial Companies (Special
Provisions) Act, 1985, or any other similar law, the Indian Company Law Board
may, on application made by us, a depositary incorporated in India, an investor,
the Securities and Exchange Board of India or certain other parties, direct a
rectification of the register of records. It is a condition of our listing that
we transfer equity shares and deliver share certificates duly endorsed for the
transfer within one month of the date of lodgment of transfer. If a company
without sufficient cause refuses to register a transfer of equity shares within
two months from the date on which the instrument of transfer is delivered to the
company, the transferee may appeal to the Company Law Board seeking to register
the transfer of equity shares. The Indian Company Law Board may, in its
discretion, issue an interim order suspending the voting rights attached to the
relevant equity shares before completing its investigation of the alleged
contravention. Our Articles of Association provide for certain restrictions on
the transfer of equity shares, including granting power to the board of
directors in certain circumstances, to refuse to register or acknowledge
transfer of equity shares or other securities issued by us. However, under the
Indian Companies Act, the enforceability of these transfer restrictions is
unclear. Further, the Reserve Bank of India requires us to obtain their approval
before registering a transfer of equity shares in favor of a person which
together with equity shares already held by him represent more than 5.0% of our
share capital.
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Our transfer agent is ICICI Infotech Services Limited, located in Mumbai.
Certain foreign exchange control and security regulations apply to the transfer
of equity shares by a non-resident or a foreigner. See "Restriction on Foreign
Ownership of Indian Securities".
We have entered into listing agreements with the Vadodara Stock Exchange,
Vadodara and five other stock exchanges in India on which our outstanding equity
shares are listed. It is a condition of our listing that if an acquisition of
our equity shares results in the acquirer holding any securities beyond 5.0% of
our voting capital, we and the acquirer shall be subject to the provisions of
the Securities and Exchange Board of India (Substantial Acquisitions of Shares &
Takeovers) Regulations, 1997. See "Nature of the Indian Securities Trading
Market -- Takeover Code". These provisions would not be applicable to the equity
shares so long as they are represented by ADSs. See "Restriction on Foreign
Ownership of Indian Securities".
DISCLOSURE OF OWNERSHIP INTEREST
The provisions of the Indian Companies Act generally require beneficial
owners of equity shares of Indian companies that are not holders of record to
declare to the company details of the holder of record and holders of record to
declare details of the beneficial owner. While it is unclear whether these
provisions apply to holders of an Indian company's ADSs, investors who exchange
ADSs for equity shares are subject to this provision. Failure to comply with
these provisions would not affect the obligation of a company to register a
transfer of equity shares or to pay any dividends to the registered holder of
any equity shares in respect of which such declaration has not been made, but
any person who fails to make the required declaration may be liable for a fine
of up to Rs. 1,000 (US$23) for each day such failure continues. Furthermore, any
charge, promissory note or any other collateral agreement created, executed or
entered into by the registered owner of any equity share in respect of which a
declaration as required by the Indian Companies Act has not been made is not
enforceable by the beneficial owner or any person claiming through him. However,
under the Indian Banking Regulation Act, a registered holder of any equity
shares, except in certain conditions, shall not be liable to any suit or
proceeding on the ground that the title to those equity shares vests in another
person.
ACQUISITION BY THE ISSUER OF ITS OWN SHARES
Until recently, the Indian Companies Act did not permit a company to
acquire its own equity shares because of the resulting reduction in the
company's capital. However, the government of India amended the Indian Companies
Act and consequently this reduction in capital is permitted in certain
circumstances. The reduction of capital requires compliance with buy-back
provisions specified in the Indian Companies Act and by the Securities and
Exchange Board of India.
ADS holders will be eligible to participate in a buyback in certain cases.
An ADS holder may acquire equity shares by withdrawing them from the depositary
facility and then selling those equity shares back to us. ADS holders should
note that equity shares withdrawn from the depositary facility may not be
redeposited into the depositary facility.
There can be no assurance that the equity shares offered by an ADS investor
in any buyback of shares by us will be accepted by us. The position regarding
regulatory approvals required for ADS holders to participate in a buyback is not
clear. ADS investors are advised to consult their Indian legal advisers prior to
participating in any buyback by us, including in relation to any regulatory
approvals and tax issues relating to such buyback.
LIQUIDATION RIGHTS
Subject to the rights of depositors, creditors, employees and holders of
any equity shares entitled to preferential prepayment over the equity shares, in
the event of our winding up, the holders of the equity shares are entitled to be
repaid the amounts of capital paid up or credited as paid up on such equity
shares. All surplus assets remaining after payments are made to the holders of
any preference shares belong to the holders of the equity shares in proportion
to the amount paid up or credited as paid up on such equity shares,
respectively, at the commencement of the winding-up.
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ACQUISITION OF THE UNDERTAKING BY THE GOVERNMENT
Under the Indian Banking Regulation Act, the government may, after
consultation with the Reserve Bank of India, in the interest of our depositors
or banking policy or better provision of credit generally or to a particular
community or area, acquire our banking undertaking. The Reserve Bank of India
may acquire our business if it is satisfied that we have failed to comply with
the directions given to us by the Reserve Bank of India or that our business is
being managed in a manner detrimental to the interest of our depositors.
Some of the provisions specified above are proposed to be amended by way of
the Companies (Bill), 1999. These include the introduction of specific
guidelines regarding the declaration of an interim dividend, voting by postal
ballot, appointment of directors by nominee shareholder and removal of
requirements to disclose beneficial ownership of securities under Section 187C
of the Companies Act. These changes will become effective once this bill is
passed by the Indian parliament and is notified in the Official Gazette of
India.
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DESCRIPTION OF THE AMERICAN DEPOSITARY SHARES
Bankers Trust Company, as depositary, will issue the ADSs. Each ADS will
represent an ownership interest in two equity shares. The equity shares will be
deposited by us with ICICI, the custodian. The custodian's office is located at
ICICI Towers, Bandra-Kurla Complex, Mumbai 400 051, India. The depositary's
principal executive office is located at 4 Albany Street, New York, NY 10006.
You may hold ADSs either directly or indirectly through your broker or
other financial institution. If you hold ADSs directly, you are an ADS holder.
This description assumes that you hold your ADSs directly. If you hold the ADSs
indirectly, you must rely on the procedures of your brokers or other financial
institutions to assert the rights of ADS holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
As the depositary will actually be the legal owner of the equity shares,
you must rely on it to exercise the rights of a shareholder. The obligations of
the depositary are set out in a deposit agreement among Bankers Trust Company,
you, as an ADS holder, and us. The deposit agreement and the ADSs are generally
governed by New York law.
The following is a summary of the material provisions of the deposit
agreement. As it is a summary, it does not contain all the information that may
be important to you. For more complete information, you should read the entire
deposit agreement and the ADR. Copies of the deposit agreement and the ADR will
be available for inspection at the Corporate Trust Office of the depositary and
at the office of the custodian set forth above.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on equity shares or other deposited
securities after deducting its fees and expenses. You will receive these
distributions in proportion to the number of equity shares your ADSs represent.
CASH
The depositary will, as promptly as practicable, convert any cash dividend
or other cash distribution we pay on the equity shares into U.S. dollars, if it
can do so on a reasonable basis and can transfer the U.S. dollars to the United
States. If that is not possible or if any approval from any government is needed
and cannot be obtained, the deposit agreement allows the depositary to
distribute the foreign currency only to those ADS holders to whom it is possible
to do so. It may hold the foreign currency it cannot convert for the account of
the ADS holders who have not been paid. It will not invest the foreign currency
and it will not be liable for interest.
Before making the distribution, any withholding taxes that must be paid
will be deducted. See "Taxation". The depositary will distribute only whole U.S.
dollars and cents and will round fractional cents to the nearest whole cent. If
exchange rates fluctuate during a time when the depositary cannot convert
foreign currency, you may lose some or all of the value of the distribution.
SHARES
The depositary will distribute new ADSs representing any equity share we
may distribute as a free distribution, if we request it to make this
distribution and provided that the depositary receives satisfactory evidence
that it is legal to do so. The depositary will only distribute whole ADSs. It
will sell equity shares which would require it to issue a fractional ADS and
distribute the net proceeds in the same way as it does with cash. If the
depositary does not distribute additional ADSs, each ADS will also represent the
new equity shares.
RIGHTS TO RECEIVE ADDITIONAL SHARES
If we offer holders of securities any rights to subscribe for additional
equity shares or any other rights, the depositary, after consultation with us,
will have discretion as to the procedure to be followed in making those rights
available to you. If the depositary decides it is not legal or feasible to make
these rights available to you,
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the Depositary may sell the rights and distribute the net proceeds. The
depositary may allow rights that are not distributed or sold to lapse. In that
case, you will receive no value for them.
After consultation with us, if the depositary makes rights available to
you, upon instruction from you, it will exercise the rights and purchase the
equity shares on your behalf. The depositary will then deposit the equity shares
and issue ADSs to you. It will only exercise rights if you pay it the exercise
price and any other charges the rights require you to pay.
The U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the ADSs issued after exercise of rights. For example, you may not
be able to trade the ADSs freely in the United States. In this case, the
depositary may issue the ADSs under a separate restricted deposit agreement
which will contain the same provisions as the deposit agreement, except for the
changes needed to put the restrictions in place. The depositary will not offer
you rights, unless those rights and the securities to which the rights relate
are either exempt from registration or have been registered under the Securities
Act with respect to a distribution to you. We will have no obligation to
register under the Securities Act those rights or the securities to which they
relate.
OTHER DISTRIBUTIONS
The depositary will, after consultation with us, send to you anything else
that we distribute on deposited securities by any means it thinks is legal, fair
and practical, subject to the receipt of requisite approvals. If it cannot make
the distribution in that way, the depositary, after consultation with us, may
decide to sell what we distributed and distribute the net proceeds, subject to
the receipt of requisite approvals, in which case the ADSs will also represent
the newly distributed property.
The depositary is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. We have no
obligation to register ADSs, equity shares, rights or other securities under the
Securities Act. We also have no obligation to take any other action to permit
the distribution of ADSs, equity shares, rights or anything else to ADS holders.
This means that you may not receive the distribution we make on our equity
shares or any value for them if it is illegal or impractical for us to make them
available to you.
DEPOSIT, WITHDRAWAL AND CANCELLATION
Subject to Indian law, the depositary will issue ADSs if you or your broker
deposits equity shares or evidence of rights to receive equity shares with the
custodian. Upon payment of its fees and expenses and of any taxes or charges,
such as stamp taxes or stock transfer taxes or fees, the depositary will
register the appropriate number of ADSs in the name you request and will deliver
the ADSs as promptly as practicable at its New York office to the persons you
request. Under current Indian laws and regulation, the depositary cannot accept
deposits of equity shares other than from us (except for equity shares issued as
bonus shares or pursuant to rights offerings) and issue ADRs evidencing ADSs
representing the equity shares.
Persons resident in India (other than us) may not, directly or indirectly,
deposit equity shares with the custodian.
If you surrender your ADSs and withdraw the underlying equity shares, you
or any subsequent transferee will not be permitted to redeposit the equity
shares and obtain ADSs. Moreover, foreign institutional investors, non-resident
Indians or overseas corporate bodies who withdraw equity shares will be subject
to Indian legal restrictions governing the foreign ownership of Indian
securities. For a discussion, see "Restriction on Foreign Ownership of Indian
Securities". The depositary has agreed, subject to the terms of the deposit
agreement, to accept deposits of equity shares if current Indian laws and
regulations are amended to permit such deposits.
You may turn in your ADSs at the depositary's New York office. Upon payment
of its fees and expenses and any taxes and charges, such as stamp taxes or stock
transfer taxes or fees, the depositary will deliver (1) the underlying equity
shares to an account in the book-entry system in India and (2) any other
deposited securities underlying the ADSs at the office of the custodian.
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If you surrender ADSs and withdraw equity shares, you will have to take the
equity shares in electronic dematerialized form. You will be required to
establish an account with a participant of the National Securities Depository
Limited or Central Depository Services (India) Limited to hold or sell the
shares in electronic dematerialized form, and you may incur customary fees and
expenses in doing so. Equity shares which are withdrawn from the depositary also
may not be sold on the stock exchanges in India until the equity shares
underlying the ADSs have been listed on those exchanges. The process of listing
on those exchanges will be completed within six weeks after the offering. In
addition, the sale of withdrawn equity shares by a non-resident of India to a
resident of India may require approval from the Reserve Bank of India. For
further details on the sale of underlying equity shares, see "Description of
Equity Shares -- Transfer of Shares".
VOTING RIGHTS
You will have no voting rights with respect to the deposited equity shares.
The depositary will exercise voting rights in respect of the deposited equity
shares as directed by the board of directors. The depositary will not, under any
circumstances, be obliged to exercise any discretion in relation to the exercise
or non-exercise of voting rights.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person. However, you may not
receive sufficient advance notice of shareholder meetings to enable you to
withdraw the underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the depositary facility, its investment in the equity shares would
be subject to the general restrictions on foreign ownership noted under
"Restriction on Foreign Ownership of Indian Securities" and may be subject to
the portfolio investment restrictions, including the 10-24.0% portfolio
investment limitations, and the 5-10.0% non-resident Indian limitation. The
application of these limitations, however, is not clear. Secondary purchases of
securities of Indian companies in India by foreign direct investors or
investments by non-resident Indians, persons of Indian origin, overseas
corporate bodies and foreign institutional investors above the ownership levels
set forth under "Restriction on Foreign Ownership of Indian Securities" require
government of India and Reserve Bank of India approval on a case-by-case basis.
It is unclear whether similar case-by-case approvals of ownership of equity
shares withdrawn from the depositary facility by foreign institutional
investors, non-resident Indians and overseas corporate bodies would be required.
FEES AND EXPENSES
<TABLE>
<S> <C>
ADS holders must pay: For:
US$ 5.00 (or less) per 100 ADSs Each issuance of an ADS, including as a result of
a distribution of equity shares or rights or other
property.
Each cancellation of an ADS, including if the
agreement terminates.
Registration or transfer fees Transfer and registration of shares on the equity
share register of the foreign registrar from your
name to the name of the depositary or its agent
when you deposit or withdraw equity shares.
Expenses of the depositary Conversion of foreign currency to US dollars.
Cable, telex and facsimile transmission expenses.
Taxes and other governmental charges that the As necessary.
depositary or the custodian is required to
pay on any ADS or equity share underlying an
ADS, for example, stock transfer taxes, stamp
duty or withholding taxes.
</TABLE>
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INSPECTION OF TRANSFER BOOKS
The depositary will maintain at its transfer office in New York facilities
for the execution and delivery, registration of transfer, combination or
split-up of ADRs and a register for the registration of ADRs and the
registration of the transfer of ADSs that at reasonable times will be open for
inspection by the investors in the ADSs and by us provided that such inspection
shall not be for the purpose of communication with investors in the ADSs in the
interest of a business or object other than our business or a matter related to
the deposit agreement or the ADRs.
REPORTS AND NOTICES
We will transmit to the depositary copies of any communications generally
distributed to holders of equity shares, including annual reports to
shareholders and notices of shareholder's meetings. The depositary will make
available for inspection by ADS holders at its principal office any notices,
reports and communications received from us that are both received by the
depositary or the custodian as the holder of the equity shares and made
generally available to holders of our equity shares. The depositary will also
send to ADS investors copies of such reports where furnished by us as provided
in the deposit agreement.
On or before the first date on which we give notice, by publication or
otherwise, of any meeting of shareholders, or of any adjourned meeting of such
holders, or of the taking of any action by such holders other than at a meeting,
or the taking of any action in respect of any cash or other distributions or the
offering of any rights, we will transmit to the depositary and the custodian a
written English-language version of the notice thereof in the form given or to
be given to shareholders. The depositary will arrange for the mailing of such
notices to all ADS holders.
PAYMENT OF TAXES
You will be responsible for any taxes or other governmental charges payable
on your ADRs or on the deposited securities underlying your ADSs. The Depositary
may refuse to transfer your ADSs or allow you to withdraw the equity shares
underlying your ADSs until such taxes or other charges are paid.
The depositary may deduct the amount of any taxes or other charges owed
from any payments due to you. The depositary may also sell deposited securities,
by public or private sale, to pay any taxes or other charges owed. You will
remain liable for any deficiency if the proceeds of the sale are not enough to
pay the taxes or other charges. If the depositary sells deposited securities, it
will, if appropriate, reduce the number of ADSs to reflect the sale and pay to
you any proceeds, or send to you any property, remaining after it has paid the
taxes.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
<TABLE>
<S> <C>
If we: Then:
Change the nominal or par value of our equity The cash, equity shares or other securities
shares received by the depositary will become deposited
Reclassify, split up or consolidate any of securities. Each ADS will automatically represent
the deposited securities its equal share of the new deposited securities.
Distribute securities on the equity shares The depositary may, and will if we ask it to,
that are not distributed to you distribute some or all of the cash, equity shares
Recapitalize, reorganize, merge, liquidate, or other securities it receives. It may also issue
sell all or substantially all of our assets, new ADSs or ask you to surrender your outstanding
or take any similar action ADSs in exchange for new ADSs, identifying the new
deposited securities.
</TABLE>
AMENDMENT AND TERMINATION
We may agree with the depositary to amend the deposit agreement and the
ADRs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or certain
expenses of the depositary, or prejudices an important right of ADS investors,
it will only become
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effective thirty days after the depositary notifies you of the amendment. At the
time an amendment becomes effective, you are considered, by continuing to hold
your ADS, to agree to the amendment and to be bound by the ADR and the deposit
agreement as amended.
The depositary will terminate the deposit agreement if we ask it do so. The
depositary may also terminate the agreement if the depositary has told us that
it would like to resign and we have not appointed a new depositary bank within
90 days. In both cases, the depositary must notify you at least 90 days before
termination.
