SREI INFRASTRUCTURE FINANCE LIMITED ANNUAL REPORT 2009-2010 DIRECTOR'S REPORT Your Directors are pleased to present the Twenty Fifth Annual Report together with the Audited Accounts of your Company for the financial year ended March 31, 2010. The summarised consolidated and standalone financial performance of your Company is as follows: Financial Results Consolidated Standalone Year ended Year ended Year ended Year ended March 31, March 31, March 31, March 31, 2010 2009 2010 2009 Total Income 97,216 85,153 47,013 32,643 Total Expenditure 68,234 68,313 30,809 26,666 Profit before 28,982 16,840 16,204 5,977 Depreciation Depreciation 4,328 3,658 1,014 769 Profit Before Bad debts/ 24,654 13,182 15,190 5,208 provisions and Tax Bad Debts/Provisions etc. 2,888 2,688 377 171 Profit Before Tax 21,766 10,494 14,813 5,037 Provision for Taxation 5,866 2,235 3,440 - Income Tax in respect 220 2 224 1 of earlier years Profit After Tax 15,680 8,257 11,149 5,036 Minority Interest 94 49 - - Pre Acquisition - (4) - - Adjustment Surplus brought forward 15,775 13,353 12,685 12,135 from Previous Year Profit Available For 31,361 21,557 23,834 17,171 Appropriation Paid up Equity Share Capital 11,629 11,629 11,629 11,629 Amount transferred 4,118 4,279 2,530 3,128 to Reserves OPERATIONAL REVIEW: Your Company is one of the leading private sector infrastructure financing institutions in India. Some of the key highlights of your Company's performance during the year under review are: * The gross profit (before depreciation, bad debts, provision and tax) is Rs. 16,204 lakh as against Rs. 5,977 lakh in the last year. * Profit before taxation is Rs.14,813 lakh as against Rs. 5,037 lakh in the last year. * Net profit after taxation is Rs. 11,149 lakh as against Rs. 5,036 lakh in the last year. * The total assets under management of the Srei Group is Rs. 13,26,508 lakh as against Rs. 10,36,685 lakh in the last year. The Consolidated Financial Statements have been prepared by your Company in accordance with the requirements of the accounting standards notified by the Central Government under the Companies (Accounting Standards) Rules, 2006. The audited Consolidated Financial Statements together with Auditors Report thereon forms part of the Annual Report. Your Company has complied with all the norms prescribed by the Reserve Bank of India including the Fair practices, Anti money laundering and Know your customer (KYC) guidelines and also all the mandatory accounting standards notified by the Central Government under the Companies (Accounting Standards) Rules, 2006. It has adopted a sound and forward looking accounting policy of providing for non performing assets in terms of the guidelines laid down by the Foreign Financial Institutions, which are more stringent than the guidelines of the Reserve Bank of India. AMALGAMATION OF QUIPPO INFRASTRUCTURE EQUIPMENT LIMITED INTO AND WITH THE COMPANY: The Board of Directors of your Company at its meeting held on January 28, 2010 has, based on the recommendations of the Committee of Independent Directors, approved amalgamation of Quippo Infrastructure Equipment Limited (Quippo) into and with your Company in terms of a Scheme of Amalgamation ('the Scheme') under Sections 391 to 394 of the Companies Act, 1956. The Board has approved the share swap ratio of 3:2, meaning thereby 3 (Three) equity shares of Rs.10/- each fully paid-up in your Company for every 2 (Two) equity shares of Rs. 10/- each fully paid-up in Quippo. Such swap ratio is based upon the reports submitted by M/s. BDO Consulting Private Limited and KPMG India Private Limited respectively, and the fairness of the same has been confirmed by ICICI Securities Limited, an independent merchant banker. The Appointed Date of the amalgamation shall be April 01, 2010. The Board, in the same meeting, has also decided to issue bonus shares in the ratio of 4:5, meaning thereby, 4 (Four) bonus equity shares of your Company of Rs. 10/- each fully paid-up for every 5 (Five) existing equity shares of Rs. 10/- each. The Board has also proposed that the bonus issue be made a part of the Scheme. Thus, the Scheme provides that the bonus shares shall be issued and allotted to the shareholders of your Company upon the Scheme becoming effective but as per a record date, which shall be a date prior to the Record Date fixed by Quippo in terms of the Scheme for the purpose of allotment of equity shares of your Company to the shareholders of Quippo in consideration of the amalgamation. In the light of the proposed bonus issue, the share swap ratio of 3:2 as mentioned above will stand adjusted. It is also proposed under the Scheme that upon the same becoming effective, the shareholding of your Company in Quippo shall not be cancelled, and accordingly, your Company shall be entitled to be allotted appropriate number of its equity shares in lieu of its current shareholding in Quippo, in accordance with the share swap ratio. However, since a company in India is not permitted to hold its own shares, the equity shares in your Company to be allotted in lieu of your Company's current shareholding in Quippo, shall be allotted to one or more persons who shall hold the said shares (together with any and all additions and accretions as may happen to the same in future) in trust and for the benefit of your Company and/or its shareholders. Such trustee(s) shall within a period of 3 (three) years from the date of such allotment or within such extended period as may be agreed to by your Company and the trustee(s), shall transfer or dispose of the said shares. Until such sale or disposal, the trustee(s) shall be entitled to exercise the voting rights in respect of such shares held by them in your Company, in a manner deemed expedient by them. The Board of Directors of your Company believes that synergistic integration through amalgamation of Quippo into and with your Company shall result in: (a) integration of the businesses presently being carried on by Quippo and your Company, which shall be beneficial to the interests of the shareholders, creditors and employees of both companies and to the interests of public at large, as such amalgamation would create greater synergies between the businesses of the two companies and would enable them to have access to better financial resources, as well as would increase the managerial efficiencies, while effectively pooling the technical, distribution and marketing skills of each other; (b) enhancement of net worth of the combined business to capitalise on future infrastructure growth potential; (c) creation of a fully integrated and holistic infrastructure institution bringing all infrastructure business under one umbrella, i.e., the present infrastructure leasing, development, advisory and financing business of your Company, and the present infrastructure business of Quippo together; (d) synergies across the group as well as tie-ups/alliances with companies, govt. agencies, etc., and niche expertise within the individual business can be utilized to capture greater share of market and to provide more comprehensive services to its customers; and (e) de-risking and augmenting shareholders' value besides aligning interest of shareholders in a single entity. The aforesaid Scheme of Amalgamation of Quippo into and with your Company has been approved by Equity shareholders of your Company with requisite majority at their meeting held on May 31, 2010. NON-ACCEPTANCE OF PUBLIC DEPOSITS AND APPLICATION TO RESERVE BANK OF INDIA FOR REGISTRATION AS AN 'INFRASTRUCTURE FINANCE COMPANY': During the year under review, the Reserve Bank of India (RBI) vide circular DNBS.PD. CC No.168/03.02.089/2009-10 dated February 12, 2010 introduced a separate category of Non Banking Finance Companies (NBFCs) as 'Infrastructure Finance Companies' (IFCs) based on the representations made by the NBFCs engaged predominantly in infrastructure financing. An 'Infrastructure Finance Company' means a non deposit taking non-banking finance company (NBFC) which:- i) deploys a minimum 75 per cent of its total assets in infrastructure loans; ii) has net owned funds of Rs. 300 crore or above; iii) has a minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accredited rating agencies; and iv) has a CRAR of 15 percent (with a minimum Tier I capital of 10 per cent). In April 2010, your Company decided to convert itself into a non-deposit taking NBFC in order to qualify for registration as an Infrastructure Finance Company. Your Company has since applied to the Reserve Bank of India (RBI) for change in classification of your Company from 'Asset Finance Company' to 'Infrastructure Finance Company'. MUTUAL FUND ACTIVITY: During the year under review, your Company has received an in-principle approval from the Securities and Exchange Board of India (SEBI) for setting up a Mutual Fund and accordingly, Srei Mutual Fund Asset Management Private Limited and Srei Mutual Fund Trust Private Limited were incorporated on November 27, 2009 as wholly owned subsidiaries of your Company. UNSECURED SUBORDINATED BONDS: In the year 2000, your Company had issued on rights basis 52,66,075 Unsecured Subordinated Bonds of Rs. 100/- each aggregating to Rs. 52,66,07,500/- vide Letter of Offer dated June 16, 2000. Each Bond has an overall tenure of 12 years, reckoned from the date of allotment viz. August 25, 2000 and the face value of the Bonds along with an overall premium of 20 percent of the original face value is to be redeemed in seven installments, commencing from the completion of sixth year from the date of allotment. Your Company has accordingly redeemed on August 25, 2009, being fourth redemption date, Rs. 15 towards principal amount and Rs. 3 towards premium amount total aggregating to Rs. 18 per Unsecured Subordinated Bond and the face value of the aforesaid Bonds stands reduced to Rs. 40 per Bond w.e.f. August 26, 2009. The aggregate principal amount outstanding as on March 31, 2010 is Rs. 21.06 crore. DIVIDEND: Your Board has recommended a Dividend of Rs. 1.20 per Equity Share (12%) for the Financial year 2009-10 to the Equity shareholders of your Company. The Dividend for the Financial year 2009-10 shall be subject to tax on dividend to be paid by your Company but will be tax-free in the hands of the shareholders. MANAGEMENT DISCUSSION AND ANALYSIS REPORT ECONOMIC REVIEW a. Global Outlook: The financial crisis that engulfed the world after the collapse of Lehman Brothers in September 2008 had affected the developed nations more severely. A sharp fall in gross domestic product (GDP) coupled with rising unemployment was a common feature in most of these nations. To counter the crisis, they introduced massive doses of monetary and fiscal stimuli. By the third quarter of 2009, the advanced economies returned to the path of positive growth. However, what these economies are mostly experiencing is jobless growth which implies that their road to recovery will be a prolonged one. Compared to the advanced economies, the impact of the crisis on emerging economies has been muted. While the governments of these countries also resorted to accommodative policies, these economies maintained positive growth even during the crisis and bounced back much faster. There has been some decline in exports, but robust domestic demand has served as a growth engine in these economies. According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF), global GDP growth for 2010 is estimated to be 4.25%. This is in stark contrast to the 1.9% growth projected for 2010 in last year's WEO. Such recovery in global growth has been entirely due to the unprecedented government support across economies. In 2010, growth rates in USA, Euro Zone, U.K. and China are expected at 3.1%, 1%, 1.3% and 10% respectively. Growth projections