As filed with the Securities and Exchange Commission on February 11, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------------
ICICI Bank Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
The Republic of India
(State or other jurisdiction of incorporation or organization)
6029
(Primary Standard Industrial Classification Code Number)
None
(I.R.S. Employer Identification No.)
-------------------------------------
ICICI Towers
Bandra-Kurla Complex
Mumbai 400 051, India
011-91-22-653-1414
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
-------------------------------------
CT Corporation System
111 Eighth Avenue
New York, New York 10011
212-894-8940
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------------------
Copies to:
Margaret E. Tahyar Stuart K. Fleischmann
Davis Polk & Wardwell Shearman & Sterling
99 Gresham Street 599 Lexington Avenue
London EC2V 7NG New York, New York 10022
England 212-848-4000
011-44-171-418-1300
-------------------------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class of securities Amount to be Proposed maximum Proposed maximum Amount of
to be registered(1) registered offering price per aggregate registration fee(2)
ADS offering price
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Equity shares, par value Rs. 10 $125,000,000 $33,000
per share, each represented by
o American Depositary Shares(3)
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(1) Assumes that all the equity shares sold in the offering are sold in the
United States.
(2) Calculated on the basis of the maximum aggregate offering price pursuant
to Rule 457(o) under the Securities Act of 1933.
(3) American Depositary Shares evidenced by American Depositary Receipts
issuable upon deposit of these Equity Shares are being registered under a
separate registration statement on Form F-6. Each American Depositary
Share will represent o equity shares.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 2000
PROSPECTUS
o American Depositary Shares
[LOGO]
Representing o Equity Shares
We are offering up to o American Depositary Shares or ADSs of ICICI Bank
outside India, including in the United States. Each American Depositary Share
represents o equity shares.
In India, our equity shares are listed on several Indian stock exchanges,
including the Stock Exchange, Mumbai, known as the BSE, and the National Stock
Exchange of India Limited, known as the NSE, the principal stock exchanges in
India.
We have applied to list our American Depositary Shares on the New York
Stock Exchange, subject to official notice of issuance, under the symbol o.
It is anticipated that the price to public per ADS will be determined by
reference to the prevailing market prices of the equity shares after taking in
account prevailing market conditions and certain other factors. The last
reported sale price of our equity shares on the BSE on February 10, 2000 was
Rs. 170.45 per equity share and the last reported sale price of our equity
shares on the NSE on February 10, 2000 was Rs.169.10 per equity share.
----------------
Investing in the American Depositary Shares involves certain risks which
are described in the Risk Factors beginning on page o.
----------------
Underwriting
discount and Proceeds to
Price to public commissions us
--------------- ------------ -----------
Per ADS................... $ $ $
Total..................... $ $ $
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters the right to purchase up to an additional
o American Depositary Shares at the public offering price, less underwriting
discount and commissions, within 30 days from the date of this prospectus to
cover over-allotments.
----------------
Joint Global Coordinators and Joint Book Runners
(listed alphabetically)
Merrill Lynch & Co. Morgan Stanley Dean Witter
, 2000
TABLE OF CONTENTS
Page
----
Information about the Offering
Prospectus Summary......................................................
The Offering............................................................
Summary Financial and Operating Data....................................
Risk Factors............................................................
Use of Proceeds.........................................................
Capitalization..........................................................
Exchange Rates..........................................................
Information about Our Business
Overview of the Indian Banking Sector...................................
Relationship with the ICICI Group.......................................
Business................................................................
Overview...........................................................
History............................................................
Our Strategy.......................................................
Our Principal Business Activities..................................
Corporate Banking..................................................
Retail Banking.....................................................
Treasury...........................................................
Funding............................................................
Loan Portfolio.....................................................
Non-Performing Loans...............................................
Risk Management....................................................
Technology.........................................................
Competition........................................................
Employees..........................................................
Properties.........................................................
Legal and Regulatory Proceedings...................................
Selected Financial and Operating Data...................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................
Management..............................................................
Related Party Transactions.............................................
Information about India
The Republic of India...................................................
Reforms in Some Key Sectors of the Indian Economy.......................
Overview of the Indian Financial Sector.................................
Supervision and Regulation..............................................
Exchange Controls.......................................................
Nature of the Indian Securities Trading Market..........................
Restriction on Foreign Ownership of Indian Securities...................
Other Information
Principal Shareholders..................................................
Dividends...............................................................
Dilution................................................................
Description of Equity Shares............................................
Description of the American Depositary Shares...........................
Taxation................................................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Presentation of Financial Information...................................
Forward-Looking Statements..............................................
Where You Can Find Additional Information...............................
2
Enforcement of Civil Liabilities Against Foreign Persons................
Selected Financial Information under Indian GAAP........................
Significant Differences between Indian GAAP and US GAAP.................
Financial Information
Index to US GAAP Financial Statements...................................
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state or jurisdiction where the
offer is not permitted. You should not assume that the information provided by
this prospectus is accurate as of any date other than the date on the front of
this prospectus.
3
PROSPECTUS SUMMARY
You should read the following summary with the more detailed financial
information about us and our financial statements, including the notes to the
financial statements, included at the end of this prospectus. In this
prospectus, all references to "we", "our", "us" and "ICICI Bank" are to ICICI
Bank Limited. References to "ICICI" are to ICICI Limited on an unconsolidated
basis and references to the "ICICI group" and "the group" are to ICICI Limited
and its consolidated subsidiaries including us.
Overview
We are a private sector commercial bank organized under the laws of India
and one of the nine new private sector banks formed since 1993. We offer a wide
range of banking products and services to corporate and retail customers
through a variety of delivery channels. We are a subsidiary of ICICI Limited,
one of the largest of all Indian financial institutions, banks and finance
companies in terms of assets, a well recognized brand in the Indian financial
sector and the first Indian company to list its securities on the New York
Stock Exchange (symbol: IC and IC.d). At December 31, 1999, we had the largest
deposit base of all of the new private sector banks in India. At year-end
fiscal 1999, we had assets of Rs. 74.8 billion (US$ 1.7 billion) and
stockholders' equity of Rs. 2.8 billion (US$ 65 million). In fiscal 1999, our
net income was Rs. 503 million (US$ 12 million). At December 31, 1999, we had
assets of Rs. 102.2 billion (US$ 2.3 billion) and stockholders' equity of Rs.
3.7 billion (US$ 85 million). Our net income for the nine months ended December
31, 1999 was Rs. 1.0 billion (US$ 24 million).
Our organization is divided into three business units: corporate banking,
retail banking and treasury. Our primary business is to develop a strong asset
portfolio consisting mainly of working capital loans and terms loans for
corporate borrowers funded by corporate and retail deposits. We seek to provide
a wide variety of fee-based corporate products and services, like documentary
credits, cash management services, standby letters of credit and treasury-based
derivative products that help us increase our non-interest income. In building
our corporate banking business, we have capitalized on the strong relationships
that our parent company, ICICI, enjoys with many of India's leading
corporations. We intend to generate significant growth in revenues based on
increased synergies with ICICI and its group of companies.
Our retail products and services include payroll accounts, online bill
payment, online remittance facilities, credit cards, depositary share accounts,
retail loans against time deposits and loans against subscriptions for initial
public offerings. We offer our customers a choice of delivery channels
including physical branches, automated teller machines or ATMs, telephone
banking call centers and the Internet. In recent years, we have expanded our
physical delivery channels, including bank branches and ATMs, to cover a total
of 121 locations in 40 cities throughout India at December 31, 1999. We intend
to continue to use technology to increase the speed and efficiency of the
delivery of our products and services. We have built a base of demand and time
deposits (494,480 retail customer accounts at December 31, 1999), representing
1.08% of total deposits held by commercial banks in India.
We were the first bank to offer Internet banking in India. Since
inception, we have consistently used technology to differentiate our products
and services from those of our competitors. Our technology driven products
include Internet banking, electronic commerce based banking solutions, cash
management services and credit cards. To support our technology initiatives, we
have set up online real time transaction processing systems. We have upgraded
our product offering in response to changes in customer needs and technological
advances. We believe that our Internet banking platform delivers competitive,
efficient and low cost banking solutions to our customers.
Our Strategy
We believe the recent upturn in the Indian economy provides us with a
significant opportunity to strengthen our position as one of the largest and
most innovative new generation private sector commercial banks in India. Our
objective is to be the leading provider of banking products through technology
driven distribution channels servicing a targeted group of corporate and retail
customers.
4
To achieve this objective, the key elements of our strategy are to:
o Increase our market share in corporate banking;
o Build a profitable retail franchise;
o Apply Internet technologies to existing product offerings and create
new business opportunities;
o Use technology to provide a multi-channel distribution network;
o Enhance recurring fee income; and
o Maintain and enhance asset quality.
5
THE OFFERING
Offering ................................ o ADSs being offered outside India which would be approximately
o% of our issued and outstanding equity shares after the
offering, assuming no exercise of the underwriters' over-allotment
option, and o%, assuming the underwriters exercise their
over-allotment option described below. The offering consists of the
US offering and the international offering.
US Offering.............................. o ADSs being offered in the United States and Canada.
International Offering................... o ADSs being offered outside the United States, Canada and
India to institutional investors in Europe and the rest of the
world.
Offering Price........................... The offering price is $o per ADS.
Underwriters' Over-Allotment
Option.................................. We have granted the underwriters in the offering an option,
exercisable for up to 30 days after the date of this prospectus, to
purchase up to o additional ADSs to cover over-allotments, if
any.
Listing................................. We have applied to list our ADSs on the New York Stock Exchange,
subject to official notice of issuance, under the symbol o.
American Depositary Shares.............. Each ADS represents o equity shares, par value Rs. 10 per
share. The ADSs will be evidenced by American Depositary Receipts.
Equity Shares to be outstanding
after the Offering. ..................... o equity shares (including any equity shares to be issued in
the event the underwriters' over-allotment option is exercised in
full in the offering).
Use of Proceeds ........................ The net proceeds from the offering will be used for funding future
growth and for other general corporate purposes. We expect that the
net proceeds from the offering will allow us to strengthen our
capital adequacy so as to be more in line with the benchmarks of
leading, well capitalized international banks and to be in
compliance with capital adequacy requirements in India. We may also
selectively pursue growth opportunities through acquisitions and
strategic investments.
Dividends............................... We have declared and paid dividends since fiscal 1996. The
declaration, amount and payment of dividends are subject to the
recommendation of our board of directors and the approval of our
shareholders. Holders of equity shares and ADSs will be entitled to
dividends paid, if any. Holders of ADSs will be entitled to full
dividends in fiscal 2001 and will not be entitled to any dividends
in fiscal 2000.
6
Voting Rights............................ The ADSs will have no voting rights. Under the deposit agreement,
the depositary will vote the equity shares deposited with it as
directed by our board of directors. See "Description of the American
Depositary Shares--Voting Rights".
Indian Taxation.......................... Any transfer of ADSs or equity shares outside India by a
non-resident investor to another non-resident investor does not give
rise to Indian capital gains tax. Subject to any relief under any
relevant double taxation treaty, a gain arising on the sale of an
equity share to a resident of India or where the sale is made inside
India will generally give rise to a liability for Indian capital
gains tax. During the period the underlying equity shares are held
by non-resident investors on a transfer from the depositary upon
redemption of ADSs, the provisions of the avoidance of double
taxation agreement entered into by the government of India with the
country of residence of the non-resident investors will be
applicable in the matter of taxation of any capital gain arising on
transfer of the equity shares. The double taxation treaty between
the United States and India does not provide US residents with any
relief from Indian tax on capital gains. The exact procedures for
the computation and collection of Indian capital gains tax are not
settled. See "Taxation--Indian Tax--Taxation on Sale of Equity Shares
or ADSs".
7
SUMMARY FINANCIAL AND OPERATING DATA
Our summary financial and other data at year-end fiscal 1998 and 1999 and
for fiscal 1997, 1998 and 1999 and at and for the nine months ended December
31, 1998 and 1999 have been prepared in accordance with US GAAP and are
included in this prospectus. The summary financial data presented below under
the captions "Selected income statement data", "Per common share data" and
"Selected balance sheet data" for and at the end of each of the years in the
three years ended March 31, 1999 are derived from our financial statements.
These financial statements have been audited by KPMG, independent accountants.