After termination, the depositary and its agents will be required to do
only the following under the agreement: (1) collect dividends and distributions
on the deposited securities, (2) sell rights offered to you, and (3) deliver
equity shares and other deposited securities upon cancellation of ADSs. Any time
after one year after termination, the depositary will, if practical, sell any
remaining deposited securities by public or private sale. After that, the
depositary will hold the proceeds of the sale, as well as any other cash it is
holding under the deposit agreement for the pro rata benefit of the ADS holders
that have not surrendered the ADSs. It will not invest the money and will have
no liability for interest. The depositary's only obligations will be to account
for the proceeds of the sale and other cash. After termination, our only
obligations will be with respect to indemnification and to pay certain amounts
to the depositary.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADS HOLDERS
The agreement expressly limits our obligations and the obligations of the
depositary, and it limits our liability and the liability of the depositary. We
and the depositary:
- are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
- are not liable if either we or the depositary is prevented or delayed by
law or circumstances beyond our or its control from performing our or
its obligations under the deposit agreement;
- are not liable if either we or the depositary exercise discretion
permitted under the deposit agreement;
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADRs or the deposit agreement on your behalf or on behalf
of any other party; and
- may rely upon any documents we or the depositary believe in good faith
to be genuine and to have been signed or presented by the proper party,
and may rely on advice or information from any person we or the
depositary believe, in good faith, to be competent to give such advice
or information.
In the deposit agreement, we and the depositary agree to indemnify each
other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before the depositary will issue or register transfer of an ADS, make a
distribution on an ADS, or allow a withdrawal of equity shares, the depositary
may require:
- payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third parties for the
transfer of any equity shares or other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with laws or governmental regulations relating to ADSs or the
withdrawal of deposited securities and such reasonable regulations, if
any, that the depositary may establish, from time to time, consistent
with the deposit agreement, including presentation of transfer
documents.
The depositary may refuse to deliver, transfer or register transfers of
ADSs generally when our books or the depositary's books are closed, or at any
time if we or the depositary think it advisable to do so.
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You have the right to cancel your ADSs and withdraw the underlying equity
shares at any time except:
- when temporary delays arise because: (1) we or the depositary have
closed our transfer books; (2) the transfer of equity shares is blocked
to permit voting at shareholders' meeting; or (3) we are paying a
dividend on the equity shares;
- you or other ADS holders seeking to withdraw equity shares owe money to
pay fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADSs or to the withdrawal
of equity shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement. Foreign investors who withdraw equity shares will be subject
to Indian legal restrictions governing the ownership of Indian securities. For a
discussion, see "Restriction on Foreign Ownership of Indian Securities".
PRE-RELEASE OF ADSS
Subject to current Indian law and regulations, our consent and the
provisions of the deposit agreement, the depositary may issue ADSs before
deposit of the underlying equity shares. This is called a pre-release of ADSs.
The depositary may deliver equity shares upon the receipt and cancellation of
ADSs, including pre-released ADSs. The depositary may receive ADSs instead of
equity shares to close out a pre-release. The depositary may pre-release ADSs
only under the following conditions:
- before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to the depositary in writing
that it or its customer, as the case may be,
-- beneficially owns the equity shares to be received,
-- assigns all beneficial rights, title and interest in the equity shares
to the depositary in its capacity as the depositary and for the
benefit of the holders of the ADSs,
-- will not take any action with respect to the ADSs or equity shares
that is inconsistent with the assignment of beneficial ownership
(including, without the consent of the depositary, disposing of the
equity shares) other than in satisfaction of the pre-release, and
-- the pre-release must be fully collateralized with cash or collateral
that the depositary considers appropriate; and
- the depositary must be able to close out the pre-release on not more
than five business days' notice.
The pre-release will be subject to whatever indemnities and credit
regulations the depositary considers appropriate. In addition, the depositary
will limit the number of ADSs that may be outstanding at any time as a result of
pre-release to 30.0% of the total equity shares deposited, although the
depositary may disregard such limit from time to time if it shall choose to do
so.
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TAXATION
INDIAN TAX
The following discussion is the opinion of Amarchand & Mangaldas & Suresh
A. Shroff & Co. The discussion of Indian tax consequences for investors in ADSs
and equity shares received upon redemption of ADSs who are not resident in India
whether of Indian origin or not is based on the provisions of the Indian
Income-Tax Act, 1961, including the special tax regime for ADSs contained in
Section 115AC, which has recently been extended to cover additional ADSs that an
investor may acquire in an amalgamation or restructuring of the company, and
certain regulations implementing the Section 115AC regime. The Indian Income Tax
Act is amended every year by the Finance Act of the relevant year. Some or all
of the tax consequences of the Section 115AC regime may be amended or modified
by future amendments to the Indian Income Tax Act.
The summary is not intended to constitute a complete analysis of the tax
consequences under Indian law of the acquisition, ownership and sale of ADSs and
equity shares by non-resident investors. Potential investors should, therefore,
consult their own tax advisers on the tax consequences of such acquisition,
ownership and sale, including specifically the tax consequences under Indian
law, the law of the jurisdiction of their residence, any tax treaty between
India and their country of residence, and in particular the application of the
regulations implementing the section 115 AC regime.
RESIDENCE
For the purpose of the Income Tax Act, an individual is a resident of India
during any fiscal year, if he (i) is in India in that year for 182 days or more
or (ii) having within the four years preceding that year been in India for a
period or periods amounting in all to 365 days or more, is in India for period
or periods amounting in all to 60 days or more in that year. The period of 60
days is substituted by 182 days in case of Indian citizen or person of Indian
origin who being resident outside India comes on a visit to India during the
financial year or an Indian citizen who leaves India for the purposes of his
employment during the financial year. A company is resident in India in any
fiscal year if it is registered in India or the control and management of its
affairs is situated wholly in India in that year. A firm or other association of
persons is resident in India except where the control and the management of its
affairs are situated wholly outside India.
TAXATION OF DISTRIBUTIONS
Dividend distributed will not be subject to tax in the hands of the
shareholders. Consequently, withholding tax on dividends paid to shareholders
does not apply. However, if dividends are declared, the company is required to
pay a 11.0% tax on distributable profits. The government of India's budget for
fiscal 2001 proposes to raise this tax to 22.0% (including surcharge).
TAXATION ON REDEMPTION OF ADSS
The acquisition of equity shares upon a redemption of ADSs by a
non-resident investor will not give rise to a taxable event for Indian tax
purposes.
TAXATION ON SALE OF EQUITY SHARES OR ADSS
Any transfer of ADSs or equity shares outside India by a non-resident
investor to another non-resident investor does not give rise to Indian capital
gains tax.
Subject to any relief under any relevant double taxation treaty, a gain
arising on the sale of an equity share to a resident of India or where the sale
is made inside India will generally give rise to a liability for Indian capital
gains tax. Such tax is required to be withheld at source. Where the equity share
has been held for more than 12 months (measured from the date of advice of
redemption of the ADS by the Depositary), the rate of tax is 10.0%. Where the
equity share has been held for 12 months or less, the rate of tax varies and
will be subject to tax at normal rates of income-tax applicable to non-residents
under the provisions of the Indian Income Tax Act, subject to a maximum of 48.0%
in the case of foreign companies. The actual rate depends on a number of
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factors, including without limitation the nature of the non-resident investor.
During the period the underlying equity shares are held by non-resident
investors on a transfer from the Depositary upon redemption of ADRs, the
provisions of the Avoidance of Double Taxation Agreement entered into by the
government of India with the country of residence of the non-resident investors
will be applicable in the matter of taxation of any capital gain arising on a
transfer of the equity shares. The double taxation treaty between the United
States and India does not provide US residents with any relief from Indian tax
on capital gains.
For purposes of determining the amount of capital gains arising on a sale
of an equity share for Indian tax purposes, the cost of acquisition of an equity
share received upon redemption of an ADS will be the price of the share
prevailing on the BSE or the NSE on the date on which the depositary advises the
custodian of such redemption, not the acquisition cost of the ADS being
redeemed. The holding period of an equity share received upon redemption of an
ADS will commence from the date of advice of redemption by the depositary. The
exact procedures for the computation and collection of Indian capital gains tax
are not settled.
RIGHTS
Distribution to non-resident holders of additional ADSs or equity shares or
rights to subscribe for equity shares made with respect to ADSs or equity shares
are not subject to tax in the hands of the non-resident holder.
It is unclear as to whether capital gain derived from the sale of rights by
a non-resident holder not entitled to exemption under a tax treaty to another
non-resident holder outside India will be subject to Indian capital gains tax.
If rights are deemed by the Indian tax authorities to be situated within India,
as our situs is in India, the gains realized on the sale of rights will be
subject to customary Indian taxation as discussed above.
STAMP DUTY
Upon the issuance of the equity shares underlying the ADSs, we are required
to pay a stamp duty of 0.1% per share of the issue price. A transfer of ADSs is
not subject to Indian stamp duty. Normally, upon the acquisition of equity
shares from the depositary in exchange for ADSs representing such equity shares
in physical form, an investor would be liable for Indian stamp duty at the rate
of 0.5% of the market value of the equity shares at the date of registration.
Similarly, a sale of equity shares by an investor would also be subject to
Indian stamp duty at the rate of 0.5% of the market value of the equity shares
on the trade date, although customarily such tax is borne by the transferee,
that is, the purchaser. However, our equity shares are compulsorily deliverable
in dematerialized form except for trades up to 500 shares only which may be for
delivery in physical form. Under Indian stamp law, no stamp duty is payable on
the acquisition or transfer of equity shares in dematerialized form.
OTHER TAXES
At present, there are no taxes on wealth, gifts and inheritance which may
apply to the ADSs and underlying equity shares.
SERVICE TAX
Brokerage or commissions paid to stockholders in connection with the sale
or purchase of shares is subject to a service tax of 5.0%. The stockbroker is
responsible for collecting the service tax and paying it to the relevant
authority.
UNITED STATES TAX
The following discussion is the opinion of Davis Polk & Wardwell. The
discussion describes the material US federal income tax consequences of the
acquisition, ownership and sale of ADSs that are generally applicable to US
investors. For these purposes, you are an US investor if you are:
- a citizen or resident of the United States under US federal income tax
laws;
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- a corporation organized under the laws of the United States or of any
political subdivision of the United States; or
- an estate or trust the income of which is includable in gross income for
US federal income tax purposes regardless of its source.
This discussion only applies to ADSs that you purchase through the
offering, and only if you own ADSs as capital assets.
This discussion assumes that we are not a passive foreign investment
company. Please see the discussion under "Passive Foreign Investment Company
Rules" below.
Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address purchasers subject to special rules, including:
- insurance companies;
- tax-exempt entities;
- dealers in securities;
- financial institutions;
- persons who own the ADSs as part of an integrated investment (including
a straddle, hedging or conversion transaction) comprised of the ADS, and
one or more other positions for tax purposes;
- persons whose functional currency is not the US dollar; or
- persons who own, actually or constructively, 10.0% or more of our voting
stock.
This discussion is based on the tax laws of the United States currently in
effect (including the Internal Revenue Code of 1986, as amended, referred to as
"the Code", Treasury Regulations, Revenue Rulings and judicial decisions). These
laws may change, possibly with retroactive effect.
For US federal income tax purposes, if you own an ADS, you will generally
be treated as the owner of the equity shares underlying the ADS.
Please consult your tax advisors with regard to the application of the US
federal income tax laws to the ADSs, including the passive foreign investment
company rules described below, as well as any tax consequences arising under the
laws of any state, local or other taxing jurisdiction.
TAXATION OF DIVIDENDS
Dividends you receive on the ADSs, other than certain pro rata
distributions of common shares, will generally constitute foreign source
dividend income for US federal income tax purposes. The amount of the dividend
you will be required to include in income will equal the US dollar value of the
rupees, calculated by reference to the exchange rate in effect on the date the
payment is received by Bankers Trust Company, as the depositary, regardless of
whether the payment is converted into US dollars. If you realize gain or loss on
a sale or other disposition of rupees, it will be US source ordinary income or
loss. You will not be entitled to claim a dividends-received deduction for
dividends paid by ICICI Bank.
TAXATION OF CAPITAL GAINS
You will recognize capital gain or loss for U.S. federal income tax
purposes on the sale or exchange of ADSs in the same manner as you would on the
sale or exchange of any other shares held as capital assets. The gain or loss
will generally be U.S. source income or loss. You should consult your own tax
advisors about the treatment of capital gains, which may be taxed at lower rates
than ordinary income for non-corporate taxpayers, and capital losses, the
deductibility of which may be limited.
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PASSIVE FOREIGN INVESTMENT COMPANY RULES
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, ICICI Bank does not expect
to be considered a passive foreign investment company. In general, a foreign
corporation is a passive foreign investment company for any taxable year in
which (i) 75.0% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties) or (ii) 50.0% or more of the average
quarterly value of its assets consists of assets that produce, or are held for
the production of, passive income. ICICI Bank has based the expectation that it
is not a passive foreign investment company on, among other things, provisions
in the proposed regulations that provide that certain restricted reserves
(including cash and securities) of banks are assets used in connection with
banking activities and are not passive assets, as well as the composition of
ICICI Bank's income and ICICI Bank's assets from time to time. Since there can
be no assurance that the proposed regulations will be finalized in their current
form and the composition of income and assets of ICICI Bank will vary over time,
there can be no assurance that ICICI Bank will not be considered a passive
foreign investment company for any fiscal year. If ICICI Bank is a passive
foreign investment company at any time that you own ADSs,
- you may be subject to additional taxes and interest charges on certain
dividends and on any gain recognized on the disposition of the shares.
This tax is assessed at the highest tax rate applicable for corporate or
individual taxpayers for the relevant periods; and
- you will be subject to additional US tax filing requirements for each
year that you hold the shares.
Please consult your tax advisors about the possibility that ICICI Bank will
be a passive foreign investment company and the rules that would apply to you if
ICICI Bank were.
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UNDERWRITING
Subject to the terms and conditions set forth in the US underwriting
agreement between us and each of the US underwriters named below, and
concurrently with the sale of -- ADSs to the international underwriters, We
have agreed to sell to each of the US underwriters, and each of the US
underwriters severally has agreed to purchase from us, the aggregate number of
ADSs set forth opposite its name below.
<TABLE>
<CAPTION>
US UNDERWRITERS NUMBER OF ADSS
- --------------- --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... --
Morgan Stanley & Co. Incorporated........................... --
Total....................................................... --
</TABLE>
Subject to the terms and conditions set forth in the international
underwriting agreement between us and each of the international underwriters
named below, and concurrently with the sale of -- ADSs to the US
underwriters, we have agreed to sell to each of the international underwriters,
and each of the international underwriters severally has agreed to purchase from
us, the aggregate number of ADSs set forth opposite its name below.
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITERS NUMBER OF ADSS
- -------------------------- --------------
<S> <C>
Merrill Lynch (Singapore) Pte. Ltd.......................... --
Morgan Stanley & Co. International Limited.................. --
Total....................................................... --
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated are the joint global coordinators and joint book runners for the US
offering and the international offering. The consummation of each of the US
offering and the international offering is a condition to the closing of the
other offering. The US underwriters and the international underwriters are
collectively referred to as the "underwriters".
Prior to the US offering and the international offering, there has been no
established market in the US, India or elsewhere for the ADSs. The equity shares
represented by the ADSs trade in the Indian stock markets. The public offering
price for the ADSs will be determined by us in consultation with the joint
global coordinators and joint book runners by reference to the market prices for
our equity shares and other relevant factors, including an assessment of our
results of operations and future prospects, demand for the ADSs, general
economic conditions, recent offering prices for similar securities of reasonably
comparable companies and the general condition of the securities markets at the
time of the offering.
The joint global coordinators and joint book runners have advised us that
the underwriters propose initially to offer the ADSs to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of -- per ADS. After
the public offering, the public offering price and concession may be changed.
The public offering price per ADS in the US offering and the international
offering is identical.
The US underwriting agreement and the international underwriting agreement
provide that the obligations of the underwriters are subject to certain
conditions precedent and that the underwriters are committed to purchase all of
the ADSs if they purchase any ADSs. The underwriters reserve the right to
withdraw, cancel or modify the US offering and the international offering and to
completely or partially reject any orders.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed 5.0% of the total number of ADSs offered by
them.
The US underwriters may engage in transactions that affect the price of the
ADSs. In particular, the US underwriters may over-allot, creating a situation
where more ADSs are sold than are set forth on the cover page of this prospectus
(a short position in the ADSs). In order to cover the over-allotments or to
stabilize the price of the ADSs, the US underwriters may purchase up to an
aggregate of -- additional ADSs at the public offering price set forth on
the cover page of this prospectus less the underwriting concession and discount
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referred to above. To the extent that the US underwriters exercise this option,
each underwriter will be obligated, subject to conditions set out in the US
underwriting agreement, to purchase additional ADSs proportionate to each
underwriter's initial amount reflected in the first table above. In addition,
the US underwriters may bid for and purchase the ADSs to stabilize the price of
the ADSs as an exception to SEC rules limiting such activities until the
distribution of the ADSs is completed. As a result of such purchases, the price
of the security would generally be higher than it would have been without such
purchases. The US underwriters may or may not engage in these transactions, and
once commenced, they may discontinue their actions without notice. We do not,
nor do the US underwriters, make any representation or prediction as to the
direction and magnitude of any effect that the transactions we have described
above may have on the price of the ADSs. Finally, the underwriting syndicate may
reclaim selling concessions allowed to a US underwriter or a dealer for
distributing the ADSs in the US offering if any US underwriter repurchases
previously distributed ADSs in transactions to cover syndicate short positions,
in stabilization transactions or otherwise.
The joint global coordinators and joint book runners may allocate the ADSs
for the US offering and the international offering as they deem appropriate.
The ADSs will be listed on the New York Stock Exchange under the symbol
"IBN".
Unless we and ICICI have obtained the prior written consent of the joint
global coordinators and joint book runners, we and ICICI have agreed that we and
ICICI will not, from the date of this prospectus through and including 180 days
after such date, sell, offer or contract to sell, or otherwise dispose of any of
our equity shares (including ADSs) or any securities (which are convertible into
or exchangeable for shares, or any options or warrants), except in connection
with the offering or other than shares or other securities or options, the
rights or warrants for equity shares or other securities, issued, offered,
allotted, appropriated, modified or granted to our employees (including
directors) or former employees (including directors), directly or indirectly,
pursuant to any employee share scheme or arrangement for any one or more
employee or employees generally or as required by law.