for emerging economies for 2010 and 2011 are markedly higher. However, policy makers across the world need to be vigilant on the possible problem of sovereign debt default that looms large on several nations (includes a few Euro Zone nations) and accordingly gear up for the consequences from such eventualities. b. Situation in India: Despite the global slowdown, FY09 saw India growing at 6.7% as was predicted by the Reserve Bank of India (RBI) last year. However, the FY10 GDP growth is now projected at a healthy 7.2%, a figure far better than all estimates made a year back. Apart from China, India is the only major economy that escaped negative GDP growth rate on a consistent basis quarter after quarter. Fiscal stimulus in India was miniscule, so the impact on growth will not be much even as government starts unwinding a part of it. With headline inflation touching double digits, RBI has initiated monetary tightening in a calibrated manner. Projections for GDP growth in FY11 are also robust. While RBI has estimated GDP to grow at 8% with an upward bias, the IMF's projection is even higher at 8.8%. Consumption had all along remained strong in India. Going ahead, capacity expansion is the key. Typically capex starts picking up after few months of a pick up in Index of Industrial Production (IIP). With industrial recovery gaining momentum and core infrastructure sectors like cement, coal, electricity and steel registering decent growth, capex is not far behind. India continues to remain an attractive investment destination. In FY09, India received USD 35 billion as FDI. FII inflow has also remained robust. The government is working on creating an FDI-friendly regime. The government remains committed towards economic reforms. Roadmaps stand prepared for a gradual phasing down of the fiscal deficit, introduction of a unified Goods & Services Tax (GST) regime and implementation of a Direct Tax Code (DTC). Emphasis on infrastructure creation is central to the government's development plans. All these steps augur well for India's future. NBFIs IN INDIA: The role of Non Banking Financial Institutions (NBFIs) in asset creation and infrastructure development is well acknowledged. They act as principal channels of credit delivery to the micro, small and medium enterprises (MSMEs) which remain under-served by banks and other financial institutions in spite of being the back-bone of the India Growth Story. On the infrastructure front, the MSMEs account for majority of the contractors and transporters whose service is central to the infrastructure creation process. Thus, by serving these MSMEs, the NBFIs are promoting inclusive growth and contributing to the nation-building process. The year under review witnessed many developments in the NBFI space, especially those which belonging to the infrastructure financing domain. Acknowledging the fact that NBFIs which are exclusively into financing of infrastructure are doing a great service to the nation, recently RBI has created a new category of NBFIs, namely the Infrastructure Finance Companies (IFCs). Quite expectedly, IFCs are likely to be treated differently from other NBFIs and are likely to have policy guidelines which will enable them for longer tenure borrowing and also realise their dues effectively. As it is, IFCs were allowed to source ECB from multilateral / regional financial institutions and government-owned development financial institutions under the 'approval route'. To facilitate their borrowing, RBI has expanded the list of eligible lenders by including reputed international banks. However, the total outstanding ECBs including the proposed ECB cannot exceed 50% of the owned funds of the IFC. The IFCs also stand to benefit from government's proposed move to allow private financial institutions to issue tax-free infrastructure bonds. While government is yet to finalise on the eligibility criteria of such players, IFCs are most likely to fit the bill as they already have to abide by certain stringent criteria. So far, the privilege of floating infrastructure bonds had been restricted to select state-owned firms. Inclusion of IFCs will greatly revolutionise infrastructure financing in India. BUSINESS OUTLOOK AND FUTURE PLANS: The Eleventh Five Year Plan (FYP) covering 2007-12 envisaged a total investment of USD 514 billion in the various infrastructure sectors. With an emphasis on public-private partnership (PPP), the private sector was expected to bear 30% of the total investment. However, a mid-term appraisal of the Eleventh Plan shows that the private sector response has been phenomenal and they have invested more than expected. Private sector investments accounted for 80% of total investments in ports, 82% in telecom, 64% in airports, 44% in electricity, 16% in roads and 4% in railways. This has encouraged the government to go for a more ambitious infrastructure creation drive for the Twelfth FYP (2012-17) where the total investment figure for infrastructure stands doubled at USD 1 trillion and within that 50% of the investment is expected to come from the private sector. However, availability of long-term finance remains a challenge in India. Asset-liability mismatch discourages banks to take too much exposure in infrastructure projects. The option of borrowing long-term capital from abroad is there, but restricted. Project developers are allowed to access external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs), but usually it is the bigger players with better credit ratings who can tap such funds. But keeping in mind the surfeit of foreign exchange inflow due to India's attractiveness as an emerging market destination, government tries to limit entry of foreign capital (for various considerations like resultant inflation, appreciation of domestic currency to hurt exports, etc.) and thus imposes restrictions in terms of quantum, end-use, approvals, etc. It is not that India does not have long-term capital. India has huge reserves of long-term capital in insurance and pension funds which can typically match infrastructure project tenure. But government allows a very limited exposure for these funds to invest in infrastructure projects. Government is aware that across the world there have been numerous instances where misadventure by fund managers had wiped out life-time savings of millions of people. Therefore, with limited availability of long-term capital in the country and a restricted window to tap foreign capital, the focus has to be on creating an atmosphere where the large domestic savings can be mobilised into infrastructure investment. As it is, India's domestic savings account for almost 33% of GDP. To facilitate resource mobilisation for infrastructure financing, the government is now actively considering a proposal to allow private financial institutions to issue tax-free infrastructure bonds. Government promoted Indian Infrastructure Finance Company Ltd. (IIFCL), which was set up to provide a boost for PPP projects, has so far had a mixed track record. Its Rs. 10,000 crore re-financing facility is still to receive an overwhelming response, especially the scheme being restricted to only road and port sectors. So Rs. 3,000 crore from the corpus is now being made available for direct lending (where infrastructure projects from all sectors are eligible to borrow). IIFCL is expected to disburse Rs. 11,000 crore in FY11. To catalyse long-term lending for infrastructure projects, government has introduced the take-out financing scheme through IIFCL. For the time being, IIFCL's total exposure to this scheme has been capped at Rs. 25,000 crore. Once implemented, the scheme would help banks by-pass the asset-liability mismatch problem. The scheme awaits a final approval from the government. A decision is yet to be taken whether take-out financing facility would be available to only new projects (to be launched) or ongoing projects as well. With an enhanced emphasis on infrastructure creation, your Company is well positioned and well capitalised to tap the opportunities and expand its business portfolio. Both project financing and equipment financing are expected to pick up riding on a robust demand-led growth of the domestic economy. However, the developments in the advanced economies in the aftermath of the rollback of stimulus packages need to be monitored closely. Any adverse development in those countries is bound to have some impact on India. The management of your Company continues to be vigilant on these fronts. Thus, there are enough reasons for your Company to be cautiously optimistic. BUSINESS REVIEW: The three main business areas of your Company have been in Infrastructure Equipment Financing, Infrastructure Project Financing and Infrastructure Project Advisory. INFRASTRUCTURE EQUIPMENT FINANCE -SREI EQUIPMENT FINANCE PRIVATE LIMITED (SREI BNP): Srei BNP, the joint venture between your Company and BNP Paribas Lease Group, is registered with the Reserve Bank of India (RBI) as a non-deposit taking Non-Banking Finance Company (NBFC) (Category - Asset Finance) and is in the business of equipment financing. In the year under review, the total disbursements of Srei BNP grew by 8.76 per cent from Rs. 5,519 crore to Rs.6,003 crore. Srei BNP has been able to consolidate and increase its market share during the year and all other operational metrics are higher. The year under review began with some challenges, but as the outlook improved the disbursements grew. With the formation of the stable government, several new projects were announced and the demand for equipment increased. Srei BNP introduced several new schemes in association with the manufacturers to spur the demand, and accelerate the sales - like Srei Partnership Week (SPW), which served the dual purpose of getting confidence back among customers and increasing customer reach. Srei BNP also started a new business line this year - Technology Solutions, for financing equipment in the Technology and Telecom sector. This was a very successful initiative and was done in association with the knowhow from BNP Paribas, who have sectoral expertise in this field. Srei BNP has been able to forge relationships with some global majors for financing mutual customers. Srei BNP has also selectively started financing healthcare equipment to large hospitals and diagnostic centres. Srei BNP has clients who are among the best in Technology and Healthcare in India, and acts as a substantial sectoral risk diversification. The partnership with BNP Paribas Lease group has been fruitful, and there is substantial mutual learning. On the human resources front, there has been minimal attrition and Srei BNP has been able to attract good talent into the organisation in the past year. The morale of the employees is high and the business is expected to grow substantially in the forthcoming year. INFRASTRUCTURE PROJECT FINANCE: The recent global financial crisis, which is now receding, has had a less severe impact on the Indian economy than it had on the rest of the world. Infrastructure sector investments are expected to drive India's economic growth and development during the next decade. The Government of India has placed an increased focus on infrastructure development with a planned expenditure of about USD 1 trillion during the Twelfth FYP, more than double the allocation under the current plan. Private sector share in the infrastructure spending is expected to increase from an estimated 36 per cent in the Eleventh FYP to 50 per cent in the Twelfth FYP (2012-17). Thus, the role of the financial institutions such as Banks, NBFCs, Foreign Institutional Investors, Private Equity firms and the capital markets has become vitally important in the Indian infrastructure market. Private sector investment in