The summary financial and other data at year-end fiscal 1997 have been derived
from our financial statements that are not included in this prospectus. The
summary financial and other data at December 31, 1998 and 1999 and for the nine
months ended December 31, 1998 and 1999 have been derived from our unaudited
interim financial statements prepared in accordance with US GAAP. Capital
adequacy ratios have been calculated both from the financial statements
prepared in accordance with Indian GAAP and the financial statements prepared
in accordance with US GAAP. Five years of selected Indian GAAP financial
information is given in "Selected Financial Information under Indian GAAP".
You should read the following data with the more detailed information
contained in "Selected Consolidated Financial and Operating Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements, included in this prospectus.
Historical results do not necessarily predict the results in the future. The
results for the nine months ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full fiscal 2000.
Year ended March 31, Nine months ended December 31,
------------------------------------------- --------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
-------- -------- -------- ---------- -------- --------- ---------
(in millions, except per common share data)
Selected income statement data:
Interest revenue...................... Rs. 1,843 Rs. 2,579 Rs. 5,390 US$ 124 Rs. 3,758 Rs. 5,837 US$ 134
Interest expense...................... (1,170) (1,854) (4,244) (98) (2,962) (4,783) (110)
--------- --------- --------- ------- --------- --------- -------
Net interest revenue.................. 673 725 1,146 26 796 1,054 24
Provisions for credit losses.......... (187) (360) (540) (12) (398) (218) (5)
--------- --------- --------- ------- --------- --------- -------
Net interest revenue after provisions
for credit losses.................. 486 365 606 14 398 836 19
Non-interest revenue, net........... 317 591 866 20 551 1,343 31
Net revenue........................... 803 956 1,472 34 949 2,179 50
Non-interest expense................ (406) (554) (799) (18) (517) (850) (19)
--------- --------- --------- ------- --------- --------- -------
Income before taxes................... 397 402 673 16 432 1,329 31
Income tax expense.................... (155) (104) (170) (4) (112) (303) (7)
--------- --------- --------- ------- --------- --------- -------
Net income............................ Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 320 Rs. 1,026 US$ 24
========= ========= ========= ======= ========= ========= =======
Per common share data:
Net income--basic...................... Rs. 1.61 Rs. 1.84 Rs.3.05 US$ 0.07 Rs. 1.94 Rs. 6.22 US$ 0.14
Net income--diluted................... 1.61 1.84 3.05 0.07 1.94 6.22 0.14
Dividends............................. 1.00 1.00 1.20 0.03 - - -
Book value............................ 10.67 14.98 17.15 0.39 16.02 22.24 0.51
Common shares outstanding at end of
period (in millions of common
shares).......................... 150 165 165 165 165
Weighted average common shares
outstanding basic (in millions of
common shares)..................... 150 162 165 165 165
Weighted average common shares
outstanding diluted (in millions
of common shares).................. 150 162 165 165 165
8
At March 31, At December 31,
---------------------------------------------- ------------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
---------- ---------- ---------- --------- ---------- ----------- -----------
(in millions, except percentages)
Selected balance sheet
data:
Total assets................ Rs. 19,766 Rs. 35,278 Rs. 74,825 US$ 1,720 Rs. 59,346 Rs. 102,205 US$ 2,349
Loans, net(2)............... 8,374 12,765 27,597 634 20,880 37,749 868
Securities.................. 3,816 1,476 3,963 91 2,912 4,402 101
Non-performing loans, net... - 179 733 17 594 882 20
Total liabilities........... 18,016 32,807 71,995 1,655 56,703 98,536 2,264
Long-term debt.............. 89 129 1,764 41 1,110 1,734 40
Deposits.................... 13,476 26,290 60,729 1,396 46,424 85,002 1,953
Stockholders' equity........ 1,750 2,471 2,830 65 2,643 3,669 85
Period average(3):
Total assets................ 15,958 26,661 52,605 1,209 48,715 82,044 1,886
Interest-earning assets..... 11,730 19,467 42,521 977 38,599 62,349 1,433
Loans, net(2)............... 7,224 9,498 18,546 426 16,623 28,469 654
Total liabilities........... 14,270 24,351 49,937 1,148 46,142 78,779 1,811
Interest-bearing liabilities 9,484 17,185 41,212 947 37,837 63,202 1,453
Long-term debt.............. 76 109 1,127 26 958 1,763 41
Deposits.................... 7,753 15,140 35,916 825 33,533 56,608 1,301
Stockholders' equity........ 1,688 2,310 2,668 61 2,573 3,265 75
At or for the
Nine months
At or for the year ended ended December
March 31, 31,
------------------------- ---------------
1997 1998 1999 1998 1999
------- -------- ------- ------- ------
(in percentages)
Profitability(4):
Net income as a percentage of:
Average total assets....................................... 1.52% 1.12% 0.96% 0.88% 1.67%
Average stockholders' equity............................... 14.34 12.90 18.85 16.58 41.90
Dividend payout ratio(5)...................................... 61.98 59.89 43.30 - -
Spread(6)..................................................... 3.38 2.46 2.38 2.54 2.39
Net interest margin(7)........................................ 5.74 3.72 2.70 2.75 2.25
Cost-to-income ratio(8)....................................... 41.01 42.10 39.71 38.38 35.47
Cost-to-average assets ratio(9)............................... 2.54 2.08 1.52 1.42 1.38
Capital:
Total capital adequacy ratio (10)............................. 13.04 13.48 11.06 11.60 9.41
Tier 1 capital adequacy ratio (10)............................ 12.71 13.38 7.32 9.18 6.60
Tier 2 capital adequacy ratio (10)............................ 0.33 0.10 3.74 2.42 2.81
Average stockholders' equity as a percentage of average total
assets.................................................... 10.58 8.66 5.07 5.28 3.98
Asset quality:
Gross non-performing loans as a percentage of gross loans..... 2.18 4.58 5.66 6.53 5.06
Net non-performing loans as a percentage of net loans......... - 1.40 2.66 2.84 2.34
Net non-performing loans as a percentage of total assets...... - 0.51 0.98 1.00 0.86
Allowance for credit losses as a percentage of gross non-
performing loans........................................... 100.00 70.36 54.56 58.08 55.11
Allowance for credit losses as a percentage of gross total
loans..................................................... 2.18 3.22 3.09 3.79 2.79
- ---------
(1) Rupee amounts for fiscal 1999 and for the nine months ended December 31,
1999 have been translated into US dollars using the noon buying rate in
effect on December 31, 1999 of Rs. 43.51 = US$ 1.00.
(2) Net of allowance for credit losses in respect of non-performing loans.
(3) Average balances are the daily average of outstanding.
(4) Profitability data for the nine months ended December 31, 1998 and 1999
is annualized.
9
(5) Represents the ratio of total dividends payable on common stock, including
the dividend distribution tax, as a percentage of net income.
(6) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(7) Represents the ratio of net interest revenue to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(8) Represents the ratio of non-interest expense to the sum of net interest
revenue, dividends and non-interest revenue.
(9) Represents the ratio of non-interest expense to average total assets.
(10) Our capital adequacy is computed in accordance with the Reserve Bank of
India guidelines. The computation is based on our financial statements
prepared in accordance with Indian GAAP. Selected financial information
under Indian GAAP and a comparison between Indian GAAP and US GAAP are
included in this prospectus. Our total capital adequacy ratio computed
under the applicable Reserve Bank of India guidelines and based on our
financial statements prepared in accordance with US GAAP was 9.08% at
December 31, 1999. Using the same basis of computation, our Tier 1 capital
adequacy ratio was 6.69% and our Tier 2 capital adequacy ratio was 2.39%
at December 31, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Financial
Condition--Capital".
10
RISK FACTORS
You should carefully consider the following risk factors as well as the other
information contained in this prospectus in evaluating us and our business
before purchasing the ADSs offered by this prospectus.
Risks Relating to India
A slowdown in economic growth in India could cause our business to suffer.
Our performance and the quality and growth of our assets are necessarily
dependent on the health of the overall Indian economy. The Indian economy has
grown significantly over the past few years with real GDP increasing from Rs.
7,990.8 billion (US$ 183.7 billion) in fiscal 1994 to Rs. 11,122.1 billion (US$
255.6 billion) in fiscal 1999. However, there was a slowdown in industrial
growth from fiscal 1997 through fiscal 1999. Industrial production in India
suffered as a result of the global downturn in commodity prices, particularly
in the man-made fibers, iron and steel and textile sectors. Although industrial
growth has recovered significantly in fiscal 2000, if any slowdown in the
Indian economy recurs, industrial production or global commodity prices could
adversely affect our borrowers and contractual counterparties. This in turn
could adversely affect our business, including our ability to grow our asset
portfolio, the quality of our assets, and our ability to implement our
strategy.
A significant change in the Indian government's economic liberalization
and deregulation policies could disrupt our business and cause the price
of our equity shares and our ADSs to go down.
We are an Indian company and all our operations are conducted, and almost
all of our assets and customers are located, in India. The Indian government
has traditionally exercised and continues to exercise a dominant influence over
many aspects of the economy. Its economic policies have had and could continue
to have a significant effect on private-sector entities, including us, and on
market conditions and prices of Indian securities, including our equity shares
and our ADSs. However, since 1991, the Indian government has adopted a policy
of deregulating the domestic economy, has been opening the economy to foreign
trade and has been reforming the framework for foreign investment.
Since 1996, the government of India has changed four times. The most
recent parliamentary elections were completed in October 1999. A coalition
government led by the Bhartiya Janata Party was formed with A. B. Vajpayee as
the Prime Minister of India. Although we expect the Vajpayee government to
continue India's current economic liberalization and deregulation policies, a
significant change in these policies could adversely affect business and
economic conditions in India in general as well as our business and the price
of our equity shares and our ADSs.
Financial instability in other countries, particularly emerging market
countries in Asia, could disrupt our business and cause the price of our
equity shares and our ADSs to go down.
The Indian market and the Indian economy are influenced by economic and
market conditions in other countries, particularly emerging market countries in
Asia. Financial turmoil in Asia, Russia and elsewhere in the world in recent
years had affected different sectors of the Indian economy in varying degrees.
Although economic conditions are different in each country, investors'
reactions to developments in one country can have adverse effects on the
securities of companies in other countries, including India. A loss of investor
confidence in the financial systems of other emerging markets may cause
increased volatility in Indian financial markets. Financial disruptions may
happen again and could have an adverse effect on our business or the price of
our equity shares and our ADSs.
Deteriorating trade deficits and economic sanctions could cause our
business to suffer and the price of our equity shares and our ADSs to go
down.
India's trade relationships with other countries can also influence Indian
economic conditions. In fiscal 1999, India experienced a trade deficit of Rs.
554.8 billion (US$ 12.8 billion). If trade deficits
11
increase or are no longer manageable, the Indian economy, our business and the
price of our equity shares and our ADSs, could be adversely affected. In May
1998, the United States imposed economic sanctions against India in response to
India's continued testing of nuclear devices. These sanctions have now been
partly lifted. However, we cannot be sure that these sanctions would not be
reactivated or that additional economic sanctions of this nature will not be
imposed by the United States or any other country, or that such sanctions will
not have a material adverse effect on our business or the price of our equity
shares and our ADSs.
A significant change in the composition of the Indian economy may affect
our business.
The Indian economy is in a state of transition. The share of the services
sector of the total GDP is rising while that of the industrial and agricultural
sector is declining. It is difficult to gauge the impact of such fundamental
economic changes on our business. We cannot be certain that these changes will
not have a material adverse effect on our business.
If regional hostilities increase, our business could suffer and the price
of our equity shares and our ADSs could go down.
India has from time to time experienced social and civil unrest and
hostilities with neighboring countries. During May-July 1999, there were armed
conflicts over parts of Kashmir involving the Indian army and infiltrators from
Pakistan into Indian territory. India and Pakistan were in a heightened state
of hostilities with significant loss of life and troop conflicts. The
hostilities have since substantially abated. The hostilities between India and
Pakistan are particularly threatening because both India and Pakistan are
nuclear powers. Additionally, Pakistan experienced a military coup in October
1999 resulting in further tensions between India and Pakistan. Although these
recent hostilities and the change of government in Pakistan did not have an
adverse impact on our business, hostilities and tensions may occur in the
future and on a wider scale. These hostilities and tensions could lead to
political or economic instability in India and a possible adverse effect on our
business and the price of our equity shares and our ADSs.
Risks Relating to Our Business
Our business is particularly vulnerable to volatility in interest rates.