From time to time, the underwriters have provided, and continue to provide,
commercial and investment banking services to us for which they have received
customary compensation We have agreed with the underwriters to indemnify each
other against certain liabilities, including liabilities arising under the
Securities Act, or to contribute to payments that the other may be required to
make in respect thereof.
The underwriters have, subject to the completion of this offering, agreed
to reimburse us for certain expenses incurred in connection with this offering.
Pursuant to the agreement among US and international underwriters, each
underwriter has represented and agreed to the following selling restrictions:
- Each US underwriter has represented and agreed that, with certain
exceptions: (a) it is not purchasing any ADSs for the account of anyone
other than a United States or Canadian person (as defined below) and (b)
it has not offered or sold, and will not offer or sell, directly or
indirectly, any ADSs or distribute any prospectus relating to the ADSs
outside the United States or Canada or to anyone other than a United
States or Canadian person.
Each international underwriter has represented and agreed that, with
certain exceptions: (a) it is not purchasing any ADSs for the account of
any United States or Canadian person (as defined below) and (b) it has
not offered or sold, and will not offer or sell, directly or indirectly,
any ADSs or distribute any prospectus relating to the ADSs in the United
States or Canada or to any United States or Canadian person.
With respect to any underwriter that is a US underwriter and an
international underwriter, the foregoing representations and agreements
(a) made by it in its capacity as a US underwriter apply only to it in
its capacity as a US underwriter and (b) made by it in its capacity as an
international underwriter apply only to it in its capacity as an
international underwriter. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in
the agreement among underwriters.
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"United States or Canadian person" means any national or resident of the
United States or Canada, or any corporation, pension, profit-sharing or
other trust or other entity organized under the laws of the United States
or Canada or of any political subdivision thereof (other than a branch
located outside the United States and Canada of any United States or
Canadian person), and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian person.
- Sales may be made between U.S. underwriters and international
underwriters of any number of ADSs as may be mutually agreed. The per
ADS price of any ADSs so sold shall be the public offering price set
forth on the cover page of this prospectus, in US dollars, less an
amount not greater than the per ADS amount of the concession to dealers
described above.
Each U.S. underwriter has represented that it has not offered or sold,
and has agreed not to offer or sell, any ADSs, directly or indirectly, in
Canada or to, or for the benefit of, any resident of Canada in
contravention of the Canadian securities laws and has represented that
any offer or sale of ADSs in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send a notice to any dealer who
purchases from it any of the ADSs which states in substance that, by
purchasing such ADSs, such dealer represents and agrees that it has not
offered or sold, and will not offer or sell, directly or indirectly, any
of such ADSs in Canada or to, or for the benefit of, any resident of
Canada in contravention of the Canadian securities laws and that any
offer or sale of ADSs in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer or sale is made, and that such
dealer will, in turn, deliver to any other dealer to whom it sells any of
such ADSs a notice containing substantially the same statement as is
contained in this sentence. References to "Canada" includes all provinces
and territories of Canada or in the particular province or territory of
Canada as applicable. References to "Canadian securities laws" include
the securities laws of Canada and all provinces and territories of Canada
or of that particular province or territory of Canada as applicable.
- Each international underwriter has represented and agreed that (a) it
has not offered or sold and will not offer or sell prior to the date six
months after the closing date for the sale of the ADSs to the
international underwriters, any ADSs to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (b) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the ADSs in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on
and will only issue or pass on in the United Kingdom any document
received by it in connection with the offering of the ADSs to a person
who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as
amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
- Each international underwriter has represented and agreed that it has
not offered and will not offer, directly or indirectly, any ADSs in The
Netherlands to the account of any person or entity other than to persons
or entities who or which trade or invest in the ADSs in the conduct of a
profession or business within the meaning of the Securities Transactions
Supervision Act 1995 (Wet Toezicht Effectenverkeer 1995) and its
implementing regulations (which persons and entities include banks,
brokers, pension funds, insurance companies, securities firms,
investment institutions, other institutional investors and other
parties).
- Each international underwriter has further represented that it has not
offered or sold, and has agreed not to offer or sell, directly or
indirectly, in Japan or to or for the account of any resident thereof,
any of the ADSs acquired in connection with the distribution
contemplated hereby, except for offers or sales to Japanese
international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with
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applicable provisions of Japanese law. Each international underwriter has
further agreed to send to any dealer who purchases from it any of the
ADSs a notice stating in substance that, by purchasing such ADSs, such
dealer represents and agrees that it has not offered or sold, and will
not offer or sell, any of such ADSs directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales
to Japanese international underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law, and that such dealer will send to any other dealer to whom
it sells any of such ADSs a notice containing substantially the same
statement as is contained in this sentence.
- Each international underwriter has represented and agreed that it has
not distributed and will not distribute, directly or indirectly, any
prospectus relating to the ADSs in India or to residents of India and
that it has not offered or sold and will not offer or sell, directly or
indirectly, any ADSs in India or to, or for the account or benefit of,
any resident of India.
- Each international underwriter has represented and agreed that no
prospectus in relation to the ADSs has been or will be lodged with, or
registered by, the Australian Securities and Investments Commission and
that it has not, directly or indirectly, offered for purchase or sale,
nor issued invitations to buy or sell and will not, directly or
indirectly, offer for purchase or sale, nor issue invitations to buy or
sell any ADSs and has not distributed and will not distribute any draft
or definitive document in relation to any such offer, invitation,
purchase or sale in Australia, except in accordance with the
Corporations Law in force in Australia and any other applicable
Australian laws.
- Each international underwriter has represented and agreed that it has
not applied for any license issued by the Central Bank of the United
Arab Emirates ("Central Bank") with respect to the ADSs and that it has
not distributed and will not distribute any prospectus relating to the
ADSs in the United Arab Emirates ("UAE") or to residents of the UAE and
that it has not offered or sold and will not offer or sell and ADSs in
the UAE for the account or benefit of any resident of the UAE, except
through a bank or financial institution operating in the UAE and duly
licensed by the Central Bank in accordance with UAE Federal Law No. 10
of 1980 (as amended) and the Resolutions and Circulars of the Board of
Directors of the Central Bank and the Regulations issued by or on behalf
of the Central Bank from time to time.
- Each international underwriter has represented and agreed that it has
not offered or sold and will not offer or sell in Hong Kong, by means of
any document, any ADSs other than to persons whose ordinary business it
is to buy or sell shares or debentures, whether as principal or agent,
or in circumstances which do not constitute an offer to the public
within the meaning of the companies ordinance (Cap32) of Hong Kong and
that, except as permitted under the securities laws of Hong Kong, it has
not issued and will not issue in Hong Kong any document, invitation or
advertisement relating to the ADSs other than with respect to ADSs which
are intended to be disposed of to persons outside Hong Kong or only to
persons whose business involves the acquisition, disposal or holding of
securities, whether as principal or agent.
- Each international underwriter has represented and agreed that it has
not offered or sold and will not offer or sell any ADSs or circulate or
distribute any document or other material relating to the ADSs, either
directly or indirectly to the public or any member of the public in
Singapore other than (a) to an institutional investor or other person
specified in Section 106C of the Companies Act, Cap. 50 of Singapore,
(b) to a sophisticated investor, and in accordance with the conditions
specified in Section 106D of the Singapore Companies Act or (c)
otherwise pursuant to, and in accordance with the conditions of, any
other provision of the Singapore Companies Act.
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LEGAL MATTERS
The validity of the ADSs offered by us in this prospectus will be passed
upon for us by Davis Polk & Wardwell, our United States counsel, and for the
underwriters by Shearman & Sterling, US counsel to the underwriters. The
validity of the equity shares represented by the ADSs and certain other Indian
legal matters will be passed upon by Amarchand & Mangaldas & Suresh A. Shroff &
Co., our Indian counsel, and by Bhaishankar Kanga & Girdharlal, Indian counsel
to the underwriters. Davis Polk & Wardwell may rely upon Amarchand & Mangaldas &
Suresh A. Shroff & Co. and Shearman & Sterling may rely upon Bhaishankar Kanga &
Girdharlal with respect to all matters of Indian law.
EXPERTS
Our US GAAP financial statements at December 31, 1999 and March 31, 1999
and 1998, and for the nine-month period ended December 31, 1999 and each of the
years in the three-year period ended March 31, 1999, have been included in this
prospectus in reliance upon the report of KPMG, India, independent accountants,
appearing elsewhere in this prospectus, and upon the authority of said firm as
experts in auditing and accounting.
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our historical financial statements in accordance with
Indian generally accepted accounting principles. Starting in fiscal 2000, we
intend to publish in our annual shareholders' report our financial statements in
US GAAP as well as in Indian GAAP.
The financial information in this prospectus has been prepared in
accordance with US GAAP, unless we have indicated otherwise. Our fiscal year
ends on March 31 of each year so all references to a particular fiscal year are
to the year ended March 31 of that year. The financial statements, including the
notes to these financial statements, audited by KPMG, India, independent
accountants, are set forth at the end of this prospectus. The reference to
"non-performing loans" in this prospectus means impaired loans as classified
pursuant to US GAAP.
Although we have translated in this prospectus certain rupee amounts into
dollars for convenience, this does not mean that the rupee amounts referred to
could have been, or could be, converted into dollars at any particular rate, the
rates stated below, or at all. Except in the sections on "The Republic of
India", and "Reforms in Some Key Sectors of the Indian Economy" which are based
on publicly available data, all translations from rupees to dollars are based on
the noon buying rate in the City of New York for cable transfers in rupees at
December 31, 1999. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate on
December 31, 1999 was Rs. 43.51 per US$1.00. The exchange rates used for
convenience translations differ from the actual rates used in the preparation of
our financial statements.
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FORWARD-LOOKING STATEMENTS
We have included statements in this prospectus which contain words or
phrases such as "will", "aim", "will likely result", "believe", "expect", "will
continue", "anticipate", "estimate", "intend", "plan", "contemplate", "seek to",
"future", "objective", "goal", "project", "should", "will pursue" and similar
expressions or variations of such expressions, that are "forward-looking
statements". Actual results may differ materially from those suggested by the
forward-looking statements due to certain risks or uncertainties associated with
our expectations with respect to, but not limited to, our ability to
successfully implement our strategy, the market acceptance of and demand for
Internet banking services, future levels of non-performing loans, our growth and
expansion, the adequacy of our allowance for credit and investment losses,
technological changes, investment income, cash flow projections and our exposure
to market risks. By their nature, certain of the market risk disclosures are
only estimates and could be materially different from what actually occur in the
future. As a result, actual future gains, losses or impact on net interest
income could materially differ from those that have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this document include, but are not limited to: general economic and political
conditions in India, south east Asia, and the other countries which have an
impact on our business activities or investments, the monetary and interest rate
policies of India, inflation, deflation, unanticipated turbulence in interest
rates, foreign exchange rates, equity prices or other rates or prices, the
performance of the financial markets and level of Internet penetration in India
and globally, changes in domestic and foreign laws, regulations and taxes,
changes in competition and the pricing environment in India, and regional or
general changes in asset valuations. For further discussion on the factors that
could cause actual results to differ, see the discussion under "Risk Factors"
contained in this prospectus.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
In accordance with the Securities Act, we have filed a registration
statement on Form F-1, including its amendments, exhibits, and schedules, with
the Commission with respect to the ADSs and the underlying equity shares we are
offering in this prospectus. This prospectus, which forms part of the
registration statement, omits certain parts of the registration statement in
accordance with rules and regulations of the Commission. Statements made in this
prospectus regarding any contract, agreement or other document are not
necessarily complete. If any statement refers to a contract, agreement or
document that is filed as an exhibit to the registration statement, please refer
to that exhibit for a more complete description of the matter involved.
For more information about us, the ADSs, and the equity shares, please
refer to the registration statement. The registration statement, including its
exhibits and schedules, may be inspected and copied at the Public Reference Room
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room is available from the Commission at 1-800-SEC-0330. The SEC
maintains an internet site at http://www.sec.gov that contains reports, proxy
and information statements and the information regarding issuers, like us, that
file electronically with the SEC.
As a result of the offering made by this prospectus, we will become subject
to the reporting requirements of the U.S. Securities Exchange Act of 1934, as
amended, applicable to a foreign private issuer. In accordance with the Exchange
Act, we will file annual reports on Form 20-F and other information with the
Commission. The annual reports and information we file with the Commission can
be inspected and copied at the Public Reference Room maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Regional Offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048, and at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition,
these materials may be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
Under the Exchange Act, we will not be required to publish financial
statements as frequently or as promptly as US companies. However, our audited
summary financial information prepared under Indian GAAP will be published
quarterly. In addition, we intend to give the depositary annual reports with
annual audited financial statements prepared under US GAAP. The depositary has
agreed that, upon our request, it will promptly mail these annual reports to all
registered holders of ADSs. We will also give the depositary all notices of
shareholders' meetings and other reports and communications that are made
generally available to our shareholders although, as described in this
prospectus, investors in ADSs will not be entitled to vote, or request the
depositary to vote, the ADSs or the underlying equity shares at any meeting of
shareholders. The depositary will arrange for the mailing of these documents to
registered holders of ADSs.
We have an internet site at http://www.icicibank.com. This web site and the
information contained in or connected to it is not incorporated into this
prospectus or registration statement and you should not rely on any of the
information contained in the web site in making a decision to acquire ADSs in
the offering.
As a foreign private issuer, we will be exempt from the rules under the
Exchange Act requiring the furnishing and content of proxy statements. Our
officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act.
204
<PAGE> 206
ENFORCEMENT OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
We are incorporated under the laws of India. All our directors and
executive officers, and substantially all experts named in this prospectus,
reside outside of the United States. All of our assets are located outside the
United States. In addition, a substantial portion of the assets of our directors
and officers and of the non-resident experts are located outside the United
States. As a result, it may be difficult to effect service of process within the
United States upon these persons or to enforce in U.S. courts judgments obtained
in U.S. courts against these persons, including judgments predicated upon the
civil liability provisions of the federal securities laws of the United States.
Section 44A of the Indian Code of Civil Procedure provides that where a
foreign judgment has been rendered by a court in any country or territory
outside India which the government of India has by notification declared to be a
reciprocating territory, it may be enforced in India by proceedings in execution
as if the judgment had been rendered by the relevant court in India. The United
States has not been declared by the government of India to be a reciprocating
territory for the purposes of Section 44A.
Amarchand & Mangaldas & Suresh A. Shroff & Co., our Indian counsel, has
advised us that, accordingly, a judgment of a court in the United States may be
enforced in India only by a suit upon the judgment in terms of Section 13 of the
Indian Code of Civil Procedure, and not by proceedings in execution. This
section, which is the statutory basis for the recognition of foreign judgments,
states that a foreign judgment is conclusive as to any matter directly
adjudicated upon except:
- where the judgment has not been pronounced by a court of competent
jurisdiction;
- where the judgment has not been given on the merits of the case;
- where the judgment appears on the face of the proceedings to be founded
on an incorrect view of international law or a refusal to recognize the
law of India in cases where such law is applicable;
- where the proceedings in which the judgment was obtained were opposed to
natural justice;
- where the judgment has been obtained by fraud; or
- where the judgment sustains a claim founded on a breach of any law in
force in India.
The suit must be brought in India within three years from the date of the
judgment in the same manner as any other suit filed to enforce a civil liability
in India. It is unlikely that a court in India would award damages on the same
basis as a foreign court if an action is brought in India. Furthermore, it is
unlikely that an Indian court would enforce foreign judgments if it viewed the
amount of damages awarded as excessive or inconsistent with Indian practice. A
party seeking to enforce a foreign judgment in India is required to obtain prior
approval from the Reserve Bank of India under the Foreign Exchange Regulation
Act to execute such a judgment or to repatriate any amount recovered. Any
judgment in a foreign currency would be converted into rupees on the date of
judgment and not on the date of payment.
We also have been advised by our Indian counsel that a party may file suit
in India against us, our directors and executive officers as an original action
based upon the provisions of the federal securities laws of the United States.
To our knowledge, no such suit has ever been brought in Indian courts.
Generally, there are considerable delays in the disposal of suits by Indian
courts. Moreover, it is unlikely that an Indian court would award damages on the
same basis as a foreign court.
205
<PAGE> 207
SELECTED FINANCIAL INFORMATION FOR ICICI BANK UNDER INDIAN GAAP
The selected financial and other data given in the table below have been
derived from our financial statements, prepared in accordance with Indian GAAP.
These financial statements are not included in this prospectus. Our Indian GAAP
financial statements for fifteen months ended March 31, 1995, 1996, 1997 and
1998 have been audited by Lodha & Co., Chartered Accountants and for fiscal 1999
by S. B. Billimoria and Company, Chartered Accountants.
<TABLE>
<CAPTION>
FIFTEEN
MONTHS
ENDED YEAR ENDED MARCH 31,
MARCH 31, -------------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
--------- --------- --------- --------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Interest income(2)................ Rs. 148 Rs. 1,066 Rs. 1,827 Rs. 2,585 Rs. 5,441 US$ 125
Other income(3)................... 93 249 426 851 890 20
------- --------- --------- --------- --------- -------
Total income...................... 241 1,315 2,253 3,436 6,331 145
EXPENSES:
Interest expense.................. 82 754 1,171 1,855 4,255 98
Operating expenses (excluding
Depreciation on fixed
assets)(4)...................... 114 223 323 431 654 15
Depreciation on fixed assets...... 14 45 82 145 175 4
------- --------- --------- --------- --------- -------
Expenses before provisions and
write-offs...................... 210 1,022 1,576 2,431 5,084 117
PROVISIONS AND WRITE-OFFS:
Provisions for depreciation on
investments..................... 5 52 54 138 (48) (1)
Other provisions and
contingencies(5)................ 1 9 51 137 323 7
------- --------- --------- --------- --------- -------
Provisions and write-offs......... 6 61 105 275 275 6
PROFIT:
Profit before tax................. 25 232 572 730 972 22
Provision for taxes............... 11 61 171 228 338 8
------- --------- --------- --------- --------- -------
Profit for the year............... Rs. 14 Rs. 171 Rs. 401 Rs. 502 Rs. 634 US$ 14
======= ========= ========= ========= ========= =======
</TABLE>
- ---------------
(1) For your convenience, rupee amounts for fiscal 1999 have been translated
into US dollars using the noon buying rate in effect on December 31, 1999
of Rs. 43.51 = US$ 1.00.