infrastructure depends on two key aspects - economic viability of projects and investor friendly regulatory framework. Various drivers such as consistently high GDP growth rates during the last decade, changing GDP composition, India's demographic transition and high rates of industrial growth have resulted in a rising price inelasticity of demand for infrastructure facilities. This means that both businesses and households are now able and willing to pay such user charges for infrastructure facilities that make these projects economically viable. Furthermore, the ongoing regulatory reforms and incentives provided by the government, including different schemes for various PPP projects, provide an impetus as well as regulatory certainty for such projects. As a result, infrastructure development projects are not only becoming economically viable but also investor friendly for private sector participation. In recognition of this growth potential, your Company has remained focused on infrastructure financing for the last twenty years, and has established itself as a holistic infrastructure finance company, providing a range of innovative financial solutions including equipment finance, asset hypothecation loans, operating leases, project loans, syndication, etc. Over the years, your Company has financed various small and medium sized projects that have contributed to the symbiotic growth of both the project developers and your Company. Leveraging upon its acute and in-depth knowledge of the infrastructure sector, combined with its expertise in financial structuring and the continued support of various bilateral/multilateral agencies, your Company got the impetus to make a foray into infrastructure project finance and has emerged as a strong niche player. While there are many financial institutions like IIFCL, IDFC, PFC, etc. to fund infrastructure development in the country, NBFCs like your Company have been active in financing the small and medium sector projects, thus facilitating a more inclusive growth. Your Company also structures and syndicates debt transactions for midsized projects as well as participates in debt consortia for large projects. During the year under review, your Company has had an impressive growth. It has increased its aggregate portfolio size to Rs. 3,586 crore in financial year 2009-10, as compared to Rs. 1,368 crore in financial year 200809. The key infrastructure investments have included the following sectors: Power, Ports, Roads, Aviation, Oil and Gas, Mining, Logistics, Industrial Parks, Telecommunications, SEZs, Urban Infrastructure and the like. Through its structured risk mitigation techniques, its appetite to experiment with financing structures, security packages and maturity profiles of loans, your Company has contributed to innovation and greater efficiency in financing, contributing to an increased availability of infrastructure services in the country. Power: The power sector in India continues to suffer from a large peak demand deficit. The Eleventh Plan targeted an additional capacity generation of 92,700 MW by investing Rs. 6.59 lakh crore in this sector. The investment opportunity for the private sector is Rs. 1.86 lakh crore during this five year period and Rs. 43,726 crore for financial year 2010-11 alone. Capitalising on this opportunity, your Company has allocated over 20 per cent of its total allocation to this sector. With an interest in thermal power, renewable energy, hydroelectric power, and co-generation and waste heat recovery systems, your Company has executed several transactions with power generation companies including interim finance for a 600 MW thermal power plant in Andhra Pradesh, short term loan for a gas based power project, project finance for 300 MW coal-based power plant, among other approvals. Railways and Logistics: Indian railways suffers from some serious deficiencies in terms of track coverage, age of rolling stock, average speed, etc. leading to high logistics cost for the economy (13-14 per cent of GDP). The Eleventh Plan's investment of Rs. 2.10 lakh crore in this sector envisages private investment opportunity of Rs. 61,543 crore in railways and logistics. Your Company has examined investment opportunities in financing rolling stocks, setting up of Inland Container Depots (ICDs), warehouses and cold storages, and development of railway sidings. On March 31, 2010, the total exposure of your Company to this sector stood at approximately Rs. 48 crore, and your Company is exploring various financing options under the new scheme declared in the Railway Budget of 2010. Your Company is already a pioneer in rolling stock financing in India, and with the entry of new private sector players in this sector, it is evaluating PPP models for asset backed financing of rolling stock, containers, and terminal facilities, so as to provide a more efficient logistics system of freight movement. Aviation and Airports: Airport standards across India, with a few recent exceptions, need considerable upgradation to come up to global benchmarks. The Eleventh Plan's investment of around Rs. 36,000 crore for the development of this sector, envisages 70 per cent to be financed by the private sector. This includes modernisation of passenger services, air traffic management as well as aircraft and ground handling facilities. Due to the steady growth of passenger traffic, both domestic and international, capacity augmentation is paramount. The aviation sector, along with air cargo services and logistics, would require large investments to meet the growing demand. Risk mitigation covenants and asset back comforts are critical inputs to financial structures in airline transactions. Your Company participated in a number of transactions in the aviation sector, using its understanding of the sector to provide innovative solutions to its customers. Your Company's exposure to this industry stood at Rs. 170 crore at the end of the financial year. It has primarily financed aircraft and helicopters for non scheduled and private operators backed by charter hire arrangements with creditworthy clients. Ports and Port Equipment: Modern ports are crucial support to the country's growing international trade. The sector requires large investments to expand capacity of existing ports and to replace obsolete equipment and cranes, so as to improve loading and unloading time. Dredging of waterway is another critical area of investment. To overcome these impediments, the Eleventh Plan envisages investment of around Rs. 40,000 crore to this sector, of which around 60 per cent is expected to be financed by the private sector. Your Company has participated in the modernisation of ports through financing of greenfield non-major ports, material handling systems, dredging vessels, and has also developed and expanded multi-modal transport facilities. As equipment financing forms a major part of your Company's activity, increased focus has been placed on financing port equipment, dredgers, etc. It is also looking into financing construction of new ports and expansion of existing ports through consortia. Mining: Mining is a very important sector because minerals like coal and iron ore play a significant role in the growth of an economy. India has huge untapped deposits of minerals like coal, iron, manganese, chrome, bauxite, alumina, copper, etc. Thus, the Eleventh Plan envisages private sector investment opportunity of Rs. 14,120 crore in the mining sector. Even though private sector has always had a significant presence in this industry, there is a huge opportunity to mechanise and upgrade mining and related equipment. Your Company, with its major operations based in Eastern India, is strategically located to provide financial solutions to mining companies in Chhattisgarh, Jharkhand and Orissa. It has undertaken several transactions and has a total exposure of Rs. 157 crore in the mining sector. It is involved in the development of captive coal mines for power plants in Orissa. It is also devising plans to increase exposure by way of financing other mining developmental projects such as land acquisition, construction of haulage roads, railway sidings and coal washeries. Telecommunications: The Indian telecom industry has expanded tremendously in size and reach, with the total number of landline and mobile subscribers reaching 654 million in May 2010. However, there is much scope to increase reach in rural India, improve broadband facilities, and increase 3G and other value added services. To meet these goals, the Eleventh Plan envisages an investment of Rs. 3.45 lakh crore, 69 per cent of which is expected to be financed by the private sector. With such a huge investment opportunity, your Company reported a total exposure of Rs. 1,235 crore in this sector. Leveraging on its acute understanding of this industry and its long standing relationships with vendors, your Company has structured financing packages that include investment in critical equipment, telecom towers, license acquisition, etc. In the last financial year, your Company has financed the expansion of cable broadband network in multiple states in India. Roads: Roads are essential for commerce in any country as it connects ports, ICDs and warehouses to cities and other markets. The roads in India need massive investment to increase and improve network coverage, quality of roads and highways, rural penetration to connect villages to cities, etc. The Eleventh Plan envisages an investment of about Rs. 2.79 lakh crore to this sector, of which around 34 per cent is to be financed by the private sector. Your Company has invested selectively in road projects allotted by NHAI with an exposure of Rs. 301 crore as on March 31, 2010. During the year, your Company has provided debt syndication facilities for several road projects to develop portions of the National Highway and other toll roads. It also participated in NHAI annuity based projects for select developers. Oil and Gas: Though oil and gas sector is a very volatile industry, it is a critical economic driver. The Eleventh Plan envisages an investment of Rs. 22,500 crore for this sector, of which 32 per cent is envisaged to be financed by the private sector. This includes development of onshore and offshore oil rigs and drilling vessels. Your Company, with its high expertise in structuring risk mitigation deals and asset-backed funding, has structured operating leases for onshore rigs and specialised deep sea pipe laying vessels. On March 31, 2010, its total exposure to this sector is Rs. 427 crore and is continuously increasing. Since infrastructure projects are capital intensive, they need a range of other financial services in addition to provisioning of debt capital -pre- project advisory for project conceptualisation and appraisal, capital markets intermediation, debt and equity fund raising, bond placement, general insurance risk cover, project development, equipment financing, etc. Your Company, with the help of its different divisions and subsidiaries, attempts to cross-sell these products and services over the project life cycle with an aim to increase its pre-tax return on equity. Your Company has successfully leveraged its strengths such as sector expertise, innovative risk mitigation techniques, competitive pricing, and transaction structuring to form strong corporate relationships with clients and gain privileged access to project developers. Moreover, to keep up this growth momentum, your Company continues to hire professionals with vast experience in infrastructure financing to augment and build its repository of quality intellectual capital so as to differentiate itself and gain from it. These positive developments position your Company well to take advantage of the huge