Our results of operations are substantially dependent upon the level of
our net interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
Interest rates are highly sensitive to many factors beyond our control,
including deregulation of the financial sector in India, the Reserve Bank of
India's monetary policies, domestic and international economic and political
conditions and other factors. Changes in market interest rates could affect the
interest rates charged on the interest-earning assets differently than the
interest rates paid on interest-bearing liabilities. This difference could
result in an increase in interest expense relative to interest income leading
to a reduction in our net interest income. Our asset-liability gap position at
March 31, 1999 was such that, if interest rates increased by 25 basis points,
we believe that our net interest revenue for fiscal 2000 would fall by
approximately Rs. 8 million (US$ 184,000) which would have been 1.6% of our net
income for fiscal 1999. Income from treasury operations is particularly
vulnerable to interest rate volatility. If interest rates increased by 25 basis
points, we believe that the value of our fixed income trading portfolio would
fall, on a tax adjusted basis, by approximately Rs. 66 million (US$ 2 million)
which would have been 13.0% of our net income for fiscal 1999. The volatility
in interest rates could adversely affect our business, future financial
performance and the price of our equity shares and our ADSs.
Our limited capital base could expose us to higher risk in the event of
sudden changes in the Indian financial markets and could restrict our
ability to grow our business as anticipated.
We are a relatively small participant in the Indian banking industry. Our
limited capital base severely restricts our ability to absorb sudden changes in
the financial markets such as tightening of monetary policy, increases in
interest rates and significant reductions in deposits. The Indian economy is
prone to these sudden changes as a result of its political and economic
situation. Therefore, any sudden
12
change in the Indian economy could have a material adverse effect on our
business, results of operations and financial position and may restrict our
ability to grow our business as anticipated.
Our funding is primarily short-term and if depositors do not roll over
deposited funds upon maturity our business could be adversely affected.
Most of our funding requirements are met through short-term funding
sources, primarily in the form of deposits and inter-bank deposits. However, a
portion of our assets had medium or long-term maturities, creating a potential
for funding mismatches. At December 31, 1999, savings deposits and non-interest
bearing demand deposits together constituted 14.5% of our total deposits and
12.5% of our total liabilities. In addition, time deposits with a residual
maturity of one year or less constituted 79.4% of our total deposits and 68.5%
of our total liabilities. At December 31, 1999, loans having residual maturity
of one year or more constituted 23.6% of our net assets. In our experience, a
substantial portion of our customer deposits has been rolled over upon maturity
and has been, over time, a stable source of funding. However, no assurance can
be given that this experience will continue. If a substantial number of our
depositors do not roll over deposited funds upon maturity, our liquidity
position could be adversely affected. This could have a material adverse effect
on our business or the price of our equity shares and our ADSs.
We could be subject to volatility in income from our treasury operations.
Non-interest revenue from trading account assets (primarily government of
India securities), securities and foreign exchange transactions represented
33.7% of our net revenue for fiscal 1999 and 42.9% of our net revenue for the
nine month period ended December 31,1999. This treasury revenue is vulnerable
to volatility in the market caused by, among other things, changes in interest
rates, foreign currency exchange rates and equity prices. Any decrease in our
income due to volatility in income from treasury operations could have a
material adverse affect on the price of our equity shares and our ADSs.
We have high concentrations of loans to certain customers and to certain
sectors and if any of these loans were to become non-performing, the
quality of our loan portfolio could be adversely affected.
At December 31, 1999, our 10 largest loans, based on outstanding balances,
totaled approximately Rs. 4.3 billion (US$ 100 million), which represented
approximately 11.2% of our total loans and 118.4% of our stockholders' equity.
Our largest single loan exposure, based on outstanding balances, at that date
was Rs. 800 million (US$ 18 million), which represented approximately 2.1% of
our total loans and approximately 21.8% of our stockholders' equity. At
December 31, 1999, the largest group of companies under the same management
control accounted for approximately 2.1% of our total loans and approximately
21.9% of our stockholders' equity. At December 31, 1999, none of our 10 largest
loans based on outstanding balances was classified as non-performing and our
largest non-performing loan was our 40th largest loan overall. However, if any
of our ten largest loans was to become non-performing, the quality of our loan
portfolio and the price of our equity shares and our ADSs could be adversely
affected.
At December 31, 1999, we had extended loans to nearly every industrial
sector in India. At that date, approximately 58.7% of our gross non-performing
loan portfolio was concentrated in three sectors: light manufacturing, textiles
and iron and steel. 17.0% of our total loan portfolio was concentrated in these
three sectors. Recently, these sectors have been adversely affected in varying
degrees by declining commodity prices, the revaluation of south-east Asian
currencies and the slowdown in industrial growth. Industry specific
difficulties in other sectors could increase our level of non-performing loans
and adversely affect our business, results of operations and financial position
and the price of our equity shares and our ADSs.
Because the regulations for the classification and treatment of
non-performing loans in India are not as stringent as regulations in the
US and other developed economies, we may classify and reserve against
non-performing loans significantly later than our counterparts in other
13
developed countries and we may not set aside comparable amounts of
allowance for credit losses.
The Indian financial system is primarily regulated by the Reserve Bank of
India. Rules and regulations relating to banks and financial institutions in
India are less restrictive than in the United States and other developed
countries.
The most significant area is the treatment of non-performing loans in
India. We treat loans as non-performing and place them on a non-accrual basis
(that is, we no longer recognize payments of interest unless and until payments
are actually received) when we determine that interest or principal is past due
beyond specified periods or that the payment of interest or principal is
doubtful. Under Indian practice, loans are classified as non-performing when
interest or principal is past due for 180 days (typically two payments).
Payments on most loans are on quarterly basis. This time period is much longer
than in the United States and other developed countries where loans are
generally placed on a non-accrual basis when any payment, including any
periodic principal payment, is not paid for a 90-day period. In addition, under
US GAAP, we provide for loan losses based on our internal subjective assessment
of the possibility of recovery of such loans based principally on the extent to
which we are able to capture sufficient cash flows from the borrower and
secondarily on the realizable value of collateral. We may classify and reserve
against non-performing loans significantly later than they would be in other
developed countries. As a result, we may not set aside comparable amounts of
allowance for credit losses as would financial institutions in the United
States or other developed countries.
If we are unable to control or reduce the level of non-performing loans in
our portfolio, our business will suffer.
Our gross non-performing loans represented 5.7% of our gross loan
portfolio at March 31, 1999 and 5.1% at December 31, 1999. Our net
non-performing loans represented 2.7% of our net loans at March 31, 1999 and
2.3% at December 31, 1999. Although we believe that our allowance for loan
losses is adequate to cover all known or knowable losses in our portfolio of
assets, the level of our non-performing loans is higher than the average
percentage of non-performing loans in the portfolios of banks in other more
developed countries. In addition, in absolute terms, our gross non-performing
loans grew by Rs. 1.0 billion (US$ 23 million) or 167.1% in fiscal 1999 and by
Rs. 417 million (US$ 10 million) or 223.0% in fiscal 1998. As a percentage of
net loans, net non-performing loans increased to 2.7% at year-end fiscal 1999
from 1.4% at year-end fiscal 1998. The growth in non-performing loans in fiscal
1999 can be attributed to several factors, including a sharp decline in
commodity prices, which reduced profitability for certain of our borrowers, a
slowdown in industrial growth, increased competition arising from economic
liberalization in India and the restructuring of certain Indian companies in
sectors such as iron and steel and textiles. Also, at December 31, 1999, 5.5%
of our directed lending loan portfolio is non-performing. We may experience a
significant increase in non-performing priority sector loans because economic
difficulties are likely to affect these borrowers more severely and we are less
able to control the quality of this portfolio.
A number of factors which are not in our control will affect our ability
to control and reduce non-performing loans, including developments in the
Indian economy, movements in global commodity markets, global competition,
interest rates and exchange rates. Although we are increasing our efforts to
improve collections and to foreclose on existing non-performing loans, we may
not be successful in our efforts and the overall quality of our loan portfolio
may deteriorate in the future. Our recent entry into credit card business may
cause our non-performing loans to increase and the overall quality of our loan
portfolio to deteriorate. If the number of our non-performing loans increases
significantly, we may be unable to execute our business plan as expected and
that could adversely affect the price of our equity shares and our ADSs.
Further, our growth-oriented strategy has involved a significant increase in
our loan portfolio which may result in additional non-performing loans.
If we are unable to improve our allowance for credit losses as a
percentage of non-performing loans, the price of the equity shares and the
ADS could go down.
14
Our allowance for credit losses represented 55.1% of our gross
non-performing loans at December 31, 1999 compared to 54.6% at March 31, 1999.
Although we believe that our allowance for credit losses is adequate to cover
all known or foreseeable losses in our asset portfolio and is in accordance
with US GAAP, we cannot assure you that our allowance will be adequate to cover
any further deterioration in our non-performing loan portfolio. In the event of
any further deterioration in our non-performing loan portfolio, there will be
an adverse impact on our net income.
We may experience delays in enforcing our collateral when borrowers
default on their obligations to us which may result in failure to recover
the expected value of collateral security exposing us to a potential loss.
Our loan portfolio consists primarily of working capital loans that are
typically secured by a first lien on inventory, receivables and other current
assets. In some cases, we may take further security of a first or second lien
on fixed assets, a pledge of financial assets like marketable securities,
corporate guarantees and personal guarantees. In India, foreclosure on
collateral generally requires a written petition to an Indian court. An
application, when made, may be subject to delays and administrative
requirements that may result in, or be accompanied by, a decrease in the value
of the collateral. These delays can last for several years leading to
deterioration in the physical condition and market value of the collateral.
Collateral, consisting of inventory and receivables, is particularly vulnerable
to decrease in value due to any delay in enforcement of the collateral. In the
event a borrower makes a reference to a specialized quasi-judicial authority
called the Board for Industrial and Financial Reconstruction, foreclosure and
enforceability of collateral is stayed. We cannot guarantee that we will be
able to realize the full value on our collateral, due to, among other things,
delays on our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers
by borrowers. We may also face problems realizing the full value of any fixed
assets that we secure on a second lien basis if the party having the first lien
security interest has already partly or fully realized the value of this
collateral. Additionally, we are a member of a consortium of banks for which we
are not the lead lender for 12 or 26.1% of our non-performing loans, including,
four of our top ten non-performing loans. Accordingly, we do not control the
negotiation, restructuring or settlement of these loans and may not be able to
enforce these obligations on the most advantageous terms to us. A failure to
recover the expected value of collateral security could expose us to a
potential loss. Any unexpected losses could reduce the value of our
stockholders' equity and adversely affect our business.
We face greater credit risks than banks in developed countries.
Our principal business is providing financing to our clients, virtually
all of whom are based in India. Our loans to middle market companies can be
expected to be more severely affected than loans to large corporations by
adverse developments in the Indian economy than loans to large corporations. In
all of these cases, we are subject to the credit risk that our borrowers may
not pay us in a timely fashion or at all. The credit risk of all our borrowers
is higher than in other developed countries due to the higher uncertainty in
our regulatory, political and economic environment and inability of our
borrowers to adapt to rapid technological advancements taking place across the
world. Unlike in most other developed countries, we are required to do directed
lending to certain sectors, specified by the Reserve Bank of India, together
called the priority sector. These sectors generally have greater credit risks
than our normal lending business. Higher credit risk may expose us to a
potential loss which would adversely affect our business and the price of our
equity shares and our ADSs.
We are subject to the control of ICICI and could be subject to the control
of other shareholders.
Although ICICI will own o% of our outstanding equity shares after the
completion of the offering, its voting power is limited due to Indian
regulations that require that holders of 10.0% or more of a bank's outstanding
equity shares may only vote 10.0% of the outstanding equity shares. Due to this
voting restriction, ICICI effectively controls a minimum of 28.0% of the voting
power of our outstanding equity shares. After the completion of the offering,
ICICI's effective voting power will decrease to a minimum of o% since its
shareholding in us will be diluted. The shares issued in this offering will be
o% of the outstanding equity shares and will be voted by the depositary as
directed by our board. The remainder of
15
our outstanding equity shares is widely dispersed among other institutional
investors and corporate bodies and individual domestic investors.
Additionally, because of the limited voting power of ICICI, it is possible
that a consortium of shareholders that acquires a minority of our outstanding
equity shares could effectively control us. If such shareholders decide to
significantly alter our business plan and change or terminate our relationship
with the ICICI group, it is likely to have a significant effect on the price of
our equity shares and ADSs. Under the current regulations, the approval of the
Reserve Bank of India is required before we can register the transfer of shares
for an individual or group, which acquires 5.0% or more of our total paid up
capital.