(2) Represents interest income on advances, income on investments and discount
on bills. purchased and discounted and interest earned on cash balances.
(3) Represents commission, exchange and brokerage, profit on sale or
revaluation of investments, sale of land, buildings and other assets and
profit on exchange transactions.
(4) Represents employee expenses, establishment expenses and other expenses.
(5) Primarily represents provisioning for bad and doubtful debts.
206
<PAGE> 208
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
--------- ---------- ---------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and balances with the
Reserve Bank of India... Rs. 997 Rs. 1,043 Rs. 1,503 Rs. 3,101 Rs. 4,658 US$ 107
Balances with banks and
money at call and short
notice.................. 685 586 2,226 5,628 11,725 269
Advances(2)............... 1,212 6,507 7,980 11,278 21,101 485
Investments............... 1,450 2,628 4,354 10,234 28,612 658
Fixed assets.............. 99 465 964 1,837 1,996 46
Other assets(3)........... 116 342 792 716 1,725 40
--------- ---------- ---------- ---------- ---------- ---------
Total assets.............. Rs. 4,559 Rs. 11,571 Rs. 17,819 Rs. 32,794 Rs. 69,817 US$ 1,605
========= ========== ========== ========== ========== =========
LIABILITIES:
Borrowings:
Deposits(4)............. 3,306 7,299 13,476 26,290 60,730 1,396
Other borrowings(5)..... 72 2,090 930 1,922 1,999 46
--------- ---------- ---------- ---------- ---------- ---------
Total borrowings.......... 3,378 9,389 14,406 28,212 62,729 1,442
Other liabilities and
provisions(6)........... 117 615 1,594 1,914 4,005 92
--------- ---------- ---------- ---------- ---------- ---------
Total liabilities......... 3,495 10,004 16,000 30,126 66,734 1,534
Shareholders' funds
Equity capital.......... 1,050 1,500 1,500 1,650 1,650 38
Reserves and surplus.... 14 67 319 1,018 1,433 33
--------- ---------- ---------- ---------- ---------- ---------
Total shareholders'
funds................... 1,064 1,567 1,819 2,668 3,083 71
--------- ---------- ---------- ---------- ---------- ---------
Total liabilities and
shareholders' funds..... Rs. 4,559 Rs. 11,571 Rs. 17,819 Rs. 32,794 Rs. 69,817 US $1,605
========= ========== ========== ========== ========== =========
</TABLE>
- ---------------
(1) For your convenience, rupee amounts for fiscal 1999 have been translated
into US dollars using the noon buying rate in effect on December 31, 1999
of Rs. 43.51 = US$ 1.00.
(2) Includes bills purchased and discounted.
(3) Includes current assets and advances for capital assets.
(4) Represents deposits received from banks as well as others.
(5) Represents borrowings from the Reserve Bank of India and from other banks
and institutions.
(6) Includes debentures issued by us.
207
<PAGE> 209
SIGNIFICANT DIFFERENCES BETWEEN INDIAN GAAP AND US GAAP
Indian GAAP differs in several respects from US GAAP. A summary of the
significant differences between Indian GAAP and US GAAP is presented below:
<TABLE>
<CAPTION>
SUBJECT INDIAN GAAP US GAAP
- ------- ----------- -------
<S> <C> <C>
Statement of cash flows.............. Statement is required for Statement is required.
companies listed on the stock
exchanges and is recommended
for other companies
Statement of changes in stockholders'
equity............................. Statement is not required. Statement is required.
Consolidation........................ The practice of consolidation When company controls more
is not followed. than 50.0% of the voting
securities of another
company, the investee company
is known as a subsidiary and
is generally considered to be
a part of the controlling
company (parent). In these
circumstances, the financial
statements of the investee
are generally required to be
consolidated with the
financial statements of its
parent in which all material
transactions between them are
eliminated.
Equity method........................ Equity accounting is not When a company controls 20.0%
recognized as an acceptable to 50.0% of the investee's
method of accounting. voting securities or has a
subsidiary that is not
consolidated, the investment
is generally stated at the
underlying net asset value,
with the equity in the
investee's earnings or loss
included in the investor's
income statement for the
current period (equity
accounting).
Business combination................. The conditions for applying Business combinations are
the purchase method are accounted for either under
different and business the purchase method or the
combinations are generally pooling method.
accounted as per the pooling
of interest method.
</TABLE>
208
<PAGE> 210
<TABLE>
<CAPTION>
SUBJECT INDIAN GAAP US GAAP
- ------- ----------- -------
<S> <C> <C>
Allowance for credit losses.......... Allowance for credit losses Loans are identified as non-
are based on defaults performing and placed on non-
expected both on principal accrual basis, where
and interest. The allowance management estimates that
does not consider present payment of interest or
value of future inflows. principal is doubtful of
collection. Non-performing
loans are reported after
considering the impact of
impairment. The impairment is
measured by comparing the
carrying amount of the loan
to the present value of
expected future cash flows or
the fair value of the
collateral (discounted at the
loans' effective rate).
Loan origination fees/costs.......... Loan origination fees and Loan origination fees (net of
costs are taken to the income loan origination costs) are
statement in the year deferred and recognized as an
accrued/incurred. adjustment to yield over the
life of the loan.
Interest capitalization.............. Capitalization of interest is Interest cost incurred for
optional. funding an asset during its
construction period is
required to be capitalized
based on the average
outstanding investment in the
asset and the average cost of
funds. The capitalized
interest cost is included in
the cost of the relevant
asset and is depreciated over
the useful life of the asset.
Redeemable preference shares......... Redeemable preference shares Redeemable preference shares
are a component of do not form a part of the
shareholders' equity, and shareholders' equity and
preference dividend is dividends on such shares are
reported as an appropriation charged to the income
of income. statement.
</TABLE>
209
<PAGE> 211
<TABLE>
<CAPTION>
SUBJECT INDIAN GAAP US GAAP
- ------- ----------- -------
<S> <C> <C>
Investment in debt and equity
securities......................... Securities are classified as Securities are classified as
current or permanent. Current trading, held to maturity or
securities are valued at the available for sale based on
lower of cost or market value management's intention on the
with any unrealized loss acquisition date. While
charged to the income trading and available for
statement. Unrealized gains sale securities are valued at
are not recorded. Permanent fair value, held to maturity
investments are valued at securities are valued at
cost, adjusted for permanent cost, adjusted for
diminution. amortization of premiums and
accretion of discount. The
unrealized gains and losses
on trading securities are
taken to the income
statement, while those on
available for sale securities
are reported as a separate
component of stockholders'
equity, net of applicable
taxes.
Revaluation of property, plant and
equipment.......................... Revaluation of property, Revaluation of property,
plant and plant and equipment plant and equipment is not
is permitted. permitted except in certain
cases.
Accounting for finance leases........ Assets under finance leases Assets under finance leases
are not required to be should be capitalized and
capitalized by lessees but, depreciated by lessees, with
instead, are capitalized and the corresponding recognition
depreciated by lessors at of the lease obligation.
statutory rates. The Lease rentals are recognized
difference between the as payments of the lease
depreciation charge and obligation and interest
annual lease charge is thereon. Lessors should
adjusted in the income recognize the minimum lease
statement through a lease payments less unearned
equalization account. income, i.e., the net
investment in the lease, as
an asset and the interest
component of the lease rental
as income.
Lessees recognize lease
rental payments as expenses
as they are incurred.
Sale of securities under
agreements......................... Recorded as sales and removed Sales proceeds are recorded
from balance sheet of seller. as borrowings in the balance
sheet of seller/borrower.
Securities continue to be
reflected as assets in the
balance sheet of
seller/borrower.
</TABLE>
210
<PAGE> 212
<TABLE>
<CAPTION>
SUBJECT INDIAN GAAP US GAAP
- ------- ----------- -------
<S> <C> <C>
Income taxes......................... The amount of tax that is Income taxes are provided
payable is recorded. against current period income
as reflected in the financial
statements, even though all
or some of such income will
not be reported for tax
purposes in the current
period and taxes will not be
payable currently. This means
that, even though certain
amount of the current period
accounting income is not
taxable, income tax must be
provided in the financial
statements against both
income on which taxes are
payable and income on which
the tax liability is deferred
regardless of the length of
that deferral, subject to
valuation allowances for
deferred tax assets.
Share issue expenses................. Share issue expenses are Direct costs to sell shares
generally deferred and are treated as a reduction of
amortized over a period of the issue proceeds; indirect
three to five years. They may costs are expensed as
also be written off against incurred.
share premium account.
Debt issue costs..................... Debt issue expenses may be Debt issue costs are deferred
written off against share and amortized over the life
premium account or accounted of the debt using the
as deferred revenue expenses "interest method".
and amortized.
Extraordinary items.................. Extraordinary items are Extraordinary items are
disclosed separately in the disclosed separately in the
statement of profit and loss. statement of profit and loss
net of applicable tax
effects.
Prior period items................... Prior period items are Prior period items, less
disclosed separately in the related tax effects, are
current statement of profit excluded from the current
and loss. statements of profit and loss
and reflected as adjustments
to the opening balance of
retained earnings.
</TABLE>
211
<PAGE> 213
<TABLE>
<CAPTION>
SUBJECT INDIAN GAAP US GAAP
- ------- ----------- -------
<S> <C> <C>
Related party transactions........... Requirements to report Financial statements are
related party transactions in generally required to include
the financial statements are full disclosures of all
limited to reporting (a) material related party
accounts receivable and loans transactions and balances,
given to management, or to other than compensation
enterprises in which arrangements, expense
management is interested or allowances, and other similar
which are under the same items in the ordinary course
management; and (b) loans of business.
taken from management.
Disclosure is also required
of guarantees given by or for
management and of
remuneration to management.
Segmental information................ Segmental information is not Information regarding total
required. revenues, operating costs,
gross profit, assets and
liabilities for each
operating segment is required
to be disclosed.
</TABLE>
212
<PAGE> 214
UNTIL -- , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTION.
<PAGE> 215
INDEX TO US GAAP FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on the Financial Statements.... F- 2
Independent Accountants' Review Report on the Financial
Statement................................................. F- 3
Balance Sheets at March 31, 1998 and 1999 and December 31,
1999...................................................... F- 4
Statements of Income for the years ended March 31, 1997,
1998 and 1999 and for the nine months ended December 31,
1998 (unaudited) and 1999................................. F- 5
Statements of Changes in Stockholders' Equity for the years
ended March 31, 1997, 1998 and 1999 and nine months ended
December 31, 1999......................................... F- 7
Statements of Cash Flows for the years ended March 31, 1997,
1998 and 1999 and for the nine months ended December 31,
1998 (unaudited) and 1999................................. F- 9
Notes to Financial Statements............................... F-12
</TABLE>
F-1
<PAGE> 216
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ICICI BANK LIMITED
We have audited the accompanying balance sheets of ICICI Bank Limited as of
December 31, 1999 and March 31, 1999 and 1998, and the related statements of
income, stockholders' equity and cash flows for the nine-month period ended
December 31, 1999 and each of the years in the three-year period ended March 31,
1999. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ICICI Bank Limited as of
December 31, 1999 and March 31, 1999 and 1998, and the result of its operations
and its cash flows for the nine-month period ended December 31, 1999, and each
of the years in the three-year period ended March 31, 1999, in conformity with
accounting principles generally accepted in United States.
The United States dollar amounts are presented in the accompanying
financial statements solely for the convenience of the readers and are
arithmetically correct on the basis disclosed in footnote 1.1.3.
KPMG
Mumbai, India
March 11, 2000
F-2
<PAGE> 217
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ICICI BANK LIMITED
We have reviewed the accompanying statements of income, stockholders'
equity and cash flows of ICICI Bank Limited for the nine-month period ended
December 31, 1998. These financial statements are the responsibility of the
Bank's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
KPMG
Mumbai, India
February 9, 2000
F-3
<PAGE> 218
ICICI BANK LIMITED
US GAAP BALANCE SHEETS
AT MARCH 31, 1998 AND 1999 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
--------------------------------- ----------------------
1998 1999 1999(1) 1999 1999(1)
--------- --------- -------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... Rs. 8,728 Rs.18,488 US$ 425 Rs. 18,590 US$ 427
Trading account assets.............. 7,387 15,822 364 28,606 657
Securities, available for sale...... 1,476 3,963 91 4,402 101
Loans, net.......................... 12,765 27,597 634 37,749 868
Acceptances......................... 2,866 5,587 128 7,822 180
Property and equipment.............. 1,363 1,761 41 1,902 44
Other assets........................ 693 1,607 37 3,134 72
--------- --------- -------- ---------- --------
TOTAL ASSETS........................ 35,278 74,825 1,720 102,205 2,349
========= ========= ======== ========== ========
LIABILITIES
Interest bearing deposits........... 22,658 54,963 1,263 76,987 1,769
Non-interest bearing deposits....... 3,632 5,766 133 8,015 184
--------- --------- -------- ---------- --------
Total deposits...................... 26,290 60,729 1,396 85,002 1,953
Trading account liabilities......... 1,793 418 10 1,797 41
Acceptances......................... 2,866 5,587 128 7,822 180
Long-term debt...................... 129 1,764 41 1,734 40
Other liabilities................... 1,729 3,497 80 2,181 50
--------- --------- -------- ---------- --------
TOTAL LIABILITIES................... 32,807 71,995 1,655 98,536 2,264
========= ========= ======== ========== ========
STOCKHOLDERS' EQUITY
Common stock........................ 1,650 1,650 38 1,650 38
Additional paid in capital.......... 375 375 9 375 9
Retained earnings................... 431 756 17 1,564 36
Other comprehensive income.......... 15 49 1 80 2
--------- --------- -------- ---------- --------
TOTAL STOCKHOLDERS' EQUITY.......... 2,471 2,830 65 3,669 85
--------- --------- -------- ---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................ Rs.35,278 Rs.74,825 US$1,720 Rs.102,205 US$2,349
========= ========= ======== ========== ========
</TABLE>
- ---------------
(1) Exchange rate: Rs. 43.51 = US$1.00
See accompanying notes to the financial statements.
F-4
<PAGE> 219
ICICI BANK LIMITED
US GAAP STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED MARCH 31, ---------------------------------
------------------------------------------- 1998
1997 1998 1999 1999(1) (UNAUDITED) 1999 1999(1)
--------- --------- --------- ------- ----------- --------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST REVENUE
Loans, including fees... Rs. 1,341 Rs. 1,499 Rs. 2,707 US$ 62 Rs. 1,853 Rs. 3,080 US$ 71
Securities, including
dividend.............. 421 148 305 7 209 525 12
Trading account assets,
Including dividend.... -- 865 2,247 52 1,618 2,079 48
Other................... 81 67 131 3 78 153 3
--------- --------- --------- ------ --------- --------- ------
TOTAL INTEREST
REVENUE............... 1,843 2,579 5,390 124 3,758 5,837 134
--------- --------- --------- ------ --------- --------- ------
INTEREST EXPENSE
Deposits................ 972 1,618 3,707 85 2,609 4,172 96
Long term debt.......... 13 16 155 4 102 184 4
Trading account
liabilities........... 159 216 256 6 215 367 9
Other................... 26 4 126 3 36 60 1
--------- --------- --------- ------ --------- --------- ------
TOTAL INTEREST
EXPENSE............... 1,170 1,854 4,244 98 2,962 4,783 110
--------- --------- --------- ------ --------- --------- ------
NET INTEREST REVENUE.... 673 725 1,146 26 796 1,054 24
Provision for credit
losses................ 187 360 540 12 398 218 5
--------- --------- --------- ------ --------- --------- ------
NET INTEREST REVENUE
AFTER PROVISION FOR
CREDIT LOSSES......... 486 365 606 14 398 836 19
NON-INTEREST REVENUE,
NET
Fees and commissions.... 149 240 370 9 261 408 9
Trading account
revenue............... -- 147 134 3 11 698 16
Securities
transactions.......... 80 32 21 -- 22 70 2
Foreign exchange
transactions.......... 86 171 341 8 257 167 4
Other................... 2 1 -- -- -- -- --
--------- --------- --------- ------ --------- --------- ------
NET REVENUE............. 803 956 1,472 34 949 2,179 50
--------- --------- --------- ------ --------- --------- ------
</TABLE>
F-5
<PAGE> 220
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED MARCH 31, ---------------------------------
------------------------------------------- 1998
1997 1998 1999 1999(1) (UNAUDITED) 1999 1999(1)
--------- --------- --------- ------- ----------- --------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST EXPENSE
Salaries................ 55 116 172 4 100 158 4
Employees............... 12 21 32 1 30 48 1
--------- --------- --------- ------ --------- --------- ------
TOTAL EMPLOYEE
EXPENSE............... 67 137 204 5 130 206 5
Premise and equipment
expense............... 116 162 232 5 186 222 5
Administration and other
expense............... 223 255 363 8 201 422 9
--------- --------- --------- ------ --------- --------- ------
TOTAL NON-INTEREST
EXPENSE............... 406 554 799 18 517 850 19
--------- --------- --------- ------ --------- --------- ------
INCOME BEFORE TAXES..... 397 402 673 16 432 1,329 31
Income tax expense...... 155 104 170 4 112 303 7
--------- --------- --------- ------ --------- --------- ------
NET INCOME.............. Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 320 Rs. 1,026 US$ 24
========= ========= ========= ====== ========= ========= ======
EARNINGS PER SHARE
Basic and diluted....... 1.61 1.84 3.05 0.07 1.94 6.22 0.15
Weighted average number
of common shares (in
millions) used for
computing earnings per
share................. 150 162 165 165 165 165 165
</TABLE>
- ---------------
(1) Exchange rate: Rs. 43.51 = US$1.00
See accompanying notes to the financial statements.