investment opportunity provided by the Indian Government in this sector, and to strengthen its position as one of the leading players in the infrastructure financing arena. INFRASTRUCTURE PROJECT ADVISORY: The Infrastructure Project Advisory group of your Company is moving ahead with renewed strength in the areas of Project Planning and Conceptualisation, Preparation of Feasibility Reports and Detailed Project Reports, Bid Process Management, Evaluation of Bids and Selection of Partners, SPV Structuring and Financial Structuring for various PPP infrastructure projects. Your Company provides integrated and comprehensive professional services towards development of infrastructure projects with a focus on sectors like Roads, Ports, Energy, Airports, SEZs, Industrial Parks, Urban Transport (MRTS/BRTS), Water Supply and Sanitation, Tourism Infrastructure, Education, Health Services, etc. In the transportation space, your Company has been associated with several prestigious projects in different Indian cities: * Under Mass Rapid Transport System (MRTS), your Company has been involved in various capacities in the Delhi Airport High Speed Metro Link, Bangalore Metro Project, Mumbai Monorail System, Lucknow Metro System and the proposed Light Rail Transit System in Kolkata. * Under Bus Rapid Transport System (BRTS), your Company has also been entrusted with the preparation of detailed project report (DPR) and quality supervision for implementation of BRTS on two corridors in Vishakhapatnam and also been given the exclusive mandate for transaction advisory services for implementation for BRTS bus stations and pedestrian grade separated facilities for Greater Vishakhapatnam Municipal Corporation. * Under National Urban Transport Policy (NUTP), your Company also has the mandate for preparing a Transportation Mobility Plan for Vadodara and providing advisory services for studies on 'Establishment of Traffic & Transit Management Centres' for Bangalore. In power sector, your Company was appointed as Consultants by Rural Electrification Corporation Ltd. to undertake selection of private developer for two Power Transmission Projects through international competitive bidding route, namely Transmission Strengthening System associated with North Karanpura (1,980 MW) and Augmentation of Talcher-II Transmission System and also as review consultants by Power Finance Corporation for the third project, namely import of NER/ER surplus power by Northern Region. With this, your Company now holds the distinction of advising all the three transmission projects, set up under the aegis of Ministry of Power, for selection of private developer. The bidding documents have been finalised in consultation with Central Electricity Authority and Ministry of Power and based on these documents the successful bidders have been selected for all the three transmission projects through tariff based competitive bidding process. Your Company has been appointed as Consultant by India Power Corporation Ltd. to undertake techno-economic feasibility study for setting up of 2x660 MW coal-based thermal power project in Gujarat. Your Company has carried out the requisite pre- feasibility studies and submitted its report. In the urban infrastructure space, your Company provided consultancy to the Government of Uttar Pradesh for the Integrated Urban Rejuvenation Plan (IURP) project for six cities (Ghaziabad, Meerut, Agra, Aligarh, Allahabad and Varanasi) wherein the scope of the work involves IURP preparation, project identification, conceptualisation, conducting pre-feasibility and bid-process management. Under this, the Agra Ring Road - a Rs. 1,098 crore project - was successfully closed. Keeping in view, the Government's emphasis on improving the social infrastructure, your Company during the year under review, has taken up a number of innovative projects in the fields of education, healthcare and rural development which have tremendous business potential and can evolve as self-sustainable business models: * Your Company had been engaged by Himachal Pradesh Infrastructure Development Board in advising them on setting up of Medical Colleges along with upgradation of District Hospitals at Hamirpur and Una to Multi- Specialty Hospitals under Public Private Partnership framework. * Your Company has also evolved a business model aimed at delivering improved healthcare services in rural areas through Primary Healthcare Centres (PHCs) managed by Entrepreneur Doctors under PPP framework. Viability Gap Funding is to be provided by the Centre and State Government through schemes under National Rural Health Mission. The proposal is under active consideration of certain state governments for implementation. * Your Company has developed a simplified and unbiased students performance evaluation process which reduces stress on school teachers / management under the Central Board of Secondary Education (CBSE) Board to a great extent while implementing the new Continuous and Comprehensive Evaluation (CCE) system. This solution is being offered to CBSE affiliated schools in some states initially but shall be extended to all states across the country in due course. In order to generate employment and livelihood opportunities for the rural masses, your Company has developed a business model for Dairy Farming undertaken through Self-Help Groups (SHGs). This project, which can be funded through the existing Government Schemes of Swarnajayanti Gram Swarojgar Yojana (SGSY) and National Rural Employment Guarantee Act (NREGA), is initially being taken up as a Demonstration Project in Madhya Pradesh and it has the potential to be replicated all across the country. Water Supply and Sanitation: With rapid urbanisation, municipalities are grappling with the challenges related to water supply, sewerage and solid waste management. Your Company realises the untapped potential in this field and is working towards exploring that opportunity: Your Company has been involved in preparation of DPRs for various districts in the State of Arunachal Pradesh on sewerage, solid waste management, construction and improvement of storm water drains under the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) Scheme. * Your Company has provided consultancy services to Public Health Engineering Departments of Government of Bihar and Haryana with regard to preparation of Pre Feasibility Report and DPR on water supply and sewerage schemes in various towns in these states. Your Company is empanelled with various government organisations and enjoys strategic associations with some of the best players in the industry. During the year under review, your Company has signed a Memorandum of Understanding (MoU) with Aker Wirth GmbH (a global provider of engineering, construction and technology products and solutions for sectors like oil & gas, mining & metals, micro tunnelling and construction) to jointly harness emerging business opportunities in areas of common interest in procuring business, identifying opportunities for leasing of plants and machineries and looking out to supplying such plants and machineries to clients in India, Sri Lanka, Bangladesh, Nepal, Thailand and Myanmar. INTERNATIONAL BUSINESS OPERATIONS: Your Company's international business primarily consists of its leasing business in Russia and advisory services in Saudi Arabia and Nigeria. Your Company's Russian business, ZAO Srei Leasing, was adversely impacted by the financial crisis during last year. The global financial crisis in 2008-09 affected Russia somewhat higher than other European nations. However, since the last quarter of 2009, the Russian Economy has shown signs of improvement although it has been slow. These were challenging times but your Company has weathered the storm successfully and maintained its track record of profitability since its inception, even under adverse circumstances. These were possible through a concerted strategy comprising of proactive client partnerships coupled with active follow up and close monitoring of receivables. A high loan to value ratio, collateral of equipment and a satisfactory asset-liability match added to the resilience of your Company in a market where survival was a challenge to many. Your Company is confident of taking advantage of the economic revival and generating a superior performance in the coming years. Your Company is currently concentrating on strengthening its business by building partnerships with financially strong creditworthy customers, using extensive risk management tools and diversifying into other infrastructure sectors. During the previous financial year, your Company had set up a leasing company in the UAE, Aalat LLC, in joint venture with Waha Capital but the said company could not commence its operation due to severe financial crisis and slowdown of construction activities in the UAE. The company is geared to commence its operations as soon as the UAE economy starts showing signs of revival. Your Company has entered into a new line of business initiative last year - for providing technical advisory services for setting/scaling up leasing companies in foreign countries. The first step in this regard was to provide advisory services in Saudi Arabia followed by Nigeria. Both these assignments are progressing successfully. Your Company has also been approached by other international clients for providing similar services in other nations. This will provide opportunities to your Company to establish footprints in many foreign shores in a short period of time. RESOURCES: Your Company is an NBFC with focus on Infrastructure Finance and being uniquely poised to play a vital role in this process of nation building by extending credit to numerous borrowers in the infrastructure sector, facilitates deeper penetration of economic benefits and promote inclusive growth. Your Company requires resources on a continuous basis to equip itself with funds to disburse at all times. Your Company took up the challenge of mobilising resources at the most competitive rates and lived up to the expectations by raising the required resources from its bankers and financial institutions all the while ensuring proper asset-liability match. a) Fixed Deposits: The total deposits outstanding as on March 31, 2010 was Rs. 520.35 lakh as compared to Rs. 514.99 lakh as on March 31, 2009. There were unclaimed matured deposits of Rs. 51.63 lakh representing 200 depositors as at March 31, 2010 who have been informed about the maturity of deposits with a request to claim their deposits back. In April 2010, your Company decided to convert itself into a non-deposit taking NBFC in order to qualify for registration as an Infrastructure Finance Company. Your Company has decided that it would not accept any further public deposits or renew such maturing deposits in any manner w.e.f. April 20, 2010 and the entire amount of outstanding public deposits as on April 19, 2010 together with interest promised to the depositors has been kept in an Escrow Account with a scheduled commercial bank. b) Bank Finance: Your Company mobilised resources to the extent of Rs. 2,900 crore during the year at the most competitive rates available in the market for the industry. Your Company continued its focus on domestic sources, comprising of a consortium of 15 banks. c) Bonds/Debentures/Commercial Papers: Your Company issued short-term debt instruments aggregating Rs. 6,543 crore during the year to various Mutual Funds. Out of above, Rs. 180 crore has been raised though commericial paper and Rs. 6,363 crore all by way of Bonds/Debentures with maturities upto one year. d) Tier II Capital: To augment resources and increase the capital base, your Company has raised Tier II Capital aggregating to Rs. 200 crore during the year. e) Foreign