Under the terms of our organizational documents, ICICI is entitled to
appoint one third of the members of our board of directors, including the
Executive Chairman and Managing Director of our board. ICICI is also permitted
to vote on the appointment of the remaining members of our board. ICICI has
appointed two directors to our current eight member board. Accordingly, ICICI
may be able to exercise effective control over our board and over matters
subject to a shareholder vote.
We work closely with ICICI and conflicts of interest with ICICI or the
deterioration of our relationship with ICICI could adversely affect our
business.
We offer products and services which complement the product and services
offered by ICICI and other ICICI group members. We seek to take advantage of
the customer relationships of ICICI group. Because both ICICI and we are
offering financial products and services, there may be conflicts of interest
between ICICI and us that could adversely affect our business and the price of
our equity shares and our ADSs. There is a risk that ICICI may seek to
facilitate its needs or the needs of other ICICI group entities.
Additionally, in the future, there is a risk that ICICI may be directed to
divest some of its holdings in us. Under current law, ICICI would be required
by the Reserve Bank of India to reduce its ownership interest in us to no more
than 40.0%. Any such divestment may result in our inability to continue to
exploit the corporate and retail relationships of the ICICI group. This would
adversely affect our business, results of operations and financial position.
However, a discussion paper issued by the Reserve Bank of India in January 1999
states that if a long-term lending institution chooses to provide commercial
banking services directly, permission to create a 100.0% owned banking
subsidiary would be considered. ICICI is presently in discussion with the
Reserve Bank of India to determine the extent to which it is required to sell
or reduce its interest in us, if required.
Any deterioration in the financial condition of our parent company, ICICI,
could adversely impact our business operations.
We fund our business operations independently of ICICI and our business
and outlook differs to some extent from the business or outlook of ICICI.
However, any deterioration in ICICI's financial condition may adversely impact
our reputation and affect the confidence of our customers in us. In addition,
this could affect our ability to raise deposits from and make loans to
customers and adversely impact our business and results of operations.
If we are unable to manage our rapid growth, our business could be
disrupted and the price of the equity shares and the ADSs could go down.
Since our inception in 1994, we have experienced rapid growth. Our asset
growth rate has been significantly higher than the Indian GDP growth rate over
the last five fiscal years. Our balance sheet growth was 78.5% in fiscal 1998,
112.1% in fiscal 1999 and 36.6% in the nine months ended December 31, 1999
compared to March 31, 1999. We expect to continue to implement a strategy of
aggressive growth. Our growth is expected to place significant demands on our
management and other resources and will require us to continue to develop and
improve our operational, credit, financial and other internal risk controls.
This growth will also provide challenges in our effort to improve the quality
of our assets. Our inability to manage our growth effectively could have a
material adverse effect on our business and the price of our equity shares and
our ADSs.
The success of our Internet banking strategy will depend, in part, on the
development of the new and evolving market for Internet banking in India.
We have offered Internet banking services to our customers since October
1997, although there
16
are low volumes of such transactions being conducted in India. At December 31,
1999, we had approximately 24,000 subscribers to our Infinity Internet banking
service. The demand and market acceptance for Internet banking are subject to a
high level of uncertainty and are substantially dependent upon the adoption of
the Internet for general commerce and financial services transactions in India.
In 1999, there were between approximately 1.5 and 2.0 million Internet users in
India and approximately 175 Internet service providers, 30 of which had
commenced operations. The International Data Corporation estimates that the
number of Internet users will increase to 4.5 million in 2002 and 12.3 million
in 2005.
Many of our existing customers and potential customers have only a very
limited experience with the Internet as a communications medium. In order to
realize significant revenue from our Infinity services, we will have to
persuade our customers to conduct banking and financial transactions through
the Internet. In addition, the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the
Internet is too high to enable many people in India to afford to use these
services. Moreover, although relevant legislation has been proposed by the
government of India, critical issues concerning the commercial use of the
Internet, such as security, legal recognition of electronic records, validity
of contracts entered into online and the validity of digital signatures, remain
unresolved. If Internet banking does not continue to grow or grows slower than
expected, we will not be able to meet our projected earnings and growth
strategy related to our Internet banking business.
The success of our Internet banking strategy will depend, in part, on the
development of adequate infrastructure for the Internet in India.
The Internet may not be accepted as a viable commercial marketplace in
India for a number of reasons, including inadequate development of the
necessary network infrastructure. There can be no assurance that the Internet
infrastructure in India will be able to support the demands of its anticipated
growth. Inadequate infrastructure could result in slower response times and
adversely affect usage of the Internet generally. If the infrastructure for the
Internet does not effectively support growth that may occur, we will not be
able to execute our growth strategy related to our Internet banking business.
If we are unable to succeed in our new business areas, we may not be able
to execute our growth strategy.
We have recently launched several Internet banking products for our retail
and corporate customers including online bill payments and online account
opening. We have also recently entered the Indian credit card market. ICICI
group also intends to provide online brokering services. We expect to provide
online integration between the customer's book entry share account, bank
account and brokerage account. We intend to continue to explore Internet-based
new business opportunities and other opportunities in both retail and corporate
banking. We cannot assure you that we have accurately estimated the relevant
demand for these new banking products or that we will be able to master the
skills and management information systems necessary to successfully manage our
new products and services. Our inability to grow in new business areas could
adversely affect our revenues and the price of our equity shares and our ADSs.
Material changes in the regulations which govern us could cause our
business to suffer and the price of our equity shares and our ADSs to go
down.
Banks in India operate in a highly regulated environment in which the
Reserve Bank of India extensively supervises and regulates banks. Our business
could be directly affected by any changes in policies for banks in respect of
directed lending and reserve requirements. In addition, banks are generally
subject to changes in Indian law, as well as to changes in regulation and
governmental policies, income tax laws and accounting principles. We cannot
assure you that laws and regulations governing the banking sector will not
change in the future or that any changes will not adversely affect our business
and the price of our equity shares and our ADSs.
17
Our business is very competitive and our growth strategy depends on our
ability to compete effectively.
Interest rate deregulation and other liberalization measures affecting the
Indian banking sector have increased competition. This liberalization process
has led to increased access for our customers to alternative sources of funds,
such as domestic and foreign commercial banks and the domestic and
international capital markets. Our corporate and retail lending business will
continue to face competition from Indian and foreign commercial banks and
non-banking finance companies. In addition, we will face increasing competition
for deposits from other banks, non-banking entities like mutual funds and
non-banking finance companies. Our future success will also depend upon our
ability to compete effectively with the public sector banks which generally
have significantly greater resources than us. Our business could also be
affected by the increasing use of technology by our competitors. Due to
competitive pressures, we may be unable to successfully execute our growth
strategy and offer products and services at reasonable returns and this may
adversely impact our results from operations.
We face risks associated with potential strategic partnerships or other
ventures, including whether any such transactions can be completed and the
other party integrated with our business on favorable terms.
We may seek opportunities for growth through future acquisitions,
investments, strategic partnerships or ventures. Any such future transactions
may involve a number of risks, including increased costs, diversion of our
management's attention required to integrate the acquired business and the
failure to retain key acquired personnel and clients, some or all of which
could have an adverse effect on our business.
If we are unable to adapt to the rapid technological changes, our business
could suffer.
Our success will depend, in part, on our ability to respond to
technological advances and emerging banking industry standards and practices on
a cost-effective and timely basis. The development and implementation of such
technology entails significant technical and business risks. There can be no
assurance that we will successfully implement new technologies effectively or
adapt our transaction-processing systems to customer requirements or emerging
industry standards. If we are unable, for technical, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, our business could be materially adversely affected.
Significant security breaches and fraud could adversely impact our
business.
We must protect our computer systems and network infrastructure from
physical break-ins as well as security breaches and other disruptive problems
caused by our increased use of the Internet. Computer break-ins and power
disruptions could affect the security of information stored in and transmitted
through such computer systems and network infrastructure. We employ security
systems, including firewalls and password encryption, designed to minimize the
risk of security breaches. Though, we intend to continue to implement security
technology and establish operational procedures to prevent break-ins, damage
and failures, there can be no assurance that these security measures will be
successful. A significant failure of security measures could have a material
adverse effect on our business, results of operations and financial condition.
Our business operations are highly transaction-oriented. Although we take
adequate measures to safeguard against fraud, there can be no assurance that we
would be able to prevent fraud. Our reputation could be adversely affected by
significant fraud committed by employees or outsiders.
Risks Relating to the ADSs and Equity Shares
You will not be able to vote your ADSs.
18
Investors in ADSs will have no voting rights unlike holders of the equity
shares who have voting rights. The depositary will exercise its right to vote
the equity shares represented by the ADSs as directed by our board of
directors. If you wish, you may withdraw the equity shares underlying the ADSs
and seek to vote the equity shares you obtain upon withdrawal. However, for
foreign investors, this withdrawal process may be subject to delays. For a
discussion of the legal restrictions triggered by a withdrawal of the equity
shares from the depositary facility upon surrender of ADSs, see "Restriction on
Foreign Ownership of Indian Securities."
Your ability to withdraw equity shares from the depositary facility is
uncertain and may be subject to delays.
India's restrictions on foreign ownership of Indian companies limit the
number of shares that may be owned by foreign investors and generally require
government approval for foreign ownership. Although we have sought all
necessary government approvals for the offering, investors who withdraw equity
shares from the depositary facility will be subject to Indian regulatory
restrictions on foreign ownership upon withdrawal. It is possible that this
withdrawal process may be subject to delays. For a discussion of the legal
restrictions triggered by a withdrawal of equity shares from the depositary
facility upon surrender of ADSs, see "Restriction on Foreign Ownership of
Indian Securities".
Your ability to sell in India any equity shares withdrawn from the
depositary facility may be subject to delays if specific government
approval is required.
Investors seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require Reserve Bank of India approval for each such
transaction unless the sale of such equity shares is made on a stock exchange
or in connection with an offer made under the regulations regarding takeovers.
We cannot guarantee that any approval will be obtained in a timely manner or at
all. Because of possible delays in obtaining requisite approvals, investors in
equity shares may be prevented from realizing gains during periods of price
increases or limiting losses during periods of price declines.
You are unable to withdraw and redeposit shares in the depositary
facility.
Because of certain Indian legal restrictions, the supply of ADSs may be
limited. The only way to add to the supply of ADSs will be through a primary
issuance because the depositary will not be permitted to accept deposits of
outstanding equity shares and issue ADSs representing such shares. Therefore,
an investor in ADSs who surrenders an ADS and withdraws equity shares will not
be permitted to redeposit his equity shares in the depositary facility. In
addition, an investor who has purchased equity shares on the Indian market will
not be able to deposit them in the ADS program. The inability of investors to
withdraw from and re-enter the depositary facility increases the risk that the
market price of our ADSs will be below that of our equity shares.
Conditions in the Indian securities market may affect the price or
liquidity of the equity shares and the ADSs.
The Indian securities markets are smaller and more volatile than
securities markets in developed economies. The Indian stock exchanges have in
the past experienced substantial fluctuations in the prices of listed
securities and the price of our stock has been especially volatile. In 1999,
our stock price ranged from a high of Rs. 75.00 (US$ 1.72) in December 1999 to
a low of Rs. 20.75 (US$ 0.48) in February 1999. During January 2000, on the
NSE, our stock price reached a peak of Rs. 146.10 (US$ 3.36) and at February
10, 2000 was Rs. 169.10 (US$ 3.89).
Indian stock exchanges have also experienced problems that have affected
the market price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, broker defaults, settlement
delays and strikes by brokers. The Stock Exchange, Mumbai, formerly known as
the Bombay Stock Exchange or the BSE, was closed for three days in March 1995
following a default by a broker. In addition, the governing bodies of the
Indian stock exchanges have from time to time imposed restrictions on trading
in certain securities, limitations on price movements and margin
19
requirements. Further, from time to time, disputes have occurred between listed
companies and stock exchanges and other regulatory bodies, which in some cases
may have had a negative effect on market sentiment. Similar problems could
happen in the future and, if they did, they could affect the market price and
liquidity of our equity shares and our ADSs.
There is a limited market for the ADSs.
Before the offering, there has been no market for our ADSs in the United
States. Even though we have applied to list our ADSs on the New York Stock
Exchange, we cannot be certain that any trading market for our ADSs will
develop or be sustained after the offering, or that the public offering price
will correspond to the price at which our ADSs will trade in the public market
after the offering. We cannot guarantee that a market for the ADSs will develop
or continue.
Settlement of trades of equity shares on Indian stock exchanges may be
subject to delays.
The equity shares represented by our ADSs are expected to be listed on the
Calcutta, Delhi, Madras and Vadodara Stock Exchanges, the BSE and the NSE.