F-6
<PAGE> 221
ICICI BANK LIMITED
US GAAP STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS
ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------------- -------------------
1997 1998 1999 1999(1) 1999 1999(1)
--------- --------- --------- ------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of period....... Rs. 1,500 Rs. 1,500 Rs. 1,650 US$ 38 Rs. 1,650 US$ 38
Common stock issued to parent
company.......................... -- 150 -- -- -- --
--------- --------- --------- ------ --------- ------
Balance, end of period............. 1,500 1,650 1,650 38 1,650 38
--------- --------- --------- ------ --------- ------
ADDITIONAL PAID IN CAPITAL
Balance, beginning of period....... -- -- 375 9 375 9
Common stock issued to parent
company.......................... -- 375 -- -- -- --
--------- --------- --------- ------ --------- ------
Balance, end of period............. -- 375 375 9 375 9
--------- --------- --------- ------ --------- ------
RETAINED EARNINGS
Balance, beginning of period....... 158 283 431 10 756 17
Net income......................... 242 298 503 12 1,026 24
Dividend declared on common
stock............................ (117) (150) (178) (5) (218) (5)
--------- --------- --------- ------ --------- ------
Balance, end of period............. 283 431 756 17 1,564 36
--------- --------- --------- ------ --------- ------
OTHER COMPREHENSIVE INCOME
Balance, beginning of period....... (66) (33) 15 -- 49 1
Unrealized gain on securities,
net.............................. 33 48 34 1 31 1
--------- --------- --------- ------ --------- ------
Balance, end of period............. (33) 15 49 1 80 2
--------- --------- --------- ------ --------- ------
TOTAL STOCKHOLDERS' EQUITY
Balance, beginning of period....... 1,592 1,750 2,471 57 2,830 65
Common stock issued to parent
company.......................... -- 525 -- -- -- --
Net income......................... 242 298 503 12 1,026 24
Dividend declared on common
stock............................ (117) (150) (178) (5) (218) (5)
Unrealized gain on securities,
net.............................. 33 48 34 1 31 1
--------- --------- --------- ------ --------- ------
Balance, end of period............. Rs. 1,750 Rs. 2,471 Rs. 2,830 US$ 65 Rs. 3,669 US$ 85
--------- --------- --------- ------ --------- ------
</TABLE>
F-7
<PAGE> 222
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------------- -------------------
1997 1998 1999 1999(1) 1999 1999(1)
--------- --------- --------- ------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME........................ Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 1,026 US$ 24
Other comprehensive income, net of
tax
Unrealized gains on securities.... 33 48 34 1 31 1
--------- --------- --------- ------ --------- ------
Comprehensive income.............. Rs. 275 Rs. 346 Rs. 537 US$ 13 Rs. 1,057 US$ 25
--------- --------- --------- ------ --------- ------
</TABLE>
- ---------------
(1) Exchange rate: Rs.43.51 = US$1.00
See accompanying notes to the financial statements.
F-8
<PAGE> 223
ICICI BANK LIMITED
US GAAP STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) 1999
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31
-------------------------------------------- ----------------------------------
1998
1997 1998 1999 1999(1) (UNAUDITED) 1999 1999(1)
--------- --------- ---------- ------- ----------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING
ACTIVITIES
Net income........... Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 320 Rs. 1,026 US$ 24
Adjustments to
reconcile net
income to net cash
from operating
activities:
Provision for credit
losses............. 187 360 540 12 398 218 5
Depreciation and
amortization....... 65 148 163 4 148 163 4
Provision for
deferred taxes..... 22 (99) (130) (3) (79) 36 1
Unrealized
(gain)/loss on
trading
securities......... -- 127 (23) (1) 76 (334) (8)
Net gain on sale of
securities,
available for
sale............... (80) (32) (21) -- (22) (70) (2)
CHANGE IN ASSETS AND
LIABILITIES
Other assets......... (87) (301) (914) (21) (1,316) (1,528) (35)
Other liabilities.... 561 727 1,898 44 421 (1,315) (30)
Trading account
assets............. (3) (7,511) (8,412) (194) (4,288) (12,450) (286)
Trading account
liabilities........ (1,166) 952 (1,375) (32) 414 1,378 32
--------- --------- ---------- ------- ---------- ---------- -------
NET CASH USED IN
OPERATING
ACTIVITIES......... Rs. (259) Rs.(5,331) Rs. (7,771) US$(179) Rs. (3,928) Rs.(12,876) US$(295)
========= ========= ========== ======= ========== ========== =======
</TABLE>
F-9
<PAGE> 224
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31
-------------------------------------------- ----------------------------------
1998
1997 1998 1999 1999(1) (UNAUDITED) 1999 1999(1)
--------- --------- ---------- ------- ----------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
INVESTING
ACTIVITIES
Securities, available
for sale
Purchases............ Rs.(2,992) Rs. (142) Rs. (3,610) US$ (83) Rs. (2,221) Rs. (3,020) US$ (70)
Proceeds from
sales.............. 1,178 2,609 1,103 25 590 2,611 60
Net increase in
loans.............. (1,704) (4,751) (15,373) (353) (8,513) (10,369) (239)
Capital expenditure
on property and
equipment.......... (396) (985) (487) (11) (295) (267) (6)
Proceeds from sale of
property and
equipment.......... -- 1 1 -- -- -- --
--------- --------- ---------- ------- ---------- ---------- -------
NET CASH USED IN
INVESTING
ACTIVITIES......... Rs.(3,914) Rs.(3,268) Rs.(18,366) US$(422) Rs.(10,439) Rs.(11,045) US$(255)
========= ========= ========== ======= ========== ========== =======
</TABLE>
- ---------------
(1) Exchange rate: Rs.43.51 = US$1.00
See accompanying notes to the financial statements.
F-10
<PAGE> 225
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
--------------------------------------------- ----------------------------------
1998
1997 1998 1999 1999(1) (UNAUDITED) 1999 1999(1)
--------- ---------- ---------- ------- ----------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING
ACTIVITIES
Net increase in
deposits........... Rs. 6,176 Rs. 12,813 Rs. 34,439 US$ 792 Rs. 20,133 Rs. 24,271 US$ 558
Proceeds from
issuance of long
term debt.......... 7 40 1,636 38 981 --
Maturity and
redemption of long
term debt.......... -- -- -- -- -- (30) (1)
Proceeds from
issuance of common
stock to parent
company............ 525 -- -- -- -- --
Payment of
dividend........... (117) (150) (178) (5) (178) (218) (5)
--------- ---------- ---------- ------- ---------- ---------- -------
NET CASH FROM
FINANCING
ACTIVITIES......... Rs. 6,066 Rs. 13,228 Rs. 35,897 US$ 825 Rs. 20,936 Rs. 24,023 US$ 552
========= ========== ========== ======= ========== ========== =======
Net increase in cash
and cash
equivalents........ 1,893 4,629 9,760 224 6,569 102 2
Cash and cash
equivalents at
beginning of
period............. 2,206 4,099 8,728 201 8,728 18,488 425
--------- ---------- ---------- ------- ---------- ---------- -------
CASH AND CASH
EQUIVALENTS AT END
OF THE PERIOD...... Rs. 4,099 Rs. 8,728 Rs. 18,488 US$ 425 Rs. 15,297 Rs. 18,590 US$ 427
========= ========== ========== ======= ========== ========== =======
</TABLE>
- ---------------
(1) Exchange rate: Rs. 43.51 = US$1.0
F-11
<PAGE> 226
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999
1 SIGNIFICANT ACCOUNTING POLICIES
1.1 BASIS OF PRESENTATION
1.1.1 ICICI Banking Corporation Limited incorporated in Vadodara, India
provides a wide range of banking and financial services including
commercial lending, trade finance and treasury products. The name
of ICICI Banking Corporation Limited was changed to ICICI Bank
Limited ("ICICI Bank" or "the Bank") on September 10, 1999. ICICI
Bank is a banking company governed by the Banking Regulations Act,
1949. ICICI Bank is a 74.25% owned subsidiary of ICICI Limited
("the parent company"), a leading financial institution in India.
ICICI Bank does not have any majority owned subsidiaries or
investments where its shareholding exceeds 20% of the voting stock
of the investee.
1.1.2 The accounting and reporting policies of ICICI Bank used in the
preparation of these financial statements reflect industry
practices and conform to generally accepted accounting principles
in the United States of America ("US GAAP"). The preparation of
financial statements in conformity with US GAAP requires management
to make estimates and assumptions that affect the reported amount
of assets and liabilities at the date of the financial statements
and the reported income and expenses during the reporting period.
Management believes that the estimates used in the preparation of
the financial statements are prudent and reasonable. Actual results
could differ from these estimates.
1.1.3 The accompanying financial statements have been prepared in Indian
rupees ("Rs"), the national currency of India. Solely for the
convenience of the reader, the financial statements at and for the
year ended March 31, 1999 and at and for the nine months period
ended December 31, 1999 have been translated into US dollars, at
the noon buying rate in New York city at December 31, 1999 for the
cable transfers in rupees, as certified for customs purposes by the
Federal Reserve of New York of US$1.00 = Rs. 43.51. No
representation is made that the rupee amounts have been, could have
been or could be converted into US dollars at such rate or any
other rate on March 31, 1999 and December 31, 1999 or at any other
certain date.
1.2 REVENUE RECOGNITION
1.2.1 Interest income is accounted on an accrual basis except in respect
of impaired loans, where it is recognized on a cash basis.
1.2.2 Income from leasing operations is accrued in a manner to provide a
fixed rate of return on outstanding investments.
1.2.3 Discount on bills is recognized on a straight line basis over the
tenure of the bills.
1.2.4 Fees from non-fund based activities such as guarantees and letters
of credit are amortized over the contractual period of the
commitment.
1.3 CASH AND CASH EQUIVALENTS
1.3.1 ICICI Bank considers all highly liquid investments, which are
readily convertible into cash and have contractual maturities of
three months or less from the date of purchase, to be cash
equivalents. The carrying value of cash equivalents approximates
fair value.
F-12
<PAGE> 227
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
1.4 SECURITIES AND TRADING ACCOUNT ACTIVITIES
1.4.1 ICICI Bank has adopted the Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". SFAS No. 115 requires that investments
in debt and equity securities be reported at fair value, except for
debt securities classified as held-to-maturity securities, which
are reported at amortized cost. Equity securities and debt
securities available for sale are carried at fair value, with
unrealized gains and losses reported as a separate component of
stockholders' equity, net of applicable income taxes. Realized
gains and losses on sale of securities are included in earnings on
a weighted average cost basis.
1.4.2 Any "other than temporary diminution" in the value of held to
maturity or securities, available for sale is charged to the income
statement. "Other than temporary diminution" is identified based on
management's evaluation.
1.4.3 Trading account assets include securities held for the purpose of
sale in the short term. These securities are valued at fair value,
with the unrealized gains/losses being taken to trading account
revenue. Trading account activities also include foreign exchange
products. Foreign exchange trading positions are valued at
prevailing market rates on the date of the balance sheet and the
resulting gains/losses are included in foreign exchange revenue.
1.5 LOANS
1.5.1 Loans are reported at the principal amount outstanding, inclusive
of interest accrued and due pursuant to the contractual terms. Loan
origination fees (net of loan origination costs) are deferred and
recognized as an adjustment to yield over the period of the loan.
Interest is accrued on the unpaid principal balance and is included
in interest income.
1.5.2 Loans are identified as impaired and placed on a non-accrual basis,
when it is determined that payment of interest or principal is
doubtful of collection or that interest or principal is past due
beyond two payment periods (each payment period being 90 days).
Such loans are classified as non-performing. Any interest accrued
(and not received) on impaired loans is reversed and charged
against current earnings, and interest is thereafter included in
earnings only to the extent actually received in cash.
Non-performing loans are returned to an accrual status when all
contractual principal and interest amounts are reasonably assured
of repayment and there is a sustained period of repayment
performance in accordance with the contractual terms.
1.5.3 Non-performing loans are reported after considering the impact of
"non-performance". Non-performance is measured by comparing the
carrying amount of the loan with the present value of the expected
future cash flows/fair value of the collateral, discounted at the
effective rate of the loan. In cases of default wherein ICICI Bank
does not have adequate security and/or the borrower is not
traceable and legal recourse is not expected to result in recovery,
ICICI Bank writes off all or part of the carrying value of the
loan.
1.5.4 Loans include aggregate rentals on lease financing transactions and
residual values, net of related unearned income and security
deposit collected from the lessee. Substantially all of the lease
financing transactions represent direct financing leases. Unearned
income is amortized under a method which primarily results in an
approximate level rate of return when related to the unrecovered
lease investment. Income on non-performing leases is recognised on
the same basis as non-performing loans.
F-13
<PAGE> 228
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
1.5.5 Loans further include credit substitutes, such as privately
placed/negotiated debt instruments and preferred shares, which are
not readily marketable.
1.6 AGGREGATE ALLOWANCE FOR CREDIT LOSSES
1.6.1 ICICI Bank evaluates its entire credit portfolio on a periodic
basis and grades its accounts considering both qualitative and
quantitative criteria. This analysis includes an account by account
analysis of the entire loan portfolio, and an allowance is made for
any probable loss on each account. In evaluating its credit losses,
management has estimated recovery of such loans at various stages
of time to recovery and has discounted these using the effective
interest rate of the loans. In estimating recovery, ICICI Bank
considers its past credit loss experience and such other factors,
which in its judgement, deserve recognition in estimating probable
credit losses. Actual recovery may differ from estimates and
consequently actual loss could differ from the estimated loss. The
aggregate allowance for credit losses is increased by amounts
charged to the provisions for credit losses, net of write-offs and
releases of provisions as a result of cash collections.
1.7 PROPERTY AND EQUIPMENT
1.7.1 Property and equipment are stated at cost, less accumulated
depreciation. The cost of additions, capital improvements and
interest during the construction period are capitalized, while
repairs and maintenance are charged to expenses when incurred.
1.7.2 Depreciation is provided over the estimated useful lives of the
assets.
1.7.3 The cost and accumulated depreciation for property and equipment
sold, retired or otherwise disposed of are relieved from the
accounts, and the resulting gains/losses are reflected in the
income statement.
1.7.4 Property under construction and advances paid towards acquisition
of property, plant and equipment are disclosed as capital work in
progress.
1.8 INTEREST CAPITALIZATION
1.8.1 The interest cost incurred for funding an asset during its
construction period is capitalized based on the actual outstanding
investment in the asset from the date of purchase/expenditure and
the average cost of funds. The capitalized interest cost is
included in the cost of the relevant asset and is depreciated over
the asset's estimated useful life.
1.9 INCOME TAXES
1.9.1 Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to the difference between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss
carry forwards. Deferred tax assets are recognized subject to
management's judgement that realization is more likely than not.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
temporary differences are expected to be received and settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the income statement in the period of
change.
F-14
<PAGE> 229
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
1.10 RETIREMENT BENEFITS
GRATUITY
1.10.1 In accordance with Indian law, ICICI Bank provides for a gratuity
to its employees in the form of a defined benefit retirement plan
covering all employees. The plan provides a lump sum payment to
vested employees at retirement, on death while in employment or on
termination of employment based on the respective employee's
salary and the years of employment with ICICI Bank. The gratuity
benefit conferred by ICICI Bank on its employees is equal to or
greater than the statutory minimum.
1.10.2 ICICI Bank provides the gratuity benefit through annual
contributions to a fund administered by trustees and managed by
the Life Insurance Corporation of India. Under this scheme, the
Life Insurance Corporation of India assumes the obligation to
settle the gratuity payment to ICICI Bank's employees. ICICI Bank
contributed Rs. 2 million, Rs. 3 million and Rs. 5 million to the
gratuity fund in fiscal 1997, 1998 and 1999 respectively. The
contribution, including provision, for nine months ended December
31, 1998 and 1999 was Rs. 3 million and Rs. 4 million
respectively.
SUPERANNUATION
1.10.3 The permanent employees of ICICI Bank are entitled to receive
retirement benefits under the superannuation fund operated by
ICICI Bank. The Superannuation fund is a defined contribution plan
under which ICICI Bank contributes annually a sum equivalent to
15% of the employee's eligible annual salary to Life Insurance
Corporation of India the manager of the fund, that undertakes to
pay the lump sum and annuity payments pursuant to the scheme.
ICICI Bank contributed Rs. 5 million, Rs. 10 million and Rs. 12
million to the superannuation plan in fiscal 1997, 1998 and 1999
respectively. The contribution, including provision, for nine
months ended December 31, 1998 and 1999 was Rs. 11 million and Rs.
17 million respectively.
PROVIDENT FUND
1.10.4 In accordance with Indian law, all employees of ICICI Bank are
entitled to receive benefits under the provident fund, a defined
contribution plan in which both the employee and ICICI Bank
contribute monthly at a determined rate (currently 12% of
employees' salary). These contributions are made to a fund set up
by ICICI Bank and administered by a board of trustees. ICICI Bank
contributed Rs. 4 million, Rs. 7 million and Rs. 11 million, Rs. 7
million and Rs. 11 million to the provident fund in fiscal 1997,
1998 and 1999 and nine months ended December 31, 1998 and 1999,
respectively. Further, in the event the return on the fund is
lower than 12% (current guaranteed rate of return to the
employees), such difference will be contributed by ICICI Bank and
charged to income.
LEAVE ENCASHMENT
1.10.5 The liability for leave encashment on retirement or on termination
of services of the employee of ICICI Bank is valued on the basis
of the employee's last drawn salary and provided for. Accordingly
ICICI Bank has made a provision of Rs. 1 million, Rs. 1 million,
Rs. 4 million, Rs. 3 million and Rs. 6 million for fiscal 1997,
1998, 1999, and nine months ended December 31 1998 and 1999
respectively.
F-15
<PAGE> 230
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
1.11 FOREIGN CURRENCY TRANSACTIONS
1.11.1 Revenue and expenses in foreign currency are accounted at the
exchange rate on the date of the transaction. Foreign currency
balances at year-end are translated at the year-end exchange rates
and the revaluation gains/losses are adjusted through the income
statement.
1.11.2 Speculative forward exchange contracts are revalued at year-end
based on forward exchange rates for residual maturities and the
contracted rates and the revaluation gain/loss is recognized in
the income statement. Forward exchange contracts that are
accounted for as hedges of foreign currency exposures, are
revalued based on year-end spot rates and the spot rates at the
inception of the contract. The revaluation gain/loss is recognized
in the income statement. Premium or discount on such forward
exchange contracts is recognized over the life of the contract.