Institutional Borrowings: Your Company has drawn ECB of USD 33.25 million during the current financial year. Beside this, your Company has RBI approval for ECB of USD 70 million which would be drawn during the forthcoming financial year. RISK MANAGEMENT: The recent global financial crisis not only disrupted all kind of financial markets, it also gave way to bankruptcies of banks and companies across the globe. While the exact causes are yet to be fully comprehended, most analysts identify risk management failure as one of the key weaknesses that caused the unprecedented increase in asset prices, the availability of cheap credit leading to build up of excessive leverage, and the resulting massive under pricing of risk. The crisis has, therefore, not only vilified the risk management function of financial institutions, but has also vindicated the importance of this function for the survival of companies and the stability of the financial system. Your Company uses a multi-faceted approach to manage its risks, which is aimed at insuring the net income against disruptions from any kind of risk, thereby minimising volatility in income with a pro-cyclically bias. In an organisation like your Company, there are risks present on all levels and aspects of its functioning, including business, strategic, operational, market, credit, liquidity, reputation, processes and the like. Hence, to manage and mitigate these risks and reduce the uncertainties that are all prevalent, an enterprise wide risk management framework has been established by your Company that allows all risks to be aggregated using a consistent measurement system as well as take account of the correlation between these risks. While most banks and financial institutions face these risks, the approaches adopted by each to manage the risks vary significantly. Sophistication of risk measurement methods, that utilise all data and information available within the organisation to arrive at a better estimation of its risk profile, is one of the key differentiating factors between institutions. Your Company constantly reviews its risk management system with a view to improve the same. The lessons learnt from the global financial crisis, especially with respect to scenario stress testing and contingent planning, are being incorporated into the existing risk management system to get better prepared to deal with future market turbulences, such as the one faced in the recent past. HUMAN RESOURCES ACTIVITIES: While the world economy recovers from the economic crisis, the market is inviting for players on account of unlocking opportunities. But with this comes demanding customers, impeccable quality and crunched timelines. So as organisations battle the challenges of intense global competition, rapid technological change and a changing demographic base, it is critical that your Company has in its armoury a sound human capital strategy that creates a stakeholder focused empowered workforce thereby making Human Capital Strategy a key differentiator in corporate success. In Srei Group, which is constantly undergoing business expansion and diversification, the Human Resources (HR) Department of your Company makes continuous effort of repositioning HR as a 'trusted business partner' from a 'traditional support/back-office' function and closely align HR with business to enable business transformation and growth. This was impossible without the right design and deployment of the HR teams in terms of structure, size and distribution. Hence, Zonal HR Structure was incorporated in your Company to operate closely from customer interfacing units i.e. branches and regions pan-India. Additionally, your Company realised the need of consolidating its diversified businesses and strategies in terms of managing risk, execution, diversity and scale. This deliberated the initiative of standardising the Srei Policies & Processes for the entire Group. This initiative was outsourced to a reputed external expert team with the intent of creating world-class employee policies benchmarked with the industry standards and well customised to your Company's diverse business needs. One of the most imperative efforts was to re-look into the Performance Management System (PMS) Policy with the clear purpose of creating a culture-driven organisation. Hence, the PMS process was not only simplified but also standardised for the entire Srei Group. The HR team has well begun this activity on an extensive scale with full commitment through PMS awareness programmes pan-India covering each of the appraisee and appraiser. Amidst your Company's diversified platform in terms of businesses, market, customer-base, location and teams, HR was poised with the challenge of integrating the People Development strategy across the Group. This influenced the creation of an HR Synergy Team consisting of cross- functional team of selected top leaders. This Synergy team is partnering HR in various employee engagement, development, motivation and hygiene- enabling activities. Your Company has identified Leadership Development as a critical issue for viability of its business goals. As part of this endeavour, your Company focuses upon the nurturing and development of leaders wherein your Company has sponsored for its leaders to attend international and national management development programmes. At the broader spectrum, your Company lives by its DNA and 'entrepreneurship' is one of them. The mission to nurture 'entrepreneurs' or 'leaders for future' has proudly shaped into an innovative and unique initiative -LeAD Srei. LeAD Srei is a Srei Institute of Entrepreneurship Development which envisions the development and nurturing of entrepreneurs. A pilot project is already underway wherein the first batch constituting of selected relationship Managers, leaders and vendor/client partners would undergo a high-end, customer-based and business-based development curriculum. The infrastructure and faculty base is being organised. This innovative initiative would perhaps change the landscape of People Development Area. For the first time, your Company participated in the Great Place to Work Study conducted by Economic Times on a pan-India scale. This has helped your Company to benchmark with the best workplaces in India and further sketch a guiding agenda for its leaders and HR department for organisational development. Your Company continues to induct talent for its present and future needs. The number of employees of Srei Group increased from 1,083 on March 31, 2009 to 1,424 on March 31, 2010. INFORMATION TECHNOLOGY: Your Company realises how technology can provide the edge to remain ahead of competition and thus constantly upgrade its technology both in terms of hardware and software. Your Company has already networked all the offices and integrated front-office with backoffice operations through Microsoft Dynamics (AXAPTA), an ERP Solution which enables faster information exchange and dissemination, thereby expediting all decision making. Over the years with changing business needs, the ERP solution was customised to handle newer business rules and MIS needs. As the user base grew, the performance of the solution began to degrade considerably. Being a mission critical solution, it was necessary to address the problems without affecting the business and completely mitigate any risk of technical failure. Your Company decided to approach the challenge and entrusted the responsibility to Microsoft Consulting Services with an objective to improve the performance of the application. Based on the study conducted, the ERP application along with the Database was successfully upgraded resulting in significant improvement in the performance of the application and has brought stability to the application. On one hand, the application performance was improved by well over 35 per cent and on the other hand, the connectivity cost for both data as well as voice for the entire group was reduced by almost 50 per cent. Additional 12 branches were enabled through virtual private network (VPN) during the year under review. Your Company now enjoys the facility of both audio as well as video conferencing facilities that can reduce the travel cost of the senior executives significantly and improve the communication across India and abroad. The entire Srei group companies were integrated through their mailing system seamlessly to provide significant improvement in collaboration across the group companies. INTERNAL CONTROL AND AUDIT: Your Company is having an independent Internal Audit Department reporting directly to the Audit Committee of the Board. Internal Audit Team is involved in constant evaluation and implementation of adequate internal control measures to ensure good governance. The Team ensures seamless efficient business operation and supports mitigation of associated risks by the process owners. The follow up role of the Internal Audit Team involves implementation of corrective actions and improvements in business processes. The Audit Committee and Senior Management review the reports and implementation status of suggestion made by Audit Department from time to time. The effectiveness and quality of internal audit functions are monitored by the Audit Committee on an ongoing basis. The Internal Audit and the Internal Control procedures adopted in your Company are adequate and commensurate with the size and complexity of its business. ENVIRONMENT PROTECTION POLICY: Your Company is getting support and guidance from International Finance Corporation (IFC) of the World Bank Group, DEG-Germany, FMO-Netherlands and other highly reputed multi-lateral agencies on environmental issues. While endorsing the view that environment protection is the key to any long-term sustainable development, your Company ensures that environmental dimensions are factored into all of your Company's business considerations and activities especially while undertaking review, clearance and supervision of projects. Your Company ensures that its assets and project financing do not cause adverse environmental and social impacts. Non-conventional sources of energy have emerged as the only viable option to achieve the goal of sustainable development. India is at the forefront of international effort to harness renewable energy resources. In line with its concern for environmental issues, your Company has a fully operational renewable energy department which finances pollution-free renewable energy technologies. SOCIAL RESPONSIBILITY: Recognising its social responsibility, your Company had created a public charitable trust in the name of 'Srei Foundation' with the objective of granting scholarships and other financial assistance to deserving and talented candidates. The Fund also supports setting up of schools, colleges, medical and scientific research institutions. Donations to Srei Foundation qualify for deduction under Section 80G of the Income Tax Act, 1961. Your Company has granted donation of Rupees Twenty Five Lakh to Srei Foundation during the financial year 2009-10. Your Company also promotes all-round development of a clean environment and help in propagating and imparting education for the betterment of agriculture / horticulture and other similar activities. CORPORATE GOVERNANCE: Your Company has always practised sound corporate governance and takes necessary actions at appropriate times for enhancing and meeting stakeholders' expectations while continuing to comply with mandatory provisions of corporate governance. A separate section on Corporate Governance and a Certificate from the Auditors of your Company regarding compliance with the requirements of corporate governance as stipulated under Clause 49 of the Listing Agreement with the Stock Exchanges, form part of