Settlement on these stock exchanges may be subject to delays and an investor in
equity shares withdrawn from the depositary facility upon surrender of ADSs may
not be able to settle trades on such stock exchanges in a timely manner.
As a result of Indian government regulation of foreign ownership, the
price of the ADSs could go down.
Foreign ownership of Indian securities is heavily regulated and is
generally restricted. ADSs issued by companies in certain emerging markets,
including India, may trade at a discount or premium to the underlying equity
shares, in part because of the restrictions on foreign ownership of the
underlying equity shares.
Your holdings may be diluted by additional issuances of equity by us and
any dilution may adversely affect the market price of our ADSs.
Any future issuances of equity by us will dilute the positions of
investors in our ADSs and could adversely affect the market price of our ADSs.
Although we do not anticipate issuing additional equity in the immediate
future, there is a risk that our continued rapid growth could require us to
fund this growth through additional equity offerings. Our recently approved
employee stock option plan could, subject to its approval by our shareholders
on February 21, 2000, lead to the issuance of up to 5.0% of our shares.
You may be unable to exercise preemptive rights available to other
shareholders.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75% of the
company's shareholders present and voting at a shareholders' general meeting.
US investors in our ADSs may be unable to exercise preemptive rights for our
equity shares underlying our ADSs unless a registration statement under the
Securities Act is effective with respect to such rights or an exemption from
the registration requirements of the Securities Act is available. Our decision
to file a registration statement will depend on the costs and potential
liabilities associated with any such registration statement as well as the
perceived benefits of enabling US investors in our ADSs to exercise their
preemptive rights and any other factors we consider appropriate at the time. We
do not commit that we would file a registration statement under these
circumstances. If we issue any such securities in the future, such securities
may be issued to the depositary, which may sell such securities in the
securities markets in India for the benefit of the investors in our ADSs. There
can be no assurance as to the value, if any, the depositary would receive upon
the sale of these securities. To the extent that investors in our ADSs are
unable to exercise preemptive rights, their proportional interests in us would
be reduced.
20
Because the equity shares underlying our ADSs are quoted in rupees in
India, you may be subject to potential losses arising out of exchange rate
risk on the Indian rupee and risks associated with the conversion of rupee
proceeds into foreign currency.
Investors that purchase our ADSs will be required to pay for the ADSs in
US dollars. Investors will be subject to currency fluctuation risks and
convertibility risks since the equity shares are quoted in rupees on the Indian
stock exchanges on which they are listed. Dividends on the equity shares will
also be paid in rupees, and then converted into US dollars for distribution to
ADS investors. Investors that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into foreign currency and export
the foreign currency will need to obtain the approval of the Reserve Bank of
India for each such transaction. In addition, investors that seek to sell
equity shares withdrawn from the depositary facility will have to obtain
approval from the Reserve Bank of India, unless the sale is made on a stock
exchange or in connection with an offer made under the regulations regarding
takeovers. Holders of rupees in India may also generally not purchase foreign
currency without general or special approval from the Reserve Bank of India.
However, dividends received by the depositary in rupees and, subject to
approval by the Reserve Bank of India, rupee proceeds arising from the sale on
an Indian stock exchange of equity shares which have been withdrawn from the
depositary facility, may be converted into US dollars at the market rate.
On an average annual basis, the rupee has declined against the US dollar
since 1980. As measured by the Reserve Bank of India's reference rate, the
rupee lost approximately 21.7% of its value against the US dollar in the last
three years, depreciating from Rs. 35.75 per US$ 1.00 at December 31, 1996 to
Rs. 43.51 per US$ 1.00 at December 31, 1999. In addition, in the past, the
Indian economy has experienced severe foreign exchange shortages, creating
future potential decline in the value of the rupee. In 1991, the government of
India obtained substantial foreign financial assistance, including a US$ 2.3
billion standby arrangement with the International Monetary Fund, in order to
avert difficulties in servicing India's external debt. The government of India
repaid US$ 1.1 billion of this amount in April 1994. India's foreign exchange
reserves have since increased and stood at US$ 35.2 billion at January 21,
2000.
You may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For the purpose of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on the BSE or the NSE on the
date the depositary advises the custodian to redeem receipts in exchange for
underlying equity shares. The period of holding of such equity shares, for
determining whether the gain is long-term or short-term, commences on the date
of the giving of such notice by the depositary to the custodian. Investors are
advised to consult their own tax advisers and to consider carefully the
potential tax consequences of an investment in our ADSs.
You may not be able to enforce a judgment of a foreign court against us.
We are a limited liability company incorporated under the laws of India.
All our directors and executive officers and some of the experts named in this
prospectus are residents of India and almost all of our assets and the assets
of such persons are located in India.
India is not a party to any international treaty in relation to the
recognition or enforcement of foreign judgments. We have been advised by our
Indian legal advisors that recognition and enforcement of foreign judgments is
provided for under Section 13 of The Code of Civil Procedure, 1908 of India on
a statutory basis and that foreign judgments shall be conclusive regarding any
matter directly adjudicated upon except:
o where the judgment has not been pronounced by a court of competent
jurisdiction;
o where the judgment has not been given on the merits of the case;
21
o where it appears on the face of the proceedings that the judgment is
founded on an incorrect view of international law or a refusal to
recognize the law of India in cases in which such law is applicable;
o where the proceedings in which the judgment was obtained were opposed
to natural justice;
o where the judgment has been obtained by fraud; or
o where the judgment sustains a claim founded on a breach of any law in
force in India.
It may not be possible for investors in our ADSs to effect service of
process upon us or our directors and executive officers and experts named in
the prospectus that are residents of India outside India or to enforce
judgments obtained against us or such persons in foreign courts predicated upon
the liability provisions of foreign countries, including the civil liability
provisions of the federal securities laws of the United States. Moreover, it is
unlikely that a court in India would award damages on the same basis as a
foreign court if an action is brought in India. Furthermore, it is unlikely
that an Indian court would enforce foreign judgments if it viewed the amount of
damages as excessive or inconsistent with Indian practice.
There may be less company information available in Indian securities
markets than securities markets in developed countries.
There is a difference between the level of regulation and monitoring of
the Indian securities markets and the activities of investors, brokers and
other participants and that of markets in the United States and other developed
economies. The Securities and Exchange Board of India is responsible for
improving disclosure and other regulatory standards for the Indian securities
markets. The Securities and Exchange Board of India has issued regulations and
guidelines on disclosure requirements, insider trading and other matters. There
may, however, be less publicly available information about Indian companies
than is regularly made available by public companies in developed economies.
22
USE OF PROCEEDS
The net proceeds to us from the sale of the o ADSs to be sold in
the offering are estimated to be US$ o (US$ o if the underwriters'
over-allotment option is exercised in full), at the public offering price of
US$ o per ADS and after deducting the underwriting discount and estimated
offering expenses. The net proceeds from the offering will be used for funding
future growth and for other general corporate purposes. We expect that the net
proceeds from the offering will allow us to strengthen our capital adequacy so
as to be more in line with the benchmarks of leading, well capitalized
international banks and to be in compliance with capital adequacy requirements
in India. We may also selectively pursue growth opportunities through
acquisitions and strategic investments.
23
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999 and
our capitalization adjusted to give effect to the sale of ADSs (including the
equity shares to be issued in the event the underwriters' over-allotment option
is exercised in full) pursuant to the offering.
There have been no material changes to our capitalization since December
31, 1999. However, we have raised funds through borrowings in the ordinary
course of business subsequent to December 31, 1999.
At December 31, 1999
---------------------------------------------------
Actual Adjusted
------------------------ -----------------------
(in millions)
Liabilities:
Short term liabilities(1):
Deposits..................................... Rs. 79,850 US$ 1,835 Rs. 79,850 US$ 1,835
Short term borrowings........................ 3,978 92 3,978 92
Long term debt maturing within one year...... - - - -
---------- --------- ---------- ---------
Total short-term liabilities..................... 83,828 1,927 83,828 1,927
---------- --------- ---------- ---------
Long-term liabilities(1):
Deposits..................................... 5,152 118 5,152 118
Long-term debt, net of current maturities.... 1,734 40 1,734 40
---------- --------- ---------- ---------
Total long-term liabilities...................... 6,886 158 6,886 158
---------- --------- ---------- ---------
Total liabilities..................................... 90,714 2,085 90,714 2,085
---------- --------- ---------- ---------
Stockholders' equity:
Common stock................................. 1,650 38 o o
Additional paid-in capital................... 375 9 o o
Retained earnings............................ 1,563 35 1,563 35
Other comprehensive income(2)................ 81 2 81 2
---------- --------- ---------- ---------
Total stockholders' equity............................ 3,669 84 o o
---------- --------- ---------- ---------
Total capitalization.................................. Rs. 94,383 2,169 o o
========== ========= ========== =========
- ---------
(1) Short-term liabilities have residual maturity of less than one year while
long-term liabilities have residual maturity of one year and more.
(2) Represents unrealized gains and losses on marketable equity securities
and debt securities available for sale, net of applicable income taxes.
24
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of the
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of the ADSs in the United States. These fluctuations will also
affect the conversion into US dollars by the depositary of any cash dividends
paid in Indian rupees on the equity shares represented by ADSs.
On an average annual basis, the rupee has consistently declined against
the dollar since 1980. In early July 1991, the government of India adjusted the
rupee downward by an aggregate of approximately 20.0% against the dollar as
part of an economic package designed to overcome an external payments crisis.
The following table sets forth, for the periods indicated, certain
information concerning the exchange rates between Indian rupees and US dollars
based on the noon buying rate:
Fiscal Year Period End(1) Average(1)(2) High Low
- ---------------------------------------------------------- ------------- ------------- ------- -------
1995..................................................... 31.43 31.38 31.90 31.37
1996..................................................... 34.35 33.47 38.05 31.36
1997..................................................... 35.88 35.70 36.85 34.15
1998..................................................... 39.53 37.37 40.40 35.71
1999..................................................... 42.50 42.27 43.60 39.55
2000 (through February 10, 2000)......................... 43.58 43.62 43.65 43.55
- ---------
(1) The noon buying rate at each period end and the average rate for each
period differed from the exchange rates used in the preparation of our
financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although we have translated in this prospectus certain rupee amounts into
dollars for convenience, this does not mean that the rupee amounts referred to
could have been, or could be, converted into dollars at any particular rate, the
rates stated below, or at all. Except in the sections on "The Republic of
India", and "Reforms in Some Key Sectors of the Indian Economy" which are based
on publicly available data, all translations from rupees to dollars are based on
the noon buying rate in the City of New York for cable transfers in rupees at
December 31, 1999. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate on
December 31, 1999 was Rs. 43.51 per US$ 1.00 and on February 10, 2000 was Rs.
43.58 per US$ 1.00. The exchange rates used for convenience translations differ
from the actual rates used in the preparation of our financial statements.
25
OVERVIEW OF THE INDIAN BANKING SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the government of India and its various ministries and the Reserve Bank of
India, and has not been prepared or independently verified by us or the
underwriters, or any of their respective affiliates or advisors. This is the
latest available information to our knowledge.
The Indian banking sector primarily consists of commercial and cooperative
banks. The commercial banks include public sector banks, new and old private
sector banks, foreign banks and regional rural banks. The cooperative banks
serve the agricultural industry and small businesses in urban and semi-urban
areas. Commercial banks provide all the traditional services provided by banks
such as taking deposits, making loans, and providing payment and money
transmission services as well as domestic and foreign treasury activities,
settlement and clearing services, advisory services and auxiliary financial
services. Commercial banks in India have traditionally focused on meeting the
short-term financial needs of industry, trade and agriculture. At September 30,
1999, there were 298 commercial banks in India, with a network of 65,294
branches serving approximately Rs. 7.4 trillion in deposit accounts.
The following table below sets forth the number of Indian commercial banks
by category.
At March 31,
--------------------------------
1997 1998 1999
---- ---- ----
Public sector banks......................... 27 27 27
Old private sector banks.................... 25 25 25
New private sector banks.................... 9 9 9
Foreign banks............................... 38 42 44
Regional rural banks........................ 196 196 196
--- --- ---
Total commercial banks...................... 295 299 301
=== === ===
- ---------
Source: Reserve Bank of India Report on Trends and Progress of Banking in
India, 1998-1999 and 1997-1998; Reserve Bank of India Quarterly
Handout, September 1999 and June 1997.
The geographic spread and reach of commercial banks are vast, with nearly
three out of four bank branches located in rural or semi-urban areas of the
country. A large number of these branches belong to the public sector banks.