1.12 DERIVATIVE INSTRUMENTS
1.12.1 ICICI Bank enters into currency swaps with its corporate clients
which it hedges with the parent company. Such hedge contracts are
structured to ensure that changes in their market values would
fully offset the effect of a change in the fair value of the
underlying contracts. Accordingly, these swap contracts are
designated as hedge transactions and accounted for under accrual
method.
1.12.2 ICICI Bank has entered into interest swap contracts for its own
balance sheet management purposes as well as for taking trading
positions. The contracts which have been entered into for its
balance sheet management purposes have been designated as hedge
transactions and accounted for under the accrual method. The
contracts entered into for trading purposes have been designated
as "traded contracts" and have been accounted at their fair value.
1.13 DEBT ISSUANCE COSTS
1.13.1 Debt issuance costs are amortized over the tenure of the debt.
1.14 DIVIDENDS
1.14.1 Dividends on common stock and the related dividend tax are
recorded as a liability at the point of their approval by the
board of directors.
1.15 EARNINGS PER SHARE
1.15.1 Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed by adjusting
outstanding shares assuming conversion of all potentially dilutive
stock options and other convertible securities.
1.16 INTERIM INFORMATION (UNAUDITED)
1.16.1 The interim information presented in the financial statements for
the nine-month period ended December 31, 1998 have been prepared
by management without audit and, in the opinion of the management,
includes all adjustments of a normal recurring nature that are
necessary for the fair presentation of financial position, results
of operations, and cash flows for the periods shown, in accordance
with generally accepted accounting principles.
F-16
<PAGE> 231
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
2 FINANCIAL INSTRUMENTS
2.1.1 ICICI Bank provides a wide variety of financial instruments as
products to its customers, and it also uses these instruments in
connection with its own activities. Following are explanatory notes
regarding financial assets and liabilities, off-balance sheet
financial instruments, concentration of credit risk and the
estimated fair value of financial instruments.
2.1.2 Collateral requirements are assessed on a case-by-case evaluation
of each customer and product, and may include cash, securities,
receivables, property, plant and equipment and other assets.
2.2 FINANCIAL ASSETS AND LIABILITIES
CASH AND CASH EQUIVALENTS
2.2.1 Cash and cash equivalents at December 31, 1999 include a balance of
Rs. 4,307 million (March 31, 1999: Rs. 4,565 million and March 31,
1998: Rs. 3,031 million) maintained with the Reserve Bank of India
being the minimum daily stipulated amount to be maintained. This
balance is subject to withdrawal and usage restrictions.
2.2.2 Cash and cash equivalents at December 31, 1999 also includes,
interest-bearing deposits with banks aggregating Rs. 12,269 million
(March 31, 1999: Rs. 11,083 million and March 31 1998: Rs. 5,211
million).
TRADING ACCOUNT ASSETS
2.2.3 listing of the trading account assets is set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------- AT DECEMBER 31,
1998 1999 1999
--------- ---------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Government of India securities............... Rs. 6,987 Rs. 14,449 Rs. 28,100
Equity securities............................ 101 198 165
Revaluation gains on derivative and foreign
exchange contracts......................... 77 425 341
Commercial paper /certificates of deposits... 222 750 --
--------- ---------- ----------
TOTAL........................................ Rs. 7,387 Rs. 15,822 Rs. 28,606
========= ========== ==========
</TABLE>
2.2.4 In accordance with the Banking Regulation Act, 1949, ICICI Bank is
required to maintain a specified percentage of its net demand and
time liabilities by way of liquid unencumbered assets like cash,
gold and approved securities. The amount of securities required to
be maintained at December 31, 1999 was Rs. 18,271 million (March
31, 1999: Rs. 12,875 million and March 31, 1998: Rs. 6,499
million).
F-17
<PAGE> 232
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
TRADING ACCOUNT REVENUE
2.2.5 A listing of trading account revenue is set out below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------ ----------------------
1998
1997 1998 1999 (UNAUDITED) 1999
-------- -------- -------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gain on sale of trading
securities........................ Rs. -- Rs. 274 Rs. 111 Rs. 87 Rs. 364
Revaluation gain/(loss) on trading
securities........................ -- (127) 23 (76) 334
-------- -------- -------- -------- --------
TOTAL............................. Rs. -- Rs. 147 Rs. 134 Rs. 11 Rs. 698
======== ======== ======== ======== ========
</TABLE>
REPURCHASE TRANSACTIONS
2.2.6 During the period under review, ICICI Bank has undertaken
repurchase and reverse repurchase transactions in Government of
India securities. The average level of repurchase outstandings
during fiscal 1998, fiscal 1999 and nine months ended 31 December
1999 was Rs. 160 million, Rs. 417 million and Rs. 299 million,
respectively. The average level of reverse repurchase transactions
outstanding during fiscal 1998, fiscal 1999 and nine months ended
December 31, 1999 was Rs. 299 million, Rs. 211 million and Rs. 91
million, respectively. At 31 December 1999 outstanding repurchase
and outstanding reverse repurchase contracts amounts to Nil and Rs.
8,015 million respectively. At March 31, 1998 and March 31, 1999
ICICI Bank had no outstanding repurchase or reverse repurchase
contracts.
SECURITIES, AVAILABLE FOR SALE
2.2.7 The portfolio of securities, available for sale is set out below:
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Corporate debt securities............. Rs. 1,117 Rs. 33 Rs. (14) Rs. 1,136
Government of India securities........ Rs. 59 Rs. 1 -- Rs. 60
--------- --------- --------- ---------
Total debt securities................. 1,176 34 (14) 1,196
Mutual fund units..................... 280 -- -- 280
--------- --------- --------- ---------
TOTAL SECURITIES, AVAILABLE FOR
SALE.................................. Rs. 1,456 Rs. 34 Rs. (14) Rs. 1,476
========= ========= ========= =========
</TABLE>
F-18
<PAGE> 233
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Corporate debt securities............... 2,860 -- -- 2,860
Government of India securities.......... 775 50 -- 825
--------- ------- ------- ---------
Total debt securities................... 3,635 50 -- 3,685
Mutual fund units....................... 266 12 -- 278
--------- ------- ------- ---------
TOTAL SECURITIES, AVAILABLE FOR SALE.... Rs. 3,901 Rs. 62 -- Rs. 3,963
========= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Corporate debt securities............... Rs. 2,218 Rs. 45 -- Rs. 2,263
Government of India securities.......... 916 75 -- 991
--------- ------- ------- ---------
Total debt securities................... 3,134 120 -- 3,254
Mutual fund units....................... 1,158 -- (10) 1,148
--------- ------- ------- ---------
TOTAL SECURITIES AVAILABLE FOR SALE..... Rs. 4,292 Rs. 120 Rs. (10) Rs. 4,402
========= ======= ======= =========
</TABLE>
INCOME FROM SECURITIES, AVAILABLE FOR SALE
2.2.8 A listing of interest and dividends on available for sale
securities is set out below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
--------------------------------- -----------------------
1998
1997 1998 1999 (UNAUDITED) 1999
--------- --------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest....................... Rs. 419 Rs. 129 Rs. 248 Rs. 165 Rs. 285
Dividends...................... 2 19 57 44 240
--------- --------- --------- --------- ---------
Total interest, including
dividends...................... Rs. 421 Rs. 148 Rs. 305 Rs. 209 Rs. 525
========= ========= ========= ========= =========
</TABLE>
F-19
<PAGE> 234
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
MATURITY PROFILE OF DEBT SECURITIES
2.2.9 A listing of debt securities of securities, available for sale at
March 31, 1999 and December 31, 1999 by original contractual
maturity is set out below:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1999
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
CORPORATE DEBT SECURITIES
Less than one year.................... Rs. 266 Rs. 266 Rs. 263 Rs. 263
One to five years..................... 1,894 1,894 1,467 1,492
More than five years.................. 700 700 488 508
--------- --------- --------- ---------
TOTAL................................. Rs. 2,860 Rs. 2,860 Rs. 2,218 Rs. 2,263
========= ========= ========= =========
</TABLE>
LOANS
2.2.10 A listing of loans by category is set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------ AT DECEMBER 31,
1998 1999 1999
---------- ---------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
CORPORATE
Working capital finance..................... Rs. 9,256 Rs. 17,508 Rs. 26,005
Term loans.................................. 1,462 2,731 3,237
Credit substitutes.......................... 1,424 6,762 8,471
Leasing and related activities.............. 458 366 339
Retail loans................................ 590 1,110 780
---------- ---------- ------------
GROSS LOANS................................. Rs. 13,190 Rs. 28,477 Rs. 38,832
Aggregate allowance for credit losses....... (425) (880) (1,083)
---------- ---------- ------------
Net loans................................... Rs. 12,765 Rs. 27,597 Rs. 37,749
========== ========== ============
</TABLE>
2.2.11 Loans given to persons domiciled outside India at December 31,
1999 were Rs. 240 million (March 31, 1999: Rs. 91 million and
March 31, 1998: nil).
2.2.12 Normally, the working capital advances are secured by a first lien
on current assets, principally comprising inventory and
receivables. Additionally, in certain cases ICICI Bank may obtain
additional security through a first or second lien on property and
equipment, a pledge of financial assets like marketable securities
and corporate/personal guarantees. The term loans are normally
secured by a first lien on the property and equipment and other
tangible assets of the borrower.
F-20
<PAGE> 235
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
NET INVESTMENT IN LEASING ACTIVITIES
2.2.13 Contractual maturities of ICICI Bank's net investment in leasing
activities and its components, which are included in loans, are
set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------
1998 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Gross finance receivable for the year ended/ending
March 31
1999.................................................. Rs. 150 Rs. --
2000.................................................. 138 162
2001.................................................. 139 121
2002.................................................. 112 128
2003 and beyond....................................... 74 88
-------- --------
613 499
Less: Unearned income................................. Rs. (106) Rs. (84)
Security deposits............................... (49) (49)
-------- --------
Investment in leasing and other receivables........... 458 366
Less: Aggregate allowance for credit losses........... -- (144)
-------- --------
NET INVESTMENT IN LEASING AND OTHER RECEIVABLES....... Rs. 458 Rs. 222
======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999
---------------
(IN MILLIONS)
<S> <C>
Gross finance receivable for Three months ending March
31, 2000............................................... Rs. 111
Year ending March 31,
2001.................................................. 108
2002.................................................. 128
2003.................................................. 47
2004.................................................. 40
2004 beyond........................................... 26
--------
460
Less: Unearned income................................. (75)
Security deposits............................... (46)
--------
Investment in leasing and other receivables........... 339
Less: Aggregate allowance for credit losses........... (155)
--------
NET INVESTMENT IN LEASING AND OTHER RECEIVABLES....... Rs. 184
========
</TABLE>
F-21
<PAGE> 236
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
MATURITY PROFILE OF LOANS
2.2.14 A listing of each category of loan other than net investment in
leasing and other receivables, by maturity is set out below:
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------------------
UP TO MORE THAN
1 YEAR 1-5 YEARS 5 YEARS TOTAL
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Term loan......................... Rs. 784 Rs. 1,736 Rs. 211 Rs. 2,731
Working capital finance........... 15,240 2,268 -- 17,508
Credit substitutes................ -- 5,744 1,018 6,762
Retail loans...................... 1,110 -- -- 1,110
---------- ---------- ---------- ----------
TOTAL............................. Rs. 17,134 Rs. 9,748 Rs. 1,229 Rs. 28,111
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------
UP TO MORE THAN
1 YEAR 1-5 YEARS 5 YEARS TOTAL
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Term loan......................... Rs. 913 Rs. 2,117 Rs. 207 Rs. 3,237
Working capital finance........... 10,961 15,044 -- 26,005
Credit substitutes................ 1,754 3,909 2,808 8,471
Retail loans...................... 780 -- -- 780
---------- ---------- ---------- ----------
TOTAL............................. Rs. 14,408 Rs. 21,070 Rs. 3,015 Rs. 38,493
========== ========== ========== ==========
</TABLE>
INTEREST AND FEES ON LOANS
2.2.15 A listing of interest and fees on loans (net of unearned income)
is set out below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------- -----------------------
1997 1998 1999 1998 1999
--------- --------- --------- (UNAUDITED) ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Working capital finance........ Rs. 1,056 Rs. 1,136 Rs. 1,755 Rs. 1,235 Rs. 1,795
Term loan...................... 184 176 338 228 339
Credit substitutes............. 17 74 465 295 707
Leasing and related
activities..................... 35 38 21 25 12
Retail loans................... 49 75 128 70 227
--------- --------- --------- --------- ---------
TOTAL.......................... Rs. 1,341 Rs. 1,499 Rs. 2,707 Rs. 1,853 Rs. 3,080
========= ========= ========= ========= =========
</TABLE>
F-22
<PAGE> 237
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
NON-PERFORMING LOANS
2.2.16 A listing of non-performing loans is set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------ AT DECEMBER 31,
1998 1999 1999
---------- ---------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Working capital finance..................... Rs. 558 Rs. 1,158 Rs. 1,408
Term loan................................... 46 236 245
Credit substitutes.......................... -- 75 75
Leasing and related activities.............. -- 144 237
---------- ---------- ----------
TOTAL....................................... Rs. 604 Rs. 1,613 Rs. 1,965
Allowance for credit losses................. (425) (880) (1,083)
---------- ---------- ----------
Impaired loans net of valuation allowance... 179 733 882
========== ========== ==========
Loans without valuation allowance........... 26 466 467
Loans with valuation allowance.............. 578 1,147 1,498
---------- ---------- ----------
TOTAL....................................... Rs. 604 Rs. 1,613 Rs. 1,965
========== ========== ==========
Interest foregone on non-performing
assets...................................... 81 93 74
Average non-performing loans................ Rs. 559 Rs. 1,343 Rs. 1,827
</TABLE>
CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
2.2.17 A listing of the changes in allowance for credit losses is set out
below:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
YEAR ENDED MARCH 31, ENDED
---------------------- DECEMBER 31,
1998 1999 1999
--------- --------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
AGGREGATE ALLOWANCE FOR CREDIT LOSSES AT
BEGINNING OF THE YEAR/PERIOD.................... Rs. 187 Rs. 425 Rs. 880
ADDITIONS
Provisions for credit losses, net of release of
provisions as a result of cash collections...... 360 540 218
--------- --------- ---------
547 965 1,098
Write offs...................................... (122) (85) (15)
--------- --------- ---------
AGGREGATE ALLOWANCE FOR CREDIT LOSSES AT END OF
THE YEAR/PERIOD................................. Rs. 425 Rs. 880 Rs. 1,083
========= ========= =========
</TABLE>
F-23
<PAGE> 238
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
TROUBLED DEBT RESTRUCTURING
2.2.18 Loans at December 31, 1999 include loans aggregating Rs. 44
million (March 31, 1999: Rs. 38 million and March 31, 1998: nil),
which are currently under a scheme of debt restructuring and which
have been identified as impaired loans. The gross recorded
investment in these loans is Rs. 44 million (March 31, 1999: Rs.
38 million and March 31, 1998: nil) against which an allowance for
credit losses aggregating Rs. 26 million (March 31, 1999: Rs. 22
million and March 31, 1998: nil) has been established.
2.2.19 There are no commitments to lend incremental funds to any borrower
who is party to a troubled debt restructuring.
CONCENTRATION OF CREDIT RISK
2.2.20 Concentrations of credit risk exist when changes in economic,
industry or geographic factors similarly affect groups of
counterparties whose aggregate credit exposure is material in
relation to ICICI Bank's total credit exposure. ICICI Bank's
portfolio of financial instruments is broadly diversified along
industry, product and geographic lines within the country.
2.2.21 A listing of the concentration of loan exposures by industry is
set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------- AT DECEMBER 31,
1998 1999 1999
------------------- ------------------- -------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Light manufacturing..... Rs. 1,300 9.86% Rs. 2,800 9.83% Rs. 4,528 11.66%
Chemical, Paints and
Pharmaceuticals......... 1,092 8.28 2,420 8.50 4,221 10.87
Finance................. 780 5.91 1,949 6.84 2,700 6.95
Transport............... 360 2.73 159 0.56 111 0.29
Electricity............. 540 4.09 1,488 5.23 1,645 4.24
Textiles................ 1,170 8.87 1,405 4.93 1,375 3.54
Metal and metal
products................ 330 2.50 1,370 4.81 1,120 2.88
Automobile.............. 600 4.55 1,006 3.53 1,518 3.91
Construction............ 770 5.84 740 2.60 940 2.42
Iron and steel.......... 460 3.49 620 2.18 715 1.84
Cement.................. 170 1.29 540 1.90 1,060 2.73
Software................ 230 1.74 460 1.62 650 1.67
Agriculture............. 501 3.80 675 2.37 1,912 4.92
Personal loans.......... 590 4.47 1,110 3.90 780 2.01
Paper and paper
products................ 240 1.82 373 1.30 663 1.71
Other industries........ 4,057 30.76 11,362 39.90 14,894 38.36
---------- ------ ---------- ------ ---------- ------
TOTAL................... Rs. 13,190 100.00% Rs. 28,477 100.00% Rs. 38,832 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
F-24
<PAGE> 239
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
UNEARNED INCOME
2.2.22 A listing of unearned income is set out below:
<TABLE>
<CAPTION>
FOR THE NINE
YEAR ENDED MARCH 31, MONTHS ENDED
-------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Unearned income on leasing and other receivable
transactions...................................... Rs. 106 Rs. 84 Rs. 75
Unearned commission on guarantees................. 38 73 104
Unearned income on letters of credit.............. 12 17 25
Unamortised loan origination fees................. -- -- 14
</TABLE>
DEPOSITS
2.2.23 Deposits include demand deposits, which are non-interest-bearing
and savings and time deposits, which are interest-bearing. A
listing of deposits is set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------ AT DECEMBER 31,
1998 1999 1999
---------- ---------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
INTEREST BEARING
Savings deposits............................ Rs. 1,037 Rs. 2,271 Rs. 4,313
Time deposits............................... 21,621 52,692 72,674
---------- ---------- ----------
22,658 54,963 76,987
NON-INTEREST BEARING
Demand deposits............................. 3,632 5,766 8,015
---------- ---------- ----------
TOTAL....................................... Rs. 26,290 Rs. 60,729 Rs. 85,002
========== ========== ==========
</TABLE>
2.2.24 At December 31, 1999, term deposits of Rs. 67,522 million (March
31, 1999: Rs. 48,720 million and March 31, 1998: Rs. 18,560
million) have a residual maturity of less than one year. The
balance of the deposits mature between one to seven years.