the Annual Report. TRANSFER TO INVESTOR EDUCATION & PROTECTION FUND: During the year under review, your Company has transferred a sum of Rs.3,18,028.90 to the Investor Education & Protection Fund, the dividend amount which was due & payable and remained unclaimed and unpaid for a period of seven years, as provided in Section 205A(5) of the Companies Act, 1956. Cumulatively, the dividend amount transferred to the said Fund till March 31, 2010 was Rs. 21,81,380.69. SUBSIDIARY COMPANIES: During the year under review, Srei Mutual Fund Asset Management Private Limited and Srei Mutual Fund Trust Private Limited were incorporated on November 27, 2009 as wholly owned subsidiaries of your Company with initial capital of Rs. 5 lakh (Rupees Five lakh) each. The Share Capital of Srei Mutual Fund Asset Management Private Limited was subsequently increased to Rs. 10 lakh (Rupees Ten lakh) on February 17, 2010 and thereafter to Rs. 10.10 crore (Rupees Ten crore ten lakh) on April14, 2010 consequent upon infusion of fresh capital by your Company. During the year under review, a short term investment was made in the Equity shares of Orbis Power Venture Private Limited (Orbis) and thereby it became a subsidiary of your Company w.e.f. January 2, 2010. Subsequently, Orbis acquired 57.17% shareholding in DPSC Limited on January 29, 2010 and therefore, DPSC Limited became a subsidiary of your Company. Consequent upon increase in paid up share capital of Orbis, Orbis and its subsidiary company, DPSC Limited ceased to be subsidiaries of your Company w.e.f. March 31, 2010. Further, Srei Advisors Pte. Limited, Singapore became a subsidiary of IIS International Infrastructure Services GmbH, Germany, a subsidiary of your Company, w.e.f. February 25, 2010. The statement pursuant to Section 212 of the Companies Act, 1956, containing details of Company's subsidiaries in India and Overseas, forms part of the Annual Report. In view of the exemption received from Ministry of Corporate Affairs, Government of India vide Letter no. 47/52/2010-CL-III dated March 26, 2010, the audited statement of accounts along with the reports of the Board of Directors and Auditors relating to your Company's subsidiaries in India and Overseas viz., Srei Capital Markets Limited, Srei Venture Capital Limited, Srei Forex Limited, Global Investment Trust Limited, Srei Sahaj e-Village Limited, Srei Infrastructure Advisors Limited, Controlla Electrotech Private Limited, Srei Infocomm Services Limited (subsidiary of Srei Infrastructure Advisors Limited), Bengal Srei Infrastructure Development Limited (subsidiary of Srei Infrastructure Advisors Limited), Hyderabad Information Technology Venture Enterprises Limited (subsidiary of Srei Venture Capital Limited), Cyberabad Trustee Company Private Limited (subsidiary of Srei Venture Capital Limited) and IIS International Infrastructure Services GmbH, Germany for the financial year ended March 31, 2010, and ZAO Srei Leasing, Russia (subsidiary of IIS International Infrastructure Services GmbH, Germany) for the financial year ended December 31, 2009 are not annexed as required under Section 212(8) of the Companies Act, 1956. Shareholders who wish to have a copy of the full report and accounts of the aforesaid subsidiary companies will be provided the same by the Company Secretary on receipt of a written request from them. These documents will also be available for inspection by any shareholder at the registered office of the Company and the concerned subsidiary companies during business hours on all working days. Further, the documents shall be available on the website of your Company. However, as directed by the Ministry of Corporate Affairs, Government of India, the financial data of the subsidiaries have been separately furnished and form part of the Annual Report. PARTICULARS OF EMPLOYEES: The names and other particulars of the employees as required under Section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, are set out in the annexure to the Directors' Report and form part of this report. PARTICULARS OF CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTFLOW: Your Company has no activity relating to Conservation of Energy and Technology Absorption as stipulated in the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988. However, your Company uses information technology extensively in its operations. During the year under review, the total foreign exchange earnings and expenditure of your Company was Rs. 47 lakh and Rs. 8,542 lakh respectively (previous year Rs. 7 lakh and Rs. 15,930 lakh respectively). SREI WEBSITE: The website of your Company, www.srei.com, carries a comprehensive database of information of interest to the investors including the financial results of your Company, dividend declared, any price sensitive information disclosed to the regulatory authorities from time to time, analyst presentations, corporate profile and business activities of your Company and the services rendered by your Company to its investors. PROMOTER GROUP COMPANIES: Pursuant to intimation from Promoters of your Company, the names of Promoters and companies comprising the 'group' as defined in the Monopolies and Restrictive Trade Practices Act, 1969, have been disclosed in the Annual Report of your Company for the purpose of Regulation 3(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. DIRECTORS: During the year under review, Dr. Satish C. Jha was appointed as an Additional Director of your Company w.e.f. January 28, 2010 and he shall hold office upto the date of the ensuing Annual General Meeting. Your Company has received a notice from a member pursuant to Section 257 of the Companies Act, 1956 signifying his intention to propose the candidature of Dr. Satish C. Jha for the office of director. Mr. Hemant Kanoria and Mr. K. K. Mohanty were re-appointed as Chairman & Managing Director and Wholetime Director respectively of your Company for a period of five years w.e.f. April 1, 2010. In accordance with the provisions of Section 302 of the Companies Act, 1956, the Members were furnished an abstract of the terms of re-appointment and payment of remuneration to Mr. Hemant Kanoria as Chairman & Managing Director and Mr. K. K. Mohanty as Wholetime Director of your Company w.e.f. April 1, 2010. Mr. Somabrata Mandal resigned as director of your Company w.e.f. September 12, 2009 due to his personal preoccupations. The Board wishes to place on record deep appreciation of the contribution, advice and guidance extended by him during his tenure as Director of your Company. Your Company has received approval of the Central Government, Ministry of Corporate Affairs vide Letter No. A-59154211-CL.VII dated June 14, 2010 regarding appointment of Mr. Saud Ibne Siddique as Joint Managing Director of your Company for a period of three years w.e.f. 01.04.2009 to 31.03.2012. In accordance with the provisions of the Companies Act, 1956 and your Company's Articles of Association, Mr. V. H. Pandya and Mr. Sunil Kanoria retire by rotation at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment. All these Directors have filed Form DDA with your Company as required under the Companies (Disqualification of Directors under Section 274(1)(g) of the Companies Act, 1956) Rules, 2003. The brief resume / details relating to Directors who are to be appointed / re-appointed are furnished in the Notice of the ensuing Annual General Meeting. In accordance with the approval of Central Government, your Company has paid remuneration of Rs. 35 lakh by way of commission on net profits calculated under Section 198 of the Companies Act, 1956 to non-executive directors of your Company for financial year 2009-10. AUDIT COMMITTEE: The Audit Committee comprises of Mr. Salil K. Gupta, Mr. V. H. Pandya, Mr. S. Rajagopal, Independent & Non Executive Directors and Mr. Sunil Kanoria, Non Executive Director. Mr. Salil K. Gupta, Chief Mentor & Director of the Company is the Chairman of the Audit Committee. DIRECTORS' RESPONSIBILITY STATEMENT: In terms of provisions of Section 217(2AA) of the Companies Act, 1956 (Act), your directors confirm that: (i) in the preparation of the annual accounts for the financial year ended March 31, 2010, the applicable accounting standards have been followed along with proper explanation relating to material departures; (ii) the directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for the year; (iii) the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and (iv) the directors have prepared the annual accounts for the financial year ended March 31, 2010 on a going concern basis. AUDITORS: Messrs Deloitte Haskins & Sells, Chartered Accountants, the Auditors of your Company will hold office till the conclusion of the ensuing Annual General Meeting. The retiring auditors have not offered themselves for reappointment. It is proposed to appoint Messrs Haribhakti & Co., Chartered Accountants having registration No. 103523W allotted by The Institute of Chartered Accountants of India (ICAI), as Auditors of your Company in place of the retiring auditors. Your Company has obtained a written consent from Messrs Haribhakti & Co., Chartered Accountants to the effect that their appointment, if made, will be within the limits specified under Section 224(1B) of the Companies Act, 1956. The Audit Committee and the Board of Directors of your Company recommend the appointment of Messrs Haribhakti & Co., Chartered Accountants as the Auditors of your Company. ACKNOWLEDGEMENT: Your Directors would like to express their grateful appreciation for the excellent support and co-operation received from the Financial Institutions, Banks, Central & State Government Authorities, Reserve Bank of India, Securities & Exchange Board of India, Indian and overseas Stock Exchanges, Credit Rating Agencies, Customers, Manufacturers, Vendors, Suppliers, Depositors, Shareholders and other Stakeholders during the year under review. Your Directors also place on record their deep appreciation of the valuable contribution of the employees at all levels for the progress of your Company during the year and look forward to their continued co-operation in realisation of the corporate goals in the years ahead. On behalf of the Board of Directors Hemant Kanoria Kolkata, June 28, 2010 Chairman & Managing Director List of Promoters List of Promoters of the Company forming part of the same 'Group' for the purposes of Regulation 3(1)(e)(i) of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997. 