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India (a government-controlled bank and
today the largest bank in India) and its associates (other
government-controlled banks with a regional presence), 19 other nationalized
banks and 196 regional rural banks. Excluding the regional rural banks, the
remaining public sector banks had 45,761 branches and accounted for 77.8% of
the outstanding loans and 79.5% of the aggregate deposits of commercial banks
at September 30, 1999. Public sector banks compete on the basis of providing
products and services through their vast branch networks and their relatively
low cost of funds.
The Indian private sector banks consist of 25 old private sector banks
which existed before July 1993 and nine new private sector banks, including us,
which began operations after July 1993. In response to the need to introduce
greater competition and achieve higher productivity and efficiency in the
Indian banking industry, the Reserve Bank of India issued guidelines in 1993
which permitted the entry of new private sector banks into the industry. At
September 30, 1999, the private sector banks had a network of 4,883 branches
which accounted for 7.5% of the total branch network of commercial banks. At
September 30, 1999, private sector banks accounted for approximately 10.2% of
aggregate deposits and 11.3% of outstanding loans of all commercial banks. New
private sector banks, though small in number, hold over 35.0% of the total
assets of all private sector banks and compete by providing efficient service,
quick responses to loan applications, technology-based, cost effective
solutions and innovative products and services using multiple channels of
delivery.
26
There were 44 foreign banks with 192 branches operating in India at March
31, 1999. The major foreign banks include Citibank, Bank of America, American
Express Bank, Hong Kong and Shanghai Banking Corporation, Standard Chartered
Bank, Deutsche Bank and ANZ Grindlays Bank. At March 31, 1999, foreign banks
accounted for 6.2% of aggregate deposits and 8.6% of outstanding loans of
commercial banks. The primary activity of most foreign banks in India has been
servicing corporate customers in the wholesale segment, including meeting the
banking needs of their global customers who have operations in India. Some of
the larger foreign banks have a significant presence in consumer finance
products such as automobile finance, home loans, credit cards and household
consumer finance.
The following table sets forth, for the periods indicated, the profile of
loans and the aggregate deposit distribution in the Indian banking industry.
At March 31,
-------------------------------------
1998 1999 %
----------- ----------- -------
(in billions, except percentages)
Deposits:
Public sector banks................................. Rs. 5,317.2 Rs. 6,386.6 79.8%
Old private sector banks............................ 477.8 560.2 7.0
New private sector banks............................ 217.4 308.1 3.9
Foreign banks....................................... 428.3 474.5 5.9
Regional rural banks................................ 221.9 270.1 3.4
----------- ----------- ------
Total.................................................... Rs. 6,662.6 Rs. 7,999.5 100.0%
=========== =========== ======
Loans(1):
Public sector banks................................. Rs. 3,039.1 Rs. 3,576.1 77.3
Old private sector banks............................ 288.8 343.4 7.4
New private sector banks............................ 141.8 211.1 4.6
Foreign banks....................................... 336.8 386.6 8.4
Regional rural banks................................ 90.1 105.6 2.3
----------- ----------- ------
Total.................................................... Rs. 3,896.6 Rs. 4,622.8 100.0%
=========== =========== ======
- ---------
Source: Reserve Bank of India Statistical Tables Relative to Banks in India,
1998-1999.
(1) Loans include advances and investments in non-statutory ratio
securities.
New private sector banks have grown their assets and deposits aggressively
since commencing their operations in 1993 and, at March 31, 1999, accounted for
approximately 3.9% of aggregate deposits and 4.6% of loans outstanding of all
Indian commercial banks. At March 31, 1999, we were the largest new private
sector bank and accounted for 18.1% of the total assets of new private sector
banks. After the completion of the proposed merger of two new private sector
banks, HDFC Bank and Times Bank our assets will be less than the assets of the
merged entity at December 31, 1999. We will still be the largest among new
private sector banks in terms of deposits.
In addition to commercial banks, a variety of financial intermediaries in
the public and private sector participate in India's financial sector,
including long-term lending financial institutions, like ICICI, non-bank
finance companies, other specialized financial institutions and state-level
financial institutions. See "Overview of the Indian Financial Sector" for a
more in-depth discussion.
27
RELATIONSHIP WITH THE ICICI GROUP
General
The ICICI group is a diversified financial services group organized under
the laws of India. The ICICI group includes ICICI, the parent, and its
subsidiaries and associated companies, which operate in the areas of commercial
banking, investment banking, venture capital, information technology,
Internet-based stock trading, retail banking and asset management. ICICI is one
of the largest of all Indian financial institutions, banks and finance
companies in terms of assets. ICICI has close relationships with a client base
of over 1,000 Indian companies, a growing retail base of three million
purchasers of its bonds and a strong pool of experienced and talented
professionals. In the last five years, the ICICI group has begun to offer
retail banking services, including taking retail deposits and offering retail
bonds. Other recent retail products include home and automobile loans and other
consumer finance products and services. At year-end fiscal 1999, the ICICI
group had consolidated assets of Rs. 653.3 billion (US$ 15.0 billion) and
consolidated stockholders' equity of Rs. 36.5 billion (US$ 839 million), and,
in fiscal 1999, the ICICI group had consolidated net income of Rs. 7.5 billion
(US$ 173 million). At December 31, 1999 the ICICI group had consolidated assets
of Rs. 742.3 billion (US$ 17.1 billion) and consolidated stockholders' equity
of Rs. 67.4 billion (US$ 1.5 billion), and in the nine months ended December
31, 1999, the ICICI group had consolidated net income of Rs 6.9 billion (US$
160 million).
Most of the activities of the ICICI group are carried out through the
parent company, ICICI, which is listed on the New York Stock Exchange (symbol:
IC and IC.d). ICICI accounted for over 87.5% of the consolidated assets at
year-end fiscal 1999 and 91.6% of the consolidated net income for fiscal 1999.
We are the largest subsidiary in the ICICI group, accounting for 11.4% of the
consolidated assets at year-end fiscal 1999 and 7.7% of the consolidated net
income for fiscal 1999.
The following chart sets forth the organizational structure of the
group.
ICICI Limited
(Parent Company)
(Diversified
Financial Services)
ICICI Personal ICICI Infotech ICICI Bank ICICI ICICI Web 12 Other
Financial Securities Trade Subsidiaries
Services including ICICI Venture
100.0% owned 100.0% owned 74.3% owned
(Retail (Technology) (Commercial 99.9% owned 100.0% owned
Products) (Banking) (Securities) (Internet
Brokerage)
Capital, Dividend and Voting Limitations
Under the conditions of the commercial banking license granted to ICICI in
1994 to establish us, there must be an arms' length relationship
organizationally and operationally between ICICI and us. We are also prohibited
from extending any credit to ICICI. We have no agreement with ICICI and no
plans to enter into such an agreement regarding any future contribution of
capital by ICICI to us for maintenance of our minimum capital adequacy ratio or
any future issuance of equity shares by us to ICICI. Any declaration and
payment of a dividend by us to any shareholder, including ICICI, would have to
be recommended by our board of directors and approved by our shareholders in
accordance with applicable Indian law, and if the
28
dividend is in excess of 25.0% of the par value of our shares (or Rs. 413
million (US$ 9 million) before the completion of the offering), we would have
to obtain prior approval from the Reserve Bank of India.
After giving effect to the offering, ICICI will own o% of our equity
shares (o% if the underwriters' over-allotment option is exercised in
full). Under Indian law, no person holding shares in a banking company can vote
more than 10.0% of the outstanding equity shares. This means that while ICICI
owns 74.3% of our equity shares, it can only vote 10.0% of our equity shares.
Due to this voting restriction and the fact that no other shareholder owns
10.0% or more of our outstanding equity shares, ICICI effectively controls a
minimum of 28.0% of the voting power of our outstanding equity shares. After
the completion of the offering, ICICI's effective voting power will decrease to
a minimum of o% (assuming the underwriters' over-allotment option is exercised
in full) since its shareholding in us will be diluted. Our organizational
documents permit ICICI to appoint up to one third of the members of our board,
including the Executive Chairman and Managing Director of our board. Pursuant
to this authority, ICICI has appointed two directors to our eight-member board
of directors. ICICI may also vote for the remaining members of our board of
directors. Pursuant to our organizational documents, to convene a board meeting,
one of the two ICICI directors on our board of directors must be present unless
they waive this requirement in writing.
Complementary Product Ranges
Traditionally, regulation in the banking and financial services sector in
India segregated the offering of various products and services between
commercial banks like us and financial institutions like ICICI. In recent
years, some of these restrictions have been relaxed, but certain restrictions
remain and practical considerations still result in limited overlap. The
product ranges are complementary and enable the ICICI group to improve its
ability to attract and retain customers by providing a complete range of
financial products and services.
Corporate Lending
Both we and ICICI offer term loans and guarantees. However, the disparity
in the respective balance sheet sizes and the relatively shorter duration of
our funding sources, means that we rarely compete in these areas. ICICI
typically offers loans of a larger size and longer duration, while we offer
smaller loans of shorter duration. ICICI offers letters of credit, but these
can only be offered to customers having an available line of foreign currency
credit with them, and only for import of capital goods. It is not permitted to
offer these products for the import of raw materials, which we can do.
Retail Lending
While ICICI does not offer credit cards, it offers retail asset products
including auto loans and mortgages which are marketed through one of its
subsidiaries. We offer credit cards, loans against time deposits and loans
against subscriptions to initial public offerings of Indian companies. We plan
to use the distribution network of the ICICI group to offer auto and home
mortgage loans in fiscal 2001. Pursuant to an understanding between ICICI and
us, we intend to place many of those loans in our books. Home mortgages of up
to Rs. 1 million and auto loans to professionals qualify as priority sector
lending and we believe that they offer us an appropriate avenue to meet our
priority sector lending target without sacrificing our standards for credit
quality.
Funding
ICICI is not permitted to offer banking products involving checking
facilities including savings accounts, checking accounts, cash management
services and time deposits of a maturity of less than one year. Our ability to
offer these products is an important building block for the ICICI group.
Treasury
The foreign exchange desk of our treasury does not compete with that of
ICICI as we are a full-fledged authorized dealer while ICICI is permitted to
deal only with regard to its underlying transactions.
29
Our domestic treasury desk operates independently with its customers and has no
connection with the ICICI desk.
As we describe in "Group Operating Strategy" below, we work closely with
ICICI and, given its large ownership stake in us (currently 74.3% and o% after
the offering if the underwriters' over-allotment option is exercised in full),
ICICI has an incentive to help us perform well. There is a risk that ICICI may
seek to facilitate its needs or the needs of other ICICI group entities.
Additionally, in the future, there is a risk that ICICI may be directed to
divest some of its holdings in us under current law. ICICI would be required by
the Reserve Bank of India to reduce its ownership interest in us to no more
than 40.0% at some point in the future. Any such divestment may result in our
inability to continue to exploit the corporate and retail relationships of the
ICICI group. This would adversely affect our business, results of operations
and financial position. However, a discussion paper issued by the Reserve Bank
of India in January 1999 states that if a long-term lending institution chooses
to provide commercial banking services directly, permission to create a 100.0%
owned banking subsidiary would be considered. ICICI is presently in discussion
with the Reserve Bank of India to determine the extent to which it is required
to sell or reduce its interest in us, if required. See also "Related Party
Transactions".
Group Operating Strategy
In fiscal 1999, in an effort to enhance the seamless delivery of products
and services to clients, the ICICI group decided to reorganize its structure.
Three client relationship groups, the Major Clients Group, the Growth Clients
Group and the Personal Financial Services Group, were formed for this purpose.
The relationship managers in the Major Clients Group and the Growth
Clients Group are drawn from companies across the group, including from us.
These relationship managers are responsible for offering the full range of the
ICICI group's corporate banking products and services with an emphasis on
cross-selling products and services offered by ICICI group companies and the
generation of fee-based income. These groups are client-driven, so they cater
to the needs of the ICICI group's customers regardless of what relationship
manager is servicing a particular customer and whether the product is one
offered by us or ICICI. The salary and other expenses of a relationship manager
that is working for one of these client relationship groups are borne by the
company that has seconded the relationship manager to one of these client
relationship groups.