TRADING ACCOUNT LIABILITIES
2.2.25 Trading account liabilities at December 31, 1999 include
borrowings from banks in the inter-bank call money market of Rs.
1,318 million (March 31, 1999: Rs. 418 million and March 31, 1998:
Rs. 293 million) and short term borrowings from other institutions
and agencies of Rs. 479 million (March 31, 1999: Rs. nil and March
31, 1998: Rs. 1,500 million).
F-25
<PAGE> 240
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
LONG-TERM DEBT
2.2.26 Long-term debt represent debt with an original maturity of greater
than one year. Long term debt bears interest at a fixed
contractual rates ranging from 12.5% to 17%. A listing of
long-term debt by residual maturity is set out below:
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1999
-------------------- --------------------
(IN MILLIONS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
RESIDUAL MATURITY
One year to five years........................ Rs. 1,084 62% Rs. 1,054 61%
Five years to 10 years........................ 680 38 680 39
---------- --- ---------- ---
TOTAL......................................... Rs. 1,764 100% Rs. 1,734 100%
========== === ========== ===
</TABLE>
2.2.27 Long-term debt at December 31, 1999 includes unsecured
non-convertible subordinated debt of Rs. 1,680 million (March 31,
1999: Rs. 1,680 million and March 31, 1998: nil).
2.3 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE AND DERIVATIVE CONTRACTS
2.3.1 ICICI Bank enters into foreign exchange forward contracts and
currency swaps with interbank participants and customers. These
transactions enable customers to transfer, modify or reduce their
foreign exchange and interest rate risks.
2.3.2 Forward foreign exchange contracts are commitments to buy or sell
foreign currency at a future date at the contracted rate. Currency
swaps are commitments to exchange cash flows by way of interest in
one currency against another currency and exchange of notional
principal amount at maturity based on predetermined rates. Currency
swaps offered to customers are hedged by opposite contracts with
the parent company and are accounted for as hedge contracts.
2.3.3 The market and credit risk associated with these products, as well
as the operating risks, are similar to those relating to other
types of financial instruments. Market risk is the exposure created
by movements in interest rates and exchange rates, during the
currency of the transaction. The extent of market risk affecting
such transactions depends on the type and nature of the
transaction, value of the transaction and the extent to which the
transaction is uncovered. Credit risk is the exposure to loss in
the event of default by counterparties. The extent of loss on
account of a counterparty default will depend on the replacement
value of the contract at the ongoing market rates.
F-26
<PAGE> 241
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
2.3.4 The following table presents the aggregate notional principal
amounts of ICICI Bank's outstanding foreign exchange and derivative
contracts at March 31, 1999 and at March 31, 1998, together with
the related balance sheet credit exposure.
<TABLE>
<CAPTION>
NOTIONAL PRINCIPAL AMOUNTS BALANCE SHEET CREDIT EXPOSURE(1)
-------------------------------------- --------------------------------
AT AT
MARCH 31, AT MARCH 31, AT
----------------------- DECEMBER 31, ----------------- DECEMBER 31,
1998 1999 1999 1998 1999 1999
---------- ---------- ------------ ------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST RATE AGREEMENTS
Swap agreements............ Rs. -- Rs. -- Rs. 900 Rs. -- Rs. -- Rs. --
---------- ---------- ---------- ------- ------- -------
-- -- 900 -- -- --
========== ========== ========== ======= ======= =======
FOREIGN EXCHANGE PRODUCTS
Forward contracts.......... Rs. 23,528 Rs. 36,705 Rs. 49,591 Rs. 77 Rs. 425 Rs. 341
Swap agreements............ -- 2,962 7,658 -- -- --
---------- ---------- ---------- ------- ------- -------
Rs. 23,528 Rs. 39,667 Rs. 57,249 Rs. 77 Rs. 425 Rs. 341
========== ========== ========== ======= ======= =======
</TABLE>
- ---------------
(1) Balance sheet credit exposure denotes the mark-to-market impact of the
derivative and foreign exchange products on the reporting date.
LOAN COMMITMENTS
2.3.5 ICICI Bank has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs.
18,091 million and Rs. 11,643 million at December 31, 1999 and
March 31, 1999 respectively (March 31, 1998: Rs. 3,700 million).
The interest rate on these commitments is dependent on the lending
rates on the date of the loan disbursement. Further, the
commitments have fixed expiry dates and may be contingent upon the
borrowers ability to maintain specific credit standards.
2.3.6 Guarantees
2.3.7 As a part of its commercial banking activities, ICICI Bank has
issued guarantees and letters of credit to enhance the credit
standing of its customers. These generally represent irrevocable
assurances that ICICI Bank will make payments in the event that the
customer fails to fulfill his financial or performance obligations.
Financial guarantees are obligations to pay a third party
beneficiary where a customer fails to make payment towards a
specified financial obligation. Performance guarantees are
obligations to pay a third party beneficiary where a customer fails
to perform a non-financial contractual obligation. The guarantees
are generally for a period not exceeding 18 months.
2.3.8 The credit risk associated with these products, as well as the
operating risks, are similar to those relating to other types of
financial instruments. Fees are recognised over the term of the
facility.
F-27
<PAGE> 242
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
2.3.9 Details of facilities outstanding are set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------- AT DECEMBER 31,
1998 1999 1999
--------- --------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Financial guarantees............................. Rs. 1,636 Rs. 2,733 Rs. 3,730
Performance guarantees........................... 1,010 1,897 2,993
--------- --------- ---------
TOTAL............................................ Rs. 2,646 Rs. 4,630 Rs. 6,723
========= ========= =========
</TABLE>
2.4 ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
2.4.1 ICICI Bank's financial instruments include financial assets and
liabilities recorded on the balance sheet, as well as off-balance
sheet instruments such as foreign exchange and derivative
contracts. A listing of the fair value of these financial
instruments is set out below:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1999
------------------------------------------ ------------------------------------------
ESTIMATED ESTIMATED
FAIR VALUE IN FAIR VALUE IN
EXCESS OF EXCESS OF
CARRYING ESTIMATED /(LESS THAN) CARRYING ESTIMATED /(LESS THAN)
VALUE FAIR VALUE CARRYING VALUE VALUE FAIR VALUE CARRYING VALUE
----------- ----------- -------------- ----------- ----------- --------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Financial
assets......... Rs. 35,278 Rs. 35,201 Rs. (77) Rs. 74,825 Rs. 74,742 Rs. (83)
Financial
liabilities.... 32,807 32,960 153 71,995 72,397 402
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------
ESTIMATED
FAIR VALUE IN
EXCESS OF
CARRYING ESTIMATED /(LESS THAN)
VALUE FAIR VALUE CARRYING VALUE
----------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Financial assets.................................. Rs. 102,205 Rs. 102,094 Rs. (111)
Financial liabilities............................. 98,536 99,354 818
</TABLE>
2.4.2 Fair values vary from period to period based on changes in a wide
range of factors, including interest rates, credit quality, and
market perception of value and as existing assets and liabilities
run off and new items are generated.
F-28
<PAGE> 243
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
2.4.3 A listing of the fair values by category of financial assets and
financial liabilities is set out below:
<TABLE>
<CAPTION>
MARCH 31, 1998 1999
-------------------------------------------- --------------------------------------------
ESTIMATED FAIR ESTIMATED FAIR
VALUE IN VALUE IN
EXCESS OF/ EXCESS OF/
CARRYING ESTIMATED FAIR (LESS THAN) CARRYING ESTIMATED FAIR (LESS THAN)
PARTICULARS VALUE VALUE CARRYING VALUE VALUE VALUE CARRYING VALUE
- ----------- ---------- -------------- -------------- ---------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Securities...... Rs. 1,476 Rs. 1,476 Rs. -- Rs. 3,963 Rs. 3,963 Rs. --
Trading
assets.......... 7,387 7,387 -- 15,822 15,822 --
Loans(1)........ 12,765 12,688 (77) 27,597 27,514 (83)
Other financial
assets(2)....... 13,650 13,650 -- 27,443 27,443 --
---------- ---------- ------- ---------- ---------- -------
TOTAL........... Rs. 35,278 Rs. 35,201 Rs. (77) Rs. 74,825 Rs. 74,742 Rs. (83)
========== ========== ======= ========== ========== =======
FINANCIAL
LIABILITIES
Interest-bearing
deposits........ Rs. 22,658 Rs. 22,811 Rs. 153 Rs. 54,963 Rs. 55,365 Rs. 402
Non-interest-bearing
deposits........ 3,632 3,632 -- 5,766 5,766 --
Trading account
liabilities..... 1,793 1,793 -- 418 418 --
Long-term
debt............ 129 129 -- 1,764 1,764 --
Other financial
liabilities(3)... 4,595 4,595 -- 9,084 9,084 --
---------- ---------- ------- ---------- ---------- -------
TOTAL........... Rs. 32,807 Rs. 32,960 Rs. 153 Rs. 71,995 Rs. 72,397 Rs. 402
========== ========== ======= ========== ========== =======
DERIVATIVES
Currency
swaps(4)........ -- -- -- -- -- 12
---------- ---------- ------- ---------- ---------- -------
</TABLE>
F-29
<PAGE> 244
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------
ESTIMATED FAIR
VALUE IN
EXCESS OF/
CARRYING ESTIMATED (LESS THAN)
PARTICULARS VALUE FAIR VALUE CARRYING VALUE
- ----------- ---------- ---------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
FINANCIAL ASSETS...................................
Securities......................................... Rs. 4,402 Rs. 4,402 Rs. --
Trading assets..................................... 28,606 28,606 --
Loans(1)........................................... 37,749 37,638 (111)
Other financial assets(2).......................... 31,448 31,448 --
---------- ---------- ----------
TOTAL.............................................. Rs.102,205 Rs.102,094 Rs. (111)
========== ========== ==========
FINANCIAL LIABILITIES
Interest-bearing deposits.......................... Rs. 76,987 Rs. 77,747 Rs. 760
Non-interest-bearing deposits...................... 8,015 8,015 --
Trading account liabilities........................ 1,797 1,797 --
Long-term debt..................................... 1,734 1,792 58
Other financial liabilities(3)..................... 10,003 10,003 --
---------- ---------- ----------
TOTAL.............................................. Rs. 98,536 Rs. 99,354 Rs. 818
========== ========== ==========
DERIVATIVES
Currency swaps(4).................................. -- -- 52
Interest rate swaps................................ -- -- (10)
---------- ---------- ----------
</TABLE>
- ---------------
(1) The carrying value of loans is net of allowance for credit losses.
(2) Includes cash, due from banks, deposits at interest with banks,
short-term highly liquid securities, and customers acceptance
liability for which the carrying value is a reasonable estimate of
fair value.
(3) Represents acceptances and other liabilities outstanding, for which
the carrying value is a reasonable estimate of the fair value.
(4) All customer positions are hedged by opposite contracts with the
parent company.
2.4.4 The above data represents management's best estimates based on a
range of methodologies and assumptions. Quoted market prices are
used for many securities. For performing loans, contractual cash
flows are discounted at current market origination rates for loans
with similar terms and risk characteristics. For impaired loans,
the impairment is considered while arriving at the fair value. For
liabilities, market borrowing rates of interest of similar
instruments are used to discount contractual cash flows.
2.4.5 The estimated fair value of loans, interest-bearing deposits and
long term debt reflects changes in market rates since the loans
were given and deposits were taken.
3 PROPERTY AND EQUIPMENT
3.1.1 Property and equipment are stated at cost less accumulated
depreciation. Generally, depreciation is computed over the
estimated useful life of the asset.
F-30
<PAGE> 245
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
3.1.2 A listing of property and equipment by asset category is set out
below:
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------- AT DECEMBER 31,
1998 1999 1999
--------- --------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Land.......................................... Rs. 121 Rs. 121 Rs. 121
Building.................................... 927 977 1024
Equipment and furniture..................... 518 738 891
Capital work in progress.................... 32 308 401
--------- --------- ---------
Gross value of property and equipment....... 1,598 2,144 2,437
Less: Accumulated depreciation.............. (235) (383) (535)
--------- --------- ---------
NET VALUE OF PROPERTY AND EQUIPMENT......... Rs. 1,363 Rs. 1,761 Rs. 1,902
========= ========= =========
</TABLE>
3.1.3 Capital work in progress at December 31, 1999 include capital
advances of Rs. 154 million (March 31, 1999: Rs. 91 million and
March 31, 1998: Rs. 13 million). Interest capitalized for nine
months ended December 31, 1999 is Rs. 24 million (March 31, 1999:
Rs. 12 million and March 31, 1998: Rs. 1 million).
3.1.4 Depreciation charge in fiscal 1997, 1998 and 1999 and nine months
ended December 31, 1998 and 1999 amounts to Rs. 66 million, Rs. 131
million and Rs. 173 million, Rs.124 million and Rs.159 million,
respectively.
4 OTHER ASSETS
4.1.1 Other assets at December 31, 1999 includes interest accrued of Rs.
1,455 million (March 31, 1999: Rs. 662 million and March 31, 1998:
Rs. 274 million), deposits in leased premises of Rs. 171 million
(March 31, 1999: Rs. 157 million and March 31, 1998: Rs. 130
million) and prepaid expenses of Rs. 8 million (March 31, 1999: Rs.
18 million and March 31, 1998: Rs. 7 million.
5 OTHER LIABILITIES
5.1.1 Other liabilities at December 31, 1999 include accounts payable of
Rs. 524 million (March 31, 1999: Rs. 1,121 million and March 31,
1998: 1,078 million) and interest accrued but not due on deposits
amounting to Rs. 566 million (March 31, 1999: Rs. 235 million and
March 31, 1998: Rs. 176 million).
6 COMMON STOCK
6.1.1 At December 31, 1999 March 31, 1999 and March 31, 1998, the
authorized common stock was 300 million shares with a par value of
Rs. 3,000 million. At December 31, 1999 and March 31, 1999 and
March 31, 1998, the issued common stock was 165 million shares with
paid-up values of Rs. 1,650 million.
7 RESTRICTED RETAINED EARNINGS
7.1.1 Retained earnings at December 31, 1999 and March 31, 1999 computed
as per generally accepted accounting principles of India include
profits aggregating to Rs. 789 million (March 31, 1998: Rs. 589
million) which are not distributable as dividends under the Banking
Regulation Act, 1949.
F-31
<PAGE> 246
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
These relate to requirements regarding earmarking a part of the
profits under banking laws. Utilization of these balances is subject
to approval of the Board of Directors and needs to be reported to
Reserve Bank of India. Statutes governing the operations of ICICI
Bank mandate that dividends be declared out of distributable profits
only after the transfer of at least 20% of net income, computed in
accordance with current banking regulations, to a statutory reserve.
Additionally, the remittance of dividends outside India is governed
by Indian statutes on foreign exchange transactions.
8 INCOME TAXES
8.1 COMPONENTS OF DEFERRED TAX BALANCES
8.1.1 The tax effects of significant temporary differences are reflected
through a deferred tax asset/liability, which is included in the
balance sheet of ICICI Bank.
8.1.2 A listing of the temporary differences is set out below:
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------- AT DECEMBER 31,
1998 1999 1999
-------- -------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Provision for loan losses....................... Rs. 144 Rs. 309 Rs. 383
Contingency reserve............................. 6 6 10
Unrealized loss on securities, available for
sale............................................ 8 21 --
Others.......................................... 13 12 10
-------- -------- -------
TOTAL DEFERRED TAX ASSET........................ Rs. 171 Rs. 348 Rs. 403
Valuation allowances............................ -- -- --
-------- -------- -------
NET DEFERRED TAX ASSET.......................... 171 348 403
DEFERRED TAX LIABILITIES
Property and equipment.......................... (148) (187) (235)
Investments..................................... (2) (3) (58)
Unrealized gains on securities, available for
sale............................................ -- (11) (20)
Amortization of software cost................... (8) (12) (12)
Amortization of debt issue costs................ -- (4) (4)
Others.......................................... -- (1) (4)
-------- -------- -------
TOTAL DEFERRED TAX LIABILITY.................... (158) (218) (333)
-------- -------- -------
NET DEFERRED TAX ASSET/(LIABILITY).............. Rs. 13 Rs. 130 Rs. 70
======== ======== =======
CURRENT......................................... Rs. 12 Rs. 10 Rs. (59)
NON-CURRENT..................................... 1 120 129
</TABLE>
8.1.3 Management is of the opinion that the realization of the recognized
net deferred tax asset of Rs. 70 million at December 31, 1999
(March 31, 1999: Rs. 130 million and March 31 1998: Rs. 13 million)
is more likely than not based on expectations as to future taxable
income.