1. Hemant Kanoria & Family 2. Adisri Investment Limited and subsidiaries 3. Bharat Connect Limited and subsidiaries 4. Adhyatma Commercial Private Limited and subsidiaries 5. Hari Prasad Kanoria Family Nidhi 6. Hari Prasad Sanjeev Kumar HUF 7. Hari Prasad Hemant Kumar HUF 8. Sujit Kanoria HUF 9. Hemant Kanoria HUF 10. Anantraj Kanoria & Family 11. Raghavraj Kanoria & Family 12. Champa Devi Kanoria & Family 13. Sunil Kanoria HUF 14. Hari Prasad Kanoria & Family 15. Sangita Kanoria & Family 16. Divita Kanoria & Family 17. Sujit Kanoria & Family 18. Madhulika Kanoria & Family 19. Sunita Kanoria & Family 20. Sunil Kanoria & Family 21. Nityashree Kanoria & Family 22. Sidhishree Kanoria & Family 23. Avanishree Kanoria & Family 24. Sanjeev Kanoria HUF 25. Sanjeev Kanoria & Family 26. Manisha Lohia & Family 27. Mukundraj Kanoria & Family 28. Vatsalraj Kanoria & Family 29. Any Company/entity promoted by any of the above Family for this purpose includes spouse, dependent children and parents Analysis of our financial statements* 1. Review of the Profit and Loss Account Highlights, 2009-10: * Disbursements increased 36% from Rs. 6,620 crore in 2008-09 to Rs. 9,017 crore in 2009-10 Total assets under management increased 28% from Rs. 10,367 crore in 2008-09 to Rs. 13,265 crore in 2009-10 * Income from operations increased 15% from Rs. 843 crore in 2008-09 to Rs.970 crore in 2009-10. * Profit before tax increased 107% from Rs. 105 crore in 2008-09 to Rs. 218 crore in 2009-10 * Profit after tax increased 90% from Rs. 83 crore in 2008-09 to Rs. 157 crore in 2009-10 * Earning per share increased from Rs. 7.07 in 2008-09 to Rs. 13.42 in 2009-10 * Net interest margin increased from 3.29% in 2008-09 to 4.31% in 2009-10 Revenue: Group revenues grew from Rs. 852 crore in 2008-09 to Rs. 972 crore in 2009- 10. Group revenues accrued from three verticals - fund-based businesses, fee-based businesses and investments. Income from the fund-based businesses increased 20% from Rs.730 crore in 2008-09 to Rs. 858 crore in 2009-10. This was largely attributed to a rise in the project financing business where assets under management increased by around 114%. The Company's fee-based businesses generated a revenue of Rs. 60 crore in 2009-10 against Rs. 87 crore in 2008-09. Interestingly, fee-based income in 2009-10 was evenly spread across a number of projects (preferred revenue stream) as against a single large fee of Rs. 61 crore from the Ganga Expressway project in 2008-09. Income from rural IT infrastructure (Srei Sahaj) grew 86% from Rs. 18 crore in 2008-09 to Rs. 34 crore in 2009-10 following a significant increase in operational CSCs in 2009-10. Income from proprietary investments increased from Rs. 6 crore in 2008-09 to Rs. 13 crore in 2009-10. This income largely accrued from monetisation of existing investments. Since income from proprietary investments will depend on the timing of divestment of such investments, income from this may vary from year to year. The Group's non-core income declined from Rs. 11 crore in 2008-09 to Rs. 6 crore in 2009-10. Other income accounted for only 0.3% of the total income of 2009-10, reflecting the continuing strength of the core businesses. Operational expenses: The Group's total operating cost (before interest and depreciation) was Rs. 149 crore in 2009-10 (Rs. 160 crore in 2008-09) despite increased operations. Employee costs: Expenses grew 16% from Rs. 54 crore in 2008-09 to Rs. 63 crore in 2009-10, attributed to an increase in team strength from 1,083 as on March 31, 2009 to 1,424 as on March 31, 2010. Administrative costs: Expenses declined from Rs. 107 crore in 200809 to Rs. 86 crore in 2009-10 owing to a significant drop in professional fee from Rs. 64 crore in 2008-09 (largely owing to the additional one-time professional fee expenses incurred for the execution of Ganga Expressway project) to Rs. 35 crore in 2009-10. Interest liability: Finance charges increased 2% from Rs. 522 crore in 2008-09 to Rs. 533 crore in 2009-10. Total interest liability during the year increased only marginally owing to the following factors: * Efficient cost management * Easing of interest rates in the domestic market * Favourable movement in the exchange and LIBOR rates Taxation: The Group's current tax liability increased from Rs. 7 crore in 2008-09 to Rs. 37 crore in 2009-10 owing to a considerable increase in profit before tax. This was partly offset by the MAT credit entitlement, which reduced net tax outflow to Rs. 15 crore for 200910. However, the total tax expense including deferred tax liability increased from Rs. 22 crore in 2008-09 to Rs. 61 crore in 2009-10. This was mainly due to a sharp increase in the deferred tax liability from Rs. 22 crore in 2008-09 to Rs. 46 crore in 2009-10. The average tax expense rate was about 28% in 2009-10 as against 21% in 2008-09. 2. Analysis of the Balance Sheet Highlights, 2009-10: * Capital adequacy ratio was 21.98% as on March 31, 2010 against 39.18% as on March 31, 2009 * Book value per share increased from Rs. 98.20 as on March 31, 2009 to Rs.110.14 as on March 31, 2010 * Shareholders' funds increased 12% from Rs. 1,149 crore as on March 31, 2009 to Rs. 1,290 crore as on March 31, 2010 * Debt-equity ratio was 5.09 as on March 31, 2010 against 3.73 as on March 31, 2009 Capital employed: The employed capital increased 45% from Rs. 5,481 crore as on March 31, 2009 to Rs. 7,957 crore as on March 31, 2010 owing to increased operations across all business verticals. Sources of funds: Amount Percentage Amount Percentage Y-o-Y (Rs. Crore) of Total (Rs. Crore) of Total growth % Share capital 116 1.46 134 2.45 (13) (including warrants) Reserves and 1,173 14.74 1,015 18.52 16 surplus Minority 24 0.30 22 0.40 7 interest Secured loans 5,578 70.10 3,752 68.45 49 Unsecured loans 992 12.47 531 9.69 87 Deferred tax 74 0.93 27 0.49 168 liability Total 7,957 100.00 5,481 100.00 45 Equity: Share capital comprised 116,144,798 equity shares with a face value of Rs. 10 totaling Rs. 116 crore. The promoters' holding constituted 30.02% and foreign holdings 20.22% as on March 31, 2010. Reserves: Group reserves grew 16% from Rs. 1,015 crore as on March 31, 2009 to Rs. 1,173 crore as on March 31, 2010. External funds: Secured debt increased 48.67% from Rs. 3,752 crore as on March 31, 2009 to Rs. 5,577 crore as on March 31, 2010. Secured loans comprised debentures, term loans and working capital loans. The growth in secured debt was largely due to an increase in term loans (46.56%) and working capital loans (84.89%). Of the outstanding term loans, 64.20% (52.10% in the previous year) was rupee-denominated debt and 35.80% (47.90% in the previous year) was from international sources. Unsecured loans experienced a churn in the debt mix from conventional short-term loans from banks and institutions to low-cost debentures and commercial paper. The Group increased its subordinated debentures/bonds/loans exposure by 174.24%, strengthening its capital adequacy. Public deposits: The total deposits outstanding as on March 31, 2010 was Rs. 5.20 crore as compared with Rs. 5.15 crore as on March 31, 2009. In April 2010, the Company decided to convert itself into a non-deposit-taking NBFC in order to qualify for registration as an Infrastructure Finance Company (IFC) and subsequently stopped accepting public deposits or renew such maturing deposits in any manner w.e.f. April 20, 2010. The Company subsequently received the regulatory approval for the category of a non-deposit-taking NBFC. Application of funds: Amount Percentage Amount Percentage Y-o-Y (Rs. Crore) of Total (Rs. Crore) of Total growth % Net block 317 3.98 314 5.73 1 Goodwill 6 0.08 6 0.11 - Deferred 1 0.01 0.22 - 282 tax assets Investments 671 8.43 444 8.10% 51 Net current 6,958 87.45 4,714 86.00 48 assets Miscelleneous 4 0.05 3 0.05 64 expenditure Total 7,957 100.00 5,481 100.00 45 Net block: The Group's net block was Rs. 317 crore as on March 31, 2010 against Rs. 314 crore as on March 31, 2009. The net block comprised own assets (15% as on March 31, 2010), intangible assets (1% as on March 31, 2010) and assets for operating lease (84% as on March 31, 2010). The Group added assets worth Rs. 49 crore in 2009-10 of which assets totalling Rs. 43 crore were operating lease assets for growing the business. Sundry debtors: Sundry debtors increased 60.43% to Rs. 108 crore as on March 31, 2010. The debtors largely comprised receivables from rural entrepreneurs (Srei Sahaj business) for the IT infrastructure provided to them; the large rollout of CSCs in 2009-10 resulted in a significant increase in the sale of IT assets and consequently outstanding debtors' balance. Financial and other current assets: This segment mainly represented the outstanding principal amount of equipment finance loans given to customers. The outstanding balance under this account grew 4.9% to Rs. 3,143 crore as on March 31, 2010 against Rs.2,996 crore as on March 31, 2009 owing to a growth in the equipment finance business. Loans and advances: This account mainly represented outstanding principal amount of project finance loans disbursed. Outstanding loans and advances grew 169.3% to Rs. 3,619 crore as on March 31, 2010 from Rs. 1,344 crore as on March 31, 2009, owing to a sharp increase in the project financing business. Non-performing assets: Gross NPA on a consolidated basis, as per RBI, increased to 0.90% of total assets in 2009-10 from 0.79% in 2008-09. On a net basis, the consolidated NPAs as per RBI were 0.29%. As per FLI standards, the gross NPA was 1.06% in 2009-10 as against 1.33% in 2008-09. The net NPA was 0.45% for this year against 0.47% for the previous year. Over a period of time, Srei has consistently kept NPA levels under check primarily owing to its robust due diligence mechanism prior to disbursement and its conservative approach in NPA provisions that conforms with standards set by Indian regulatory authorities, foreign lending institutions and credit rating agency parameters. Mapping uncertainties Managing risks: The business of financing is really the business of managing risk. The recent global financial crisis not only disrupted all kinds of financial markets, it also gave way to bankruptcies of bank and non-bank finance companies across the globe. While the exact causes are yet to be fully comprehended, most analysts identified risk management failure as one of the key factors that cause the unprecedented increase in asset prices, the availability of cheap credit leading to build-up of excessive leverage and the massive underpricing of risk. The crisis has therefore, not only vilified the risk management function of financial institutions, but also vindicated the importance of this function for the survival of finance companies and the stability of the financial system. Srei uses a multi-faceted approach to manage its risks, aimed at insuring the net income against disruptions from any kind of risk, minimising volatility in income with a pro-cyclically bias. Risk in general terms is defined as uncertainties in the achievement of objectives, leading to a negative organisational effect. These uncertainties may either be systemic i.e. caused by the factors affecting an entire industry, sector, or economic such as interest rate risk, foreign exchange risk and regulatory risk, among others, or unsystemic i.e. caused by factors specific to a particular firm, like fire, theft, project failure, bad debt and shortage of liquidity, among others. In an organisation like Srei, there are risks present at all levels and across all aspects of its functioning, including business, strategic, operational, market, credit, liquidity, reputation and processes, among others. To manage and mitigate these risks and reduce the uncertainties prevalent, an enterprise-wide risk management framework was established that allows all risks to be aggregated using a consistent measurement system as well as take account of the correlation between these risks. An enterprise's risk management framework includes all systems and processes that lead to managing risks and seizing opportunities towards the achievement of objectives. These seven steps constitute a comprehensive risk management framework. Thus, Srei aims to gain a complete knowledge of the internal and external operating environment to identify all potential threats that negatively affect its market position and achievement of its objectives. The quantitative assessment of loss pertaining to each risk helps in the aggregation of all risks to determine the overall impact on the company, prioritisation of risks within the aggregate risk profile, and decision- making regarding which risks to mitigate, while assuming the residual risks so as to maintain the required risk-return profile of the Company. There is also a constant need to review and monitor the risk profile and assess the viability of policy measures in today's dynamic environment to attain long-term viability and sustainability. These step-by-step processes of enterprise-wide risk management help Srei optimise its returns, given the