The ICICI group restructuring has enabled us to take advantage of ICICI's
strong relationships with over 1,000 corporations in India to sell our products
and services. These relationships have been particularly effective in helping
us gain access to the larger corporations, as our balance sheet on a
stand-alone basis would not have permitted us to take the large exposures that
may be underwritten by ICICI given its large balance sheet capabilities. As
described in greater detail below, in cases where ICICI and we both provide
credit to the same customer, we appraise the customers' credit requirements
separately and independently. On the basis of our credit analysis, pricing,
portfolio exposure and other factors, we determine whether and to what extent
we take an exposure. Our decision is independent of ICICI's credit approval and
appraisal processes.
We also seek to benefit from ICICI's corporate relationships in growing
our retail business. We sell retail products to the employees of the ICICI
group's corporate customers, including offering corporate customers our payroll
deposit scheme for their employees. ICICI's three million retail bond customers
present us with an opportunity for cross-selling a variety of products,
including bank accounts, credit cards, depositary share accounts and, to a
limited extent, retail loans.
Both our and the ICICI group's retail strategy depends on the offering of
multiple products through multiple delivery channels to provide choice and
convenience to customers. Offering the entire range of products and services
through multiple channels also results in greater economies of scale. The
channels are owned by different ICICI group companies. We own the bank branch
channel, and Infinity, the Internet banking channel, and ICICI owns the call
centers. Substantially all of the ATMs are leased from ICICI. The call centers
are owned by ICICI Personal Financial Services Limited and we use their
services to offer telephone banking to our customers. For this purpose, we pay
them on the basis of actual call volume. The ICICI centers are owned by ICICI,
our parent. Our credit card back-end processing operations are managed by ICICI
Personal Financial Services. We pay ICICI Personal Financial Services
30
on a cost plus 10.0% markup basis. See "Business--Retail Banking--Credit Cards"
and "Related Party Transactions".
To enable the pooling of talent and a compensation structure aligned to
those of other information technology companies, the group decided to
consolidate the technology teams from all group companies into one information
technology company, ICICI Infotech. ICICI Infotech now offers technology
solutions to the entire ICICI group. We outsource our information technology
requirements from ICICI Infotech and 33 of their employees have been seconded
to us. These officers are dedicated to meet our requirements and we pay ICICI
Infotech the salary expenses of these ICICI Infotech employees. While the
personnel are outsourced from ICICI Infotech, the existing hardware and
software continue to be owned by us.
31
BUSINESS
Overview
We are a private sector commercial bank organized under the laws of India
and one of the nine new private sector banks formed since 1993. We offer a wide
range of banking products and services to corporate and retail customers
through a variety of delivery channels. We are a subsidiary of ICICI Limited,
one of the largest of all Indian financial institutions, banks and finance
companies in terms of assets, a well recognized brand in the Indian financial
sector and the first Indian company to list its securities on the New York
Stock Exchange (symbol: IC and IC.d). At December 31, 1999, we had the largest
deposit base of all of the new private sector banks in India. At year-end
fiscal 1999, we had assets of Rs. 74.8 billion (US$ 1.7 billion) and
stockholders' equity of Rs. 2.8 billion (US$ 65 million). In fiscal 1999, our
net income was Rs. 503 million (US$ 12 million). At December 31, 1999, we had
assets of Rs. 102.2 billion (US$ 2.3 billion) and stockholders' equity of Rs.
3.7 billion (US$ 85 million). Our net income for the nine months ended December
31, 1999 was Rs. 1.0 billion (US$ 24 million).
Our organization is divided into three business units: corporate banking,
retail banking and treasury. Our primary business is to develop a strong asset
portfolio consisting mainly of working capital loans and terms loans for
corporate borrowers funded by corporate and retail deposits. We seek to provide
a wide variety of fee-based corporate products and services, like documentary
credits, cash management services, standby letters of credit and treasury-based
derivative products that help us increase our non-interest income. In building
our corporate banking business, we have capitalized on the strong relationships
that our parent company, ICICI, enjoys with many of India's leading
corporations. We intend to generate significant growth in revenues based on
increased synergies with ICICI and its group of companies.
Our retail products and services include payroll accounts, online bill
payment, online remittance facilities, credit cards, depositary share accounts,
retail loans against time deposits and loans against subscriptions for initial
public offerings. We offer our customers a choice of delivery channels
including physical branches, automated teller machines or ATMs, telephone
banking call centers and the Internet. In recent years, we have expanded our
physical delivery channels, including bank branches and ATMs, to cover a total
of 121 locations in 40 cities throughout India at December 31, 1999. We intend
to continue to use technology to increase the speed and efficiency of the
delivery of our products and services. We have built a base of demand and time
deposits (494,480 retail customer accounts at December 31, 1999), representing
1.08% of total deposits held by commercial banks in India.
We were the first bank to offer Internet banking in India. Since
inception, we have consistently used technology to differentiate our products
and services from those of our competitors. Our technology driven products
include Internet banking, electronic commerce based banking solutions, cash
management services and credit cards. To support our technology initiatives, we
have set up online real time transaction processing systems. We have upgraded
our product offering in response to changes in customer needs and technological
advances. We believe that our Internet banking platform delivers competitive,
efficient and low cost banking solutions to our customers.
Our principal corporate office is located at ICICI Towers, Bandra-Kurla
Complex, Mumbai 400 051, India and our telephone number is 011-91-22-653-1414.
History
We were formed in 1994 as a part of the ICICI group of companies. Our
initial equity capital was contributed 75.0% by ICICI and 25.0% by SCICI
Limited, a diversified finance and shipping finance lender of which ICICI owned
19.9% at December 1996. In December 1996, SCICI was merged into ICICI. As a
result, we became a wholly-owned subsidiary of ICICI. We have grown rapidly in
size to become a leading player among the new private sector Indian banks.
When ICICI obtained the commercial banking license to establish us in
1994, the Reserve Bank of India imposed a condition that ICICI reduce its
ownership interest in us to no more than 40.0%. This condition reflected the
government policy of preventing monopolization of economic power. A discussion
32
paper issued by the Reserve Bank of India in January 1999 states that if a
long-term lending institution chooses to provide commercial banking services
directly, permission to create a 100.0% owned banking subsidiary would be
considered. ICICI is presently in discussion with the Reserve Bank of India to
determine the extent it is required to sell or reduce its interest in us, if
required. In 1997, ICICI sold a 25.7% interest in us in an offering in India to
the public and to employees of the ICICI group. Upon completion of the
offering, ICICI's shareholding in us will decrease to o%.
Effective April 1, 1999, we reorganized our business by function to form
three strategic business units, corporate banking, retail banking and treasury.
We believe that this reorganization has resulted in increased customer focus,
superior product delivery and improved profit orientation. As part of our
initiatives in corporate governance, we also formed a number of board
committees, including an Audit and Risk Committee, a Compensation Committee and
a Nomination Committee, to improve the accountability of our board of directors
and to improve our public reporting.
Our Strategy
We believe the recent upturn in the Indian economy provides us with a
significant opportunity to strengthen our position as one of the largest and
most innovative new generation private sector commercial banks in India. Our
objective is to be the leading provider of banking products through technology
driven distribution channels servicing a targeted group of corporate and retail
customers.
To achieve this objective, the key elements of our strategy are to:
o Increase our market share in corporate banking;
o Build a profitable retail franchise;
o Apply Internet technologies to existing product offerings and create
new business opportunities;
o Use technology to provide a multi-channel distribution network;
o Enhance recurring fee income; and
o Maintain and enhance asset quality.
Increase Our Market Share in Corporate Banking
Our corporate lending business, consisting principally of working capital
finance and term lending, has grown at a compound annual growth rate of 56.9%
over the past three years. We expect that short-term finance will continue to
represent a significant growth opportunity as the economy in India develops.
The ICICI group enjoys strong financial ties with over 1,000 of India's
leading corporations, mainly through long-term funding relationships. Together
with other members of the ICICI group, we participate in joint marketing teams,
to provide a comprehensive range of financial products to these corporate
customers. Our integrated product offerings and the group relationships have
enabled us to significantly enhance our market share in short-term funding. We
expect to continue to work closely with the ICICI group to harness synergies in
the marketing of our complementary range of products and rapidly expand our
asset base.
Over the past year, we have shifted our focus in favor of financing large,
highly rated corporations, although we continue to seek to identify and gain
market share in the new growth sectors of the Indian economy. Further, in all
of our activities, we seek to be flexible and adapt to our clients needs, while
at the same time maintaining safeguards through conservative risk management
practices. We believe we can continue to expand our market presence through the
effective use of technology, speedy response times, quality service and the
provision of structured financial products and value-added solutions designed
to meet specific customer needs.
Build a Profitable Retail Franchise
33
We believe the "ICICI" brand name is well established and one of the most
respected names in the financial services business in India. We believe that
this strength in brand identity, together with the ICICI group's strong
corporate relationships and existing retail investor base, provides us with a
unique opportunity to build a profitable retail franchise in India. Within
India, we have a target market of 34 million households. Our target segment
consists principally of professionals and high net worth individuals as well as
select wage and salary earners. This market is supplemented by 22 million
non-resident Indians, a significant portion of whom are well educated and
affluent. We expect "Power Pay", a direct deposit product that allows our
corporate customers' employee salaries to be directly credited to special
savings accounts, to significantly drive the growth in the number of our
savings accounts. We believe this and similar products will facilitate further
penetration of the Indian retail consumer market.
We will continue to seek to provide our target market with a growing range
of deposit, funds transfer, and retail bank products to meet their growing
financial needs. For example, we have recently begun to offer VISA credit cards
and plan soon to introduce electronic debit cards. We will continue to expand
our range of retail savings products tailored to meet the needs of our customer
base, such as foreign currency denominated accounts for non-resident Indians,
as well as premium current accounts for small businesses.
We believe the lack of strong mass market players in retail assets in
India creates a significant growth opportunity. While our retail asset products
at present are limited to loans against term deposits, roll-over credit in
credit cards and loans against subscriptions for initial public offerings in
India, we intend to grow our retail asset base by offering residential
mortgages and auto loans. We expect to take advantage of the ICICI group's
established presence in these segments, and we have agreed upon an asset
sharing mechanism. We will continue to broaden our range of retail products and
services in an effort to gain market share among our target customer base.
We are using the Retail Customer Data Mart, a database that consolidates
retail customer and product data across all ICICI group companies including
ICICI's three million retail bond customers. This data is constantly analyzed
for customer segmentation and is used in marketing campaigns. We plan to
continue our use of this and similar information systems to enhance customer
loyalty through increased cross selling.
Apply Internet Technologies to Existing Product Offerings and Create New
Business Opportunities on the Internet
Our focus on applying Internet technologies to our products and services
is based on our belief that the Internet will become a key distribution channel
and we would be in an advantageous position by virtue of our first mover
status. We also believe that through the Internet we can integrate the entire
value chain, spanning customers, retailers, distributors, manufacturers, their
vendors and suppliers and the banking system. Lower costs from effective use of
technology coupled with increased scale of operations should allow us to
deliver greater value to more customers.
Accordingly, we were the first bank in India to introduce an Internet
banking service and an Internet-based bills payment system, and even today are
one among very few banks offering this service in India. We pioneered online
business-to-business solutions in India by launching "i-payments", a payments
tool connecting our customers with their suppliers and vendors. We offer online
electronic payment facilities to our corporate customers and their suppliers
and dealers as a closed user group using the Internet as the delivery platform.
Our product offerings have resulted in significant cost savings to our clients,
allowing us to develop client loyalty while at the same time better
understanding the needs of our clients. In all of our endeavors, we intend to
use the Internet as a means of enhancing our accessibility and overall customer
convenience and satisfaction.
Use Technology to Provide a Multi-Channel Distribution Network
34
The use of online delivery channels presents added convenience for our
customers while markedly reducing the cost of financial transactions, and the
need to have an extensive branch network. We believe that product
differentiation through delivery helps increase customer attraction and enables
gains in market share. Accordingly, we have tried to provide products and
services, using the Internet, ATMs and other technology to increase our service
and attract and satisfy customers. Given our relatively recent entry into the
banking sector, we have been able to develop all our systems using new
technology. Our technology architecture is expected to allow the customer to
access any product through any delivery channel and thereby give the customer
the option of choosing the most convenient channel. To further increase our ATM
network, we have entered into alliances with petroleum companies, department
stores and cyber cafes to deploy ATMs at select high traffic locations. Our
proposed strategic alliance with an Internet portal is intended to help
distribute our banking products on the Internet. Our goal is to develop a cost
efficient, highly effective distribution network, which ensures quality
customer service.
Enhance Recurring Fee Income
We will continue to seek to develop value-added products and services in
an effort to enhance our market share and to increase our recurring fee income.