F-32
<PAGE> 247
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
8.2 RECONCILIATION OF TAX RATES
8.2.1 The following is the reconciliation of estimated income taxes at
Indian statutory income tax rate to income tax expense as reported.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
--------------------- -----------------------
1998
1997 1998 1999 (UNAUDITED) 1999
--------- --------- --------- ----------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Net income before taxes....... Rs. 397 Rs. 402 Rs. 673 Rs. 432 Rs. 1,329
Statutory tax rate............ 43% 35% 35% 35% 38.5%
Income tax expense at
statutory tax rate............ 171 141 236 151 511
Increase (reductions) in taxes
on account of
Income exempt from taxes...... (6) (30) (81) (57) (211)
Effect of change in statutory
tax rate...................... (4) (15) -- -- 13
Others........................ (6) 8 15 18 (10)
--------- --------- --------- --------- ---------
REPORTED INCOME TAX EXPENSE... Rs. 155 Rs. 104 Rs. 170 Rs. 112 Rs. 303
========= ========= ========= ========= =========
</TABLE>
8.3 COMPONENTS OF INCOME TAX EXPENSE
8.3.1 The components of income tax expense are set out below:
<TABLE>
<CAPTION>
FOR THE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
--------------------------------- -----------------------
1998
1997 1998 1999 (UNAUDITED) 1999
--------- --------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Current....................... Rs. 133 Rs. 203 Rs. 300 Rs. 191 Rs. 267
Deferred...................... 22 (99) (130) (79) 36
--------- --------- --------- ----------- ---------
Total income tax expense...... Rs. 155 Rs. 104 Rs. 170 Rs. 112 Rs. 303
========= ========= ========= =========== =========
</TABLE>
9 SEGMENTAL DISCLOSURES
9.1 SEGMENTAL DISCLOSURES
9.1.1 ICICI Bank's operations are solely in the financial services
industry and consist of providing traditional banking services,
primarily commercial lending activities, treasury operations and
retail banking activities. ICICI Bank carries out these activities
through offices in India. Operating decisions are made based upon
reviews of the Bank's operations as a whole. As a result, ICICI
Bank constitutes the only reportable segment.
9.2 GEOGRAPHIC DISTRIBUTION
9.2.1 The business operations of ICICI Bank are largely concentrated in
India. Accordingly the entire revenue assets and net income are
attributed to Indian operations.
F-33
<PAGE> 248
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
MAJOR CUSTOMERS
9.2.2 ICICI Bank provides banking and financial services to a wide base
of customers. There is no major customer which contributes more
than 10% of total revenues.
10 COMMITMENTS AND CONTINGENT LIABILITIES
10.1.1 ICICI Bank is obligated under a number of capital contracts.
Capital contracts are job orders of a capital nature which have
been committed. Estimated amounts of contracts remaining to be
executed on capital account aggregated to Rs. 50 million at
December 31, 1999 (March 31, 1999: Rs. 62 million and March 31,
1998: Rs. 6 million).
LEASE COMMITMENTS
10.1.2 ICICI Bank has commitments under long-term operating leases
principally for premises and Automated Teller Machines. Lease
terms for premises generally cover periods of nine years. The
following is a summary of future minimum lease rental commitments
for non-cancelable leases.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, 1999 1999
-------------- ------------
(IN MILLIONS)
<S> <C> <C>
2000.................................................. Rs. 90 Rs. 116
2001.................................................. 99 127
2002.................................................. 109 137
2003.................................................. 120 153
2004.................................................. 132 170
Thereafter............................................ 324 409
------------ -----------
TOTAL MINIMUM LEASE COMMITMENTS....................... Rs. 874 Rs. 1,112
============ ===========
</TABLE>
10.1.3 Various tax-related legal proceedings are pending against ICICI
Bank. Potential liabilities, if any, have been adequately provided
for, and management does not estimate any incremental liability in
respect of legal proceedings.
11 RELATED PARTY TRANSACTIONS
11.1.1 ICICI Bank has entered into transactions with the following
related parties:
- The parent company;
- Affiliates of the Bank;
- Employees Provident Fund Trust; and
- Directors and employees of the group.
11.1.2 The related party transactions can be categorized as follows:
BANKING SERVICES
11.1.3 ICICI Bank provides banking services to all the related parties on
the same terms that are offered to other customers.
F-34
<PAGE> 249
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
11.1.4 The revenues earned from these related parties are set out below:
<TABLE>
<CAPTION>
FOR NINE MONTHS PERIOD
ENDED DECEMBER 31,
YEAR ENDED MARCH 31, -----------------------
--------------------------- 1998
1997 1998 1999 (UNAUDITED) 1999
------- ------- ------- ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Parent company....................... Rs. 6 Rs. 15 Rs. 12 Rs. 8 Rs. 15
Affiliates(1)........................ 3 5 4 3 4
------- ------- ------- ------- -------
TOTAL................................ Rs. 9 Rs. 20 Rs. 16 Rs. 11 Rs. 19
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Comprising ICICI Securities and Finance Company Limited, ICICI
Brokerage Services Limited, ICICI Capital Services Limited, Prudential
ICICI Asset Management Company Limited and ICICI Venture Funds
Management Company Limited.
11.1.5 ICICI Bank has paid to the parent company interest on deposits and
borrowings in call money markets amounting to Rs. 27 million, Rs.
105 million, Rs. 125 million, Rs. 40 million and Rs. 99 million in
fiscal 1997, 1998 and 1999 and nine months ended December 31, 1998
and 1999 respectively.
LEASING OF PREMISES AND INFRASTRUCTURAL FACILITIES
11.1.6 ICICI Bank has entered into lease agreements with the parent
company for the lease of certain premises and infrastructural
facilities to ICICI Bank. Total amount paid as rent for fiscal
1997, 1998 and 1999 and the nine months ended December 31, 1998 and
1999 is Rs. 92 million, Rs. 20 million, Rs. 7 million, Rs. 5
million and Rs. 9 million respectively.
ACQUISITION OF PREMISES
11.1.7 ICICI Bank purchased premises from the parent company for Rs. 532
million in fiscal 1998.
DERIVATIVE TRANSACTIONS
11.1.8 ICICI Bank enters into foreign exchange currency swaps and interest
rate swaps with the parent company on a back to back basis. The
outstanding contracts at December 31, 1999 are cross currency swaps
amounting to Rs. 3,829 million and interest related swaps amounting
to Rs. 900 million.
EXPENSES FOR SERVICES RENDERED
11.1.9 ICICI Bank paid Rs. 2 million, Rs. 1 million, Rs. 1 million, Rs.
0.4 million and Rs. 2 million in fiscal 1997, 1998 and 1999 and the
nine-month ended December 31, 1998 and 1999 respectively to the
parent company for use of the parent company's employees. ICICI
Bank also paid Rs. 5 million in the nine months ended December 31,
1999 to ICICI Infotech Services Limited for use of the employees of
ICICI Infotech Services Limited for information technology
services.
F-35
<PAGE> 250
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
SHARE TRANSFER ACTIVITIES
11.1.10 ICICI Bank has paid Rs. 3 million, Rs. 6 million, Rs. 4 million and
Rs. 3 million in fiscal 1998 and 1999 and nine months ended
December 31, 1998 and 1999 respectively to ICICI Infotech Services
Limited for share transfer services provided by them.
OTHER TRANSACTION WITH RELATED PARTIES
11.1.11 ICICI Bank has advanced loans to employees, bearing interest
ranging from 3.5% to 6%. These are housing, vehicle and general
purpose loans. The tenure of these loans ranges from five to twenty
years. Further, ICICI Bank has advanced loans at 16% to employees
for purchase of its equity shares at the time of the public issues.
The balance outstanding at March 31, 1998, March 31, 1999 and
December 31, 1999 was Rs. 105 million, Rs. 138 million and Rs. 198
million respectively.
11.1.12 During the nine months ended December 31, 1999 ICICI Bank entered
into an agreement with ICICI Personal Financial Services Limited
for availing telephone banking call centers services.
11.1.13 ICICI Bank sold certain investments to Prudential ICICI Asset
Management Company Limited and booked a gain of Rs. 9 million
during the nine months ended December 31, 1999.
11.1.14 The balances pertaining to receivables from and payable to related
parties are as follows:
<TABLE>
<CAPTION>
PARENT
COMPANY AFFILIATES(1)
---------- --------------
(IN MILLIONS)
<S> <C> <C>
AT MARCH 31, 1998
Accounts payable...................................... Rs. 2,237 Rs. 630
AT MARCH 31, 1999
Accounts payable...................................... 3,081 217
AT DECEMBER 31, 1999
Accounts receivable................................... 2 1
Accounts payable...................................... 2,147 1,119
</TABLE>
- ---------------
(1) Comprises ICICI Securities and Finance Company Limited, Prudential
ICICI Asset Management Company Limited, Prudential ICICI Trust
Limited, ICICI Infotech Services Limited, ICICI Brokerage Services
Limited, ICICI Personal Financial Services Limited, ICICI Capital
Services Limited, ICICI Venture Funds Management Company Limited,
ICICI Properties Limited and ICICI Home Finance Company Limited.
12 CAPITAL ADEQUACY REQUIREMENTS
12.1.1 The Company is a banking company within the meaning of the Indian
Banking Regulation Act, 1949, registered with and subject to
examination by the Reserve Bank of India.
12.1.2 ICICI Bank is subject to the capital adequacy requirements set by
the Reserve Bank of India, which stipulate a minimum ratio of
capital to risk adjusted assets and off-balance sheet items of 8%,
at least half of which must be Tier I capital. The Reserve Bank of
India is increasing the minimum capital adequacy ratio to 9.0%
effective March 31, 2000. The capital adequacy ratio of the Bank
calculated in accordance with the Reserve Bank of India guidelines
at December 31, 1999, March 31, 1998 and March 31, 1999 was 9.41%,
13.48% and 11.06% respectively.
F-36
<PAGE> 251
ICICI BANK LIMITED
NOTES TO US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED
DECEMBER 31, 1998 (UNAUDITED) AND 1999 -- (CONTINUED)
13 EMPLOYEE STOCK OPTION SCHEME
13.1.1 In January 2000 ICICI Bank's Board of Directors approved an
employee stock option plan which was approved by the shareholders
in an extraordinary general meeting on February 21, 2000. Under the
plan, up to 5% of the issued equity shares may be allocated to
employee stock options.
14 FUTURE IMPACT OF NEW ACCOUNTING STANDARDS
14.1.1 The Financial Accounting Standards Board ("FASB") recently issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes standards for accounting and
reporting for derivative instruments and hedging activities. As the
derivative activities of ICICI Bank are not significant, the future
impact of SFAS No. 133 on the financial statements of ICICI Bank is
unlikely to be material. SFAS No. 133 is effective for fiscal
periods beginning after June 15, 2000.
15 YEAR 2000
15.1.1 To date, ICICI Bank has not encountered any material Year 2000
issues concerning its respective computer programs. ICICI Bank's
plan for the Year 2000 included replacing or updating existing
systems (which were not Year 2000 compliant), assessing the Year
2000 preparedness of clients and counterparties and formulating a
contingency plan to ensure business continuity in the event of
unforeseen circumstances.
F-37
<PAGE> 252
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the registrant in connection with the sale
of the securities being registered. All amounts shown are estimates except for
the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee........................................ US$ 46,200
New York Stock Exchange fees................................ 102,000
Blue sky qualification fees and expenses.................... 15,000
Printing and engraving expenses............................. 200,000
Accountant's fees and expenses.............................. 156,000
Legal fees and expenses..................................... 500,000
-----------
Total..................................................... 1,019,200
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 201 of the Indian Companies Act, 1956, a company is
prohibited from indemnifying any officer of the company or any person employed
by the company as an auditor against any liability which, by virtue of any rule
of law, would otherwise attach to him in respect of any negligence, default,
misfeasance, or breach of duty of which he may be guilty in relation to ICICI
Bank.
Article 215 of ICICI Bank's Articles of Association provides that the
directors and officers of ICICI Bank shall be indemnified by ICICI Bank against
all costs, losses and expenses which any director or officer may incur or become
liable for by reason of any contract entered into or act done by him in his
capacity as director or officer, including any liability incurred by him in
defending any proceeding brought against directors and officers in their
capacity if the indemnified director or officer receives judgment in his favor
or is acquitted in such proceeding.
The form of Underwriting Agreement to be filed as Exhibit 1.1 to this
registration statement will also provide for indemnification of ICICI Bank and
its directors and officers.
ICICI has obtained directors and officers insurance providing
indemnification for certain of ICICI Bank's directors, officers or employees for
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
ICICI Bank has sold the following amounts of unregistered securities in
private placements in India in the last three years.
<TABLE>
<CAPTION>
AMOUNT IN
DATE TITLE MILLIONS
- ---- ----- ---------
<S> <C> <C>
January 29, 1999............... Unsecured Redeemable Non-Convertible Debentures-Series II Rs. 680
(Rupee-denominated subordinated bonds)...................
May 30, 1998................... Unsecured Redeemable Non-Convertible Debentures Rs.1,000
(Rupee-denominated subordinated bonds)
June 7, 1997................... Equity Shares Rs. 150
</TABLE>
All of the rupee-denominated subordinated bonds were sold in India through
private placements to banks and institutional investors in India. All of the
equity shares were sold through a private placement to ICICI, our parent
company. The proceeds from these sales of securities were used for funding our
growth and for other general corporate purposes. The proceeds also allowed us to
strengthen our capital adequacy.
II-1
<PAGE> 253
All of the above securities were sold in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended, in foreign
transactions to foreign persons outside the United States.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF THE DOCUMENT
- ----------- ---------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 ICICI Bank Articles of Association, as amended.
*3.2 ICICI Bank Memorandum of Association, as amended (including
in Exhibit 3.1).
4.1 Form of Deposit Agreement among ICICI Bank, Bankers Trust
Company and the holders from time to time of American
Depositary Receipts issued thereunder, including as an
exhibit, the form of American Depositary Receipt
(incorporated by reference to the Registration Statement on
Form F-6 of ICICI Bank Limited (File No. 333-11504) filed
with the Securities and Exchange Commission on February 18,
2000).
*4.2 ICICI Bank's Specimen Certificate for Equity Shares.
*5.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co.
*8.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co. as
to certain Indian tax matters (included under "Taxation --
Indian Tax" in the Prospectus included as part of this
Registration Statement).
*8.2 Opinion of Davis Polk & Wardwell as to certain US tax
matters (included under "Taxation -- United States Tax" in
the Prospectus included as part of this Registration
Statement).
15.1 Letter of KPMG, India, Independent Auditors, as to unaudited
interim financial information.
23.1 Consent of KPMG, India, Independent Auditors.
*23.2 Consent of Amarchand & Mangaldas & Suresh A. Shroff & Co.
*23.3 Consent of Davis Polk & Wardwell.
*24.1 Powers of Attorney.
</TABLE>
- ---------------
* Previously provided.
(b) Financial Statement Schedules.
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Financial Statements or the
Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, ADRs representing the
ADSs in such denominations and registered in such names as required by the
Underwriters to permit prompt deliver to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification by it is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A
II-2
<PAGE> 254
and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 255
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Mumbai, India on March 24, 2000.
ICICI BANK LIMITED
By: /s/ H. N. SINOR
------------------------------------
H. N. Sinor
Managing Director and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
II-4
<PAGE> 256
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ H. N. SINOR Managing Director and Chief March 24, 2000
- --------------------------------------------- Executive Officer and Director
H.N. Sinor
K. V. KAMATH* Director March 24, 2000
- ---------------------------------------------
K. V. Kamath
LALITA D. GUPTE* Director March 24, 2000
- ---------------------------------------------
Lalita D. Gupte
SATISH C. JHA* Director March 24, 2000
- ---------------------------------------------
Satish C. Jha
R. RAJAMANI* Director March 24, 2000
- ---------------------------------------------
R. Rajamani
B.V. BHARGAVA* Director March 24, 2000
- ---------------------------------------------
B.V. Bhargava
UDAY M. CHITALE* Director March 24, 2000
- ---------------------------------------------
Uday M. Chitale
SOMESH R. SATHE* Director March 24, 2000
- ---------------------------------------------
Somesh R. Sathe
G. VENKATAKRISHNAN Executive Vice President and Chief March 24, 2000
- --------------------------------------------- Financial Officer
G. Venkatakrishnan
BHASHYAM SESHAN Company Secretary March 24, 2000
- ---------------------------------------------
Bhashyam Seshan
</TABLE>
/s/ H. N. SINOR
*By:
- --------------------------------------
Name: H. N. Sinor
Title: Managing Director
and
Chief Executive Officer
II-5
<PAGE> 257
AUTHORIZED REPRESENTATIVE
PUGLISI & ASSOCIATES,
As the duly authorized representative
of ICICI Bank Limited in the United
States
By: /s/ DONALD J. PUGLISI
----------------------------------
Name: Donald J. Puglisi
Title: Managing Director
II-6
<PAGE> 258
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF THE DOCUMENT
- ----------- ---------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 ICICI Bank Articles of Association, as amended.
*3.2 ICICI Bank Memorandum of Association, as amended (including
in Exhibit 3.1)
4.1 Form of Deposit Agreement among ICICI Bank, Bankers Trust
Company and the holders from time to time of American
Depositary Receipts issued thereunder, including as an
exhibit, the form of American Depositary Receipt
(incorporated by reference to the Registration Statement on
Form F-6 of ICICI Bank Limited (File No. 333-11504) filed
with the Securities and Exchange Commission on February 18,
2000).
*4.2 ICICI Bank's Specimen Certificate for Equity Shares.
*5.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co.
*8.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co. as
to certain Indian tax matters (included under "Taxation --
Indian Tax" in the Prospectus included as part of this
Registration Statement).
*8.2 Opinion of Davis Polk & Wardwell as to certain US tax
matters (included under "Taxation -- United States Tax" in
the Prospectus included as part of this Registration
Statement).
15.1 Letter of KPMG, India, Independent Auditors, as to unaudited
interim financial information
23.1 Consent of KPMG, India, Independent Auditors.
*23.2 Consent of Amarchand & Mangaldas & Suresh A. Shroff & Co.
*23.3 Consent of Davis Polk & Wardwell
*24.1 Powers of Attorney
</TABLE>
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* Previously provided.
II-7
<PAGE> 1
Exhibit 15.1
Board of Directors
ICICI Bank Limited
ICICI Towers
Bandra Kurla Complex
Mumbai - 400 051
RE: REGISTRATION STATEMENT NO. 333-30132
With respect to the subject registration statement we acknowledge our awareness
of the use therein of our report dated February 9, 2000 related to our review
of interim financial information.
Pursuant to Rule 436(c) under the Securities Act 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
/s/KPMG
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KPMG
Mumbai, India
March 24, 2000
<PAGE> 1
Exhibit 23.1
Board of Directors
ICICI Bank Limited
ICICI Towers
Bandra Kurla Complex
Mumbai - 400 051
We consent to the use of our audit report dated March 11, 2000 on the financial
statements of ICICI Bank Limited, included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/KPMG
- -------
KPMG
Mumbai, India
March 24, 2000