portfolio of risks it assumes. Prudent risk management is the goal of any business enterprise. For a finance company like Srei, these risks take on a multitude of forms - from dominant risks such as credit risk to small but significant risks like sustainability risk or legal risk. The ultimate goal of risk management is to keep the aggregate risk within the Company's risk appetite or risk tolerance limit, so as to ensure long-term survival despite all the business uncertainties that Srei is exposed to. In particular, the key risks are: 01] Credit risk: Credit risk is the risk of a financial loss arising if a borrower or counter-party fails to meet a contractual payment obligation. It arises principally from direct lending and leasing business, as well as from off- balance sheet products like derivatives transaction and from Srei Group debt security holdings. Credit risk requires the largest regulatory capital requirement. Mitigation measures: This is more relevant for fund-based businesses, namely equipment financing and project financing. Equipment finance: Srei's customers belong to the micro, small and medium enterprise (MSME) category. The Company has been financing this customer segment for two decades now and is completely aware of the intricacies of this kind of business. It has created a multi-check credit appraisal system verifying project details, project and entrepreneur's credit worthiness. The Company maintains a continuous relationship with all its clients that helps in collaborative addressal of business uncertainties. All these have resulted in keeping NPAs well below the national average. Project finance: Srei provides senior secured loans to various infrastructure projects both, as the sole lender and a consortium of lenders. The highly experienced project finance team structures non- recourse funding in a manner such that all risks are duly identified along with appropriate mitigants. All projects and their various parts and components undergo detailed due diligence and review during the credit appraisal process and are further examined by a dedicated and independent credit function. Srei also has strong systems and processes in place to manage and administer its collaterals on project finance. Due to its effective risk mitigation techniques and transaction structuring expertise, the project finance division achieved a zero NPA portfolio as on March 31, 2010. 02] Liquidity risk: Srei may not have sufficient financial resources to meet its liabilities as they fall due, or to meet its commitments. This risk could arise from a mismatch in the timing of cash flows of the Company with its repayment commitment. Mitigation measures: In most cases, an inability to match the debt repayment cycle with the funds receivable cycle affects viability. Srei created a framework for the stringent and regular mapping of assets and liabilities to avoid such mismatches. The Company aligns its interest payment with customers' cash flows to achieve the most effective risk mitigation method. Additionally, the Company also monitors its cash-flow situation, asset-liability positions and market conditions, on a daily basis that enables it to identify probable mismatches between receipts and payments well in advance. All these enable Srei to meet its financial obligations in a timely manner. 03] Funding risk: Funding risk, a form of liquidity risk, arises when the liquidity needed to fund illiquid asset positions cannot be obtained at the expected terms as and when required. Mitigation measures: The Company enjoys sound relationships with most scheduled banks and financial institutions in India and with leading international financial institutions (like DEG, FMO, KfW, HSBC and UPS, among others.). Besides, Srei enjoys a zero-default repayment record and reliable asset financing opportunities, making it a preferred borrowing company (for providers). Also, the Company's modest gearing of 4.48 (standalone) and strong capital adequacy ratio 21.98% (standalone) as on March 31, 2010, positioned it attractively to mobilise funds. Besides, the Company has on average utilised less than 50% of its working capital limit of Rs. 1,775 crore during the year 2009-10, reflecting its liquidity to fund future growth initiatives over the long-term. In addition, the Srei- Quippo merger has strengthened its financial ratios and its ability to borrow large sums of low-cost funds from the market to fund its future growth. In addition, the Company raised its borrowing limits with its domestic banking consortium which is expected to seamlessly accommodate its growth appetite. 04] Market risk: Certain fluctuating market factors, such as foreign exchange rates, market prices, interest rates, credit spreads and equity prices could reduce Srei's income or portfolio value. Mitigation measures: The Company has limited exposure to market risk, primarily in the form of interest rate risk and foreign exchange risk. The interest rate risk exposure emanates from a mismatch, if any, in the interest rates on the Company's assets and liabilities. Since both, assets and liabilities, are typically floating, the limited risk on our asset- liability mismatch is in the form of a basis risk between the benchmark used on the liabilities against the ones on the assets. The ALCO continuously monitors these mismatches and suggests strategies to manage them. The Company's risk from currency fluctuation is restricted to its foreign currency debt of Rs. 755.52 crore. The Company mitigates this risk through a prudent hedging strategy which covers its earnings against adverse currency fluctuations. 05] Residual value risk: Residual value risk arises because of operating lease transactions, a situation where the values recovered from disposing of leased assets or re- letting them at the end of the leased term, called the 'residual values', differ from those projected at the lease inception. Mitigation measures: Srei structures its operating lease transactions in a robust manner, wherein it is ensured that the lease period is less than the economic life of the leased equipment. The business regularly monitors residual value exposure by reviewing the recoverability of the residual value projected at lease inception. This entails considering the potential of re-letting of operating lease assets and their projected disposal proceeds at the end of their lease terms. The Company also has the option to operate the leased equipment itself, in order to recover the residual value, should there be an erosion in the market value of the leased facility. 06] Operational risk: Operational risk is the risk of loss arising from fraud, unauthorised activities, errors, omissions, inefficiencies, systems failure or from some external events. Operational risks can be further divided into the following categories: a] Legal risk:- Legal risk arises owing to various factors such as defective contractual relationships, involvement in actual or potential disputes, failure to adhere to the laws of the jurisdiction in which Srei operates, illegal infringement on assets and rights and so on. Mitigation measures: The Company's legal team is involved in every transaction - from the documentation to its closure -ensuring transparent and water-tight documentation. The legal team works closely with the business teams to ensure that the transactions are based on unambiguous legal opinions and also provides legal support in cases of customer default, facilitating faster resolution of the cases. b] Compliance risk:- Compliance risk is the risk of loss caused by failure in compliance with domestic and overseas laws and regulations. Mitigation measures: Srei belongs to a regulated NBFC sector. The Company has a competent team that monitors regulations, changes, alternatives and applicability. This enables Srei to improve systems and processes to ensure a complete and consistent regulatory adherence. The Company has never been censured for regulatory non-compliance across its two decade history, attracting the association of leading global brands, with BNP Paribas and Tatas being the most prominent. c] Business processing risk: Risk of loss caused by clerical mistakes or by the breakdown or malfunction of corporate systems. Mitigation measures: Srei has in place a system of laid down processes and policies that guide the functioning of all departments of the Company. It has a well defined control mechanism with a system of checks and balances that controls the negative effects of business processing risk. The Company also proposes to introduce a risk and control self-assessment (RCSA) system to identify gaps in its processes and design mitigation initiatives accordingly. d] Information security risk: Risk arising because of unauthorised access, use, disclosure, disruption or modification of information and data systems that are useful to Srei, resulting in a loss or breakdown. Mitigation measures: Srei manages an elaborate information technology set- up and resources. Well defined policies are in place to ensure information security as well as business continuity planning through an off-site disaster recovery. Standard globally accepted security features covering firewalls, encryption technologies and spam-guards are also in place. Srei's system provides for controlled access with very stringent password protection facilities and appropriate document back-up management systems. Reports on deviations and/or irregularities, if any, are checked by the internal audit department. Findings on control points are circulated on a monthly basis. Corrective actions, wherever necessary, are taken, either on a reactive or proactive basis. Sustainability risk is especially relevant for Srei due to its project financing activities, and it arises owing to the provision of financial services to companies or projects, which run counter to the needs of Srei's sustainable development. In effect, these risks arise when the environmental and social effects outweigh the economic benefits. Sustainability risks can be avoided and even mitigated if environmental, social, health and safety issues related to infrastructure projects can be properly identified and mitigation measures adopted accordingly. Mitigation measures: Assessment of the environmental and social impact of projects financed by Srei is firmly embedded in Srei's overall risk management processes. Srei adopted an environmental policy in August 1999. The policy is based on the guidelines and norms of best international practices, also referred to as IFC Standards and incorporates requirements under Indian environmental regulations and rules. Srei's environmental and social management system screens all medium and large projects for categorisation based on the sensitivity of the environmental issues involved. Small projects, that mainly involve individual financing, are assessed informally by verbal questioning for environmental impacts. These policies are currently being reviewed with the objective of updating its policy on environmental as well as the introduction of social, health and safety (ESHS) issues. While most banks and financial institutions face these risks, the approaches adopted by each to manage the risks vary significantly. Sophistication of risk measurement methods, that utilise all data and information available within the Company to arrive at a better estimation of its risk profile, is one of the key differentiating factors between institutions. At Srei, there is a constant effort to improve its risk management system. The lessons learnt from the global financial crisis, especially with respect to scenario stress-testing and contingent planning, will be incorporated into the existing risk system to be better prepared to deal with market turbulences.