Our fees, commission and brokerage income has grown at an average rate of 57.6%
per annum since fiscal 1997, principally from issuing guarantees, documentary
credits and similar instruments. We believe we are the third largest provider
of cash management services in India and are among the market leaders in
providing trust, retention and escrow account services. We have developed
countrywide collection and payment mechanisms for rural and cooperative banks
with limited geographic presence. We continue to seek to provide funds
collection and transfer services to our clients and clients of the ICICI group.
We also offer our customers depositary share account and custody services and
direct sales of third party mutual funds and propose to offer insurance
products in the near future. Through Infinity, our Internet banking service, we
offer Money2India, our online remittance facility for non-resident Indians,
which is already generating fee income. We also offer "i-payments", our
business-to-business solution for corporate customers, and online utility bills
for retail customers, which are presently free to increase customer
acquisition. We believe all these initiatives will enhance our fee revenue in
ways that are responsive to the needs of our customers and will minimize the
need to use or rely on our capital resources.
Maintain and Enhance Asset Quality
We believe conservative risk management policies, processes and controls
are critical for our long-term success. While we will continue to extend credit
to growth oriented companies with strong financial positions, we expect that
our emphasis on lending primarily to higher rated credits and active management
of older less creditworthy assets will help improve the risk profile of our
loan portfolio.
We expect to build on our established credit risk management procedures,
credit evaluation and rating methodology, credit risk pricing models,
proprietary analytics and monitoring and control mechanisms.
Finally, we believe that our adoption of U.S. GAAP accounting including
its heightened provisioning requirements embodies a more conservative approach
to quantifying credit losses.
Our Principal Business Activities
Our principal business activities include the corporate banking, retail
banking and treasury, which are undertaken by three business units. Under
corporate banking, we make working capital loans and term loans to our
corporate borrowers, take deposits from corporate customers and provide a range
of fee-based products and services. Under retail banking, we take deposits from
retail customers through multiple products and delivery channels. We also offer
credit cards and other retail loan products.
The following table sets forth, for the periods indicated, the share of
our corporate and retail banking activities in our total business:
35
At or for the year ended At or for nine months ended
March 31, 1999 December 31, 1999
----------------------------------- ----------------------------------
Corporate Retail Corporate Retail
banking banking Total banking banking Total
----------- ---------- --------- ----------- --------- ---------
(in Rs. billion, except percentages)
Gross loans............. 27.4 1.1 28.5 38.0 0.8 38.8
% of total........... 96.1% 3.9% 100.0% 98.0% 2.0% 100.0%
Deposits............... 45.6 15.1 60.7 59.6 25.4 85.0
% of total.......... 75.1% 24.9% 100.0% 70.1% 29.9% 100.0%
Our treasury business unit manages our balance sheet through the
maintenance of regulatory reserves and optimizes profits from both our
regulatory and trading portfolios by taking advantage of market opportunities.
Corporate Banking
General
Our largest strategic business unit in terms of deposits and gross loans
is our corporate banking operations. At December 31, 1999, corporate banking
represented 70.1% of our deposits and 98.0% of our gross loans.
Our key corporate banking products include loan products and fee and
commission-based products and services. Loan products consist of working
capital loans, including cash credit facilities (a revolving floating rate
asset-backed overdraft facility) and bill discounting, and term loans. Fee and
commission-based products and services include documentary credit and standby
letters of credit, forward contracts, interest and currency swaps, cash
management services, trust and retention accounts and payment services. Most of
these fee and commission-based products and services provide recurring fees
from each customer. We also take deposits from our corporate customers. These
deposits are rupee or foreign currency deposits with fixed or floating interest
bases. Our deposit taking products include certificates of deposit, checking
accounts and time deposits. We deliver our corporate banking products and
services through a combination of physical branches, correspondent banking
networks and the Internet.
We seek to differentiate ourselves from our competitors primarily by
capitalizing on the relationships of the ICICI group and through speedy and
efficient client servicing. We seek to achieve this through the effective use
of technology, high quality staff, speedy decision-making and the provision of
structured financial products to meet specific customer needs.
We provide our products and services to a wide range of private sector and
public sector commercial and industrial corporations, including some of India's
leading companies as well as growth-oriented, middle market commercial
enterprises, traders and service providers and to the agricultural sector. In
the first few years of our operations, due to our small balance sheet size,
small to medium-sized middle market companies were our target customers. Over
the past year as our balance sheet has grown, we have, consistent with our
strategy of focusing on quality growth opportunities, concentrated on financing
large, highly-rated corporations by taking advantage of the corporate
relationships of the ICICI group. Of our 800 corporate customers at December
31, 1999, 171 were also ICICI customers.
Loan Products
Our loan products consist of working capital finance and term loans.
Working Capital Finance
Under working capital finance, we offer our corporate customers cash
credit facilities and bill discounting. At December 31, 1999, gross working
capital loans outstanding were Rs. 26.0 billion (US$ 598 million), constituting
67.0% of our gross loan portfolio.
36
Cash Credit Facilities. Cash credit facilities are the most common form of
working capital financing in India. Cash credit facilities are given to the
borrowers to finance the cash flow gap arising out of the time difference
between purchase of raw materials and realization of sale proceeds. A cash
credit facility is a revolving overdraft line of credit for meeting the working
capital needs of companies and is generally backed by current assets like
inventories and receivables. Under the cash credit facility, we provide a line
up to a pre-established amount based on the borrower's projected level of
inventories, receivables and cash deficits. Within this limit, disbursals are
made based on the actual level of inventories and receivables. A portion of the
cash credit facility can also be made in the form of a demand loan. A cash
credit facility is typically given to companies in the manufacturing, trading
and service sectors on a floating interest rate basis. The facility is
generally given for a period of up to 18 months, with a review after 12 months.
Our cash credit facility is generally fully secured with full recourse to the
borrower. In most cases, we have a first lien on the current assets, which
normally are inventory and receivables. Additionally, in some cases, we may
take further security of a first or second lien on fixed assets including real
estate, a pledge of financial assets like marketable securities and corporate
or personal guarantees.
Cash credit facilities are extended to borrowers by either a single bank,
multiple banks or a consortium of banks with a lead bank. The nature of
arrangement depends upon the amount of working capital financing required by
the borrower, the risk profile of the borrower and the amount of loan exposure
a single bank can take on the borrower. Though in the past we have extended
cash credit facilities on our own, with our increased focus on highly rated
large corporations, we are increasingly participating in multiple banking and
consortium arrangements. Regardless of the arrangement, we undertake our own
due diligence and follow our credit risk policy to determine whether we should
lend money to the borrower and, if so, the amount to be lent to the borrower.
For more details on our credit risk procedures, see "--Risk Management--Credit
Risk". We earn interest on this facility on a quarterly basis, based on the
daily outstanding amounts.
In cases where ICICI provides long-term loans for financing projects of
corporations, we seek to participate in the working capital consortia of these
corporations by providing short-term demand loans and other working capital
products.
Bill Discounting. Bill discounting involves the financing of short-term
trade receivables of corporations through negotiable instruments. These
negotiable instruments can then be discounted with other banks if required,
providing us liquidity. In addition to traditional bill discounting, we also
provide customized solutions to our corporate customers having large dealer
networks. Loans are approved to dealers in the form of working capital lines of
credit, based on analysis of dealer credit risk profiles. These dealer
financing facilities help us to deepen our relationships with our corporate
customers and may be expanded into Internet-based corporate banking services.
Term Loans
Term loans are amortizing loans given typically for a period of three to
seven years for financing core working capital requirements and normal capital
expenditures of small and medium-sized companies. Our term credits include
rupee loans, foreign currency loans, lease financing and subscription to
preferred stock. These products also include marketable instruments such as
fixed rate and floating rate debentures. In the case of rupee and foreign
currency loans, we generally have a security interest and first lien on all the
fixed assets of the borrower. The security interest typically includes
property, plant and equipment and other tangible assets of the borrower. We
typically provide term loans of smaller size, generally up to Rs. 200 million,
(US$ 5 million), considering our liability profile and refer larger loans to
ICICI.
At December 31, 1999, gross term loans outstanding were Rs. 12.0 billion
(US$ 277 million), constituting 31.0% of our gross loan portfolio.
Fee and Commission-Based Activities
37
Our fee and commission-based products and services include documentary
credits, standby letter of credits, forward contracts, interest and currency
swaps, cash management services, trust and retention accounts and payment
services.
Documentary Credits
We provide documentary credit facilities to our working capital loan
customers both for meeting their working capital needs as well as for capital
equipment purchases. For working capital purposes, we issue documentary credits
on behalf of our customers for the sourcing of their raw materials and stock
inputs. Lines of credit for documentary credits and standby letters of credit
are approved as part of a working capital loan package provided to a borrower.
These facilities, like cash credit facilities are generally given for a period
up to 18 months, with review after 12 months. Typically, the line is drawn down
on a revolving basis over the term of the facility, resulting in recurring fee
income. A significant proportion of our documentary credits for capital
equipment was issued on behalf of borrowers who also had taken term loans from
ICICI.
We issue documentary credits on behalf of borrowers both for domestic and
foreign purchases. The term of these documentary credits is generally up to 180
days. Borrowers pay a fee to us based on the amount drawn down from the
facility and the term of the facility. This facility is generally secured by
same collateral available for cash credit facilities. We also take collateral
in the form of cash deposits from our borrowers.
Standby Letters of Credit
We also provide standby letter of credit facilities, called guarantees in
India, that can be drawn down any number of times up to the committed amount of
the facility. We issue standby letters of credit on behalf of our borrowers in
favor of corporations and government authorities inviting bids for projects,
guaranteeing the performance of our borrowers. We also issue standby letters of
credit as security for advance payments made to our borrowers by such project
authorities and for deferral of and exemption from the payment of import duties
granted to our borrowers by the government against fulfillment of certain
export obligations by our borrowers. The term of these standby letters of
credit is generally up to 18 months. This facility is generally secured by
collateral similar to that of documentary credits.
At December 31, 1999, we had a portfolio of documentary credits of Rs. 7.8
billion (US$ 179 million) and a portfolio of standby letters of credit of Rs.
6.7 billion (US$ 154 million).
Forward Contracts and Interest and Currency Swaps
We provide forward contracts to our customers for hedging their short-term
exchange rate risk on foreign currency denominated receivables and payables. We
generally provide this facility for a term of up to six months and occasionally
up to 12 months. We also offer interest rate and currency swaps to our
customers for hedging their medium and long-term risks due to interest rate and
currency exchange rate movements. We offer these swaps for a period ranging
from three to ten years. Our customers pay a commission to us for this product
that is included in the price of the product and is dependent upon market
conditions.
At December 31, 1999, we had a portfolio of outstanding forward contracts
of Rs. 49.6 billion (US$ 1.1 billion) and a portfolio of interest and currency
swaps of Rs. 8.6 billion (US$ 198 million).
Cash Management Services
Under cash management services, we offer our corporate clients custom-made
payment and remittance services allowing them to reduce the time period between
collections and remittances, thereby streamlining their cash flows. Our cash
management products include physical check-based clearing in locations where
settlement systems are not uniform, electronic clearing services, central
pooling of country-wide collections, dividend and interest remittance services
and Internet-based payment products. We
38
believe we are the third largest provider of cash management services in India.
We also provide cash management services to our parent, ICICI. Our customers
including ICICI pay a fee to us for these services based on the volume of the
transaction, the location of the check collection and speed of delivery.
The total amount handled under cash management services was Rs. 44.1
billion (US$ 1.00 billion) for the nine month period ended December 31, 1999,
resulting in fee income of Rs. 74 million (US$ 2.0 million). At December 31,
1999, we had 231 cash management services customers. ICICI paid us Rs. 14
million (US$ 322,000) for the nine months ended December 31, 1999 for these
services.
Trust and Retention Accounts
We offer trust and retention account facilities to lenders in limited and
non-recourse project finance transactions who typically require the setting up
of trust and retention accounts as part of the project financing structure and
a number of our customers include power and telecommunications companies. This
service enables us to capture the receivables of the project on behalf of the
lenders and channel the cash flows in a pre-determined manner. We also offer
escrow account facilities for securitization and merger and acquisition
transactions. Our customers pay a negotiated fee to us for this product based
on the complexity of the structure and the level of monitoring involved in the
transaction.
We actively provide these services and utilize the strengths of our parent
as a leading project financier in the country to obtain customers for these
services. We believe that we are the market leader in providing these services
in India, with about 90 accounts. The cash flows managed under this product
during the nine months ended December 31, 1999 were about Rs. 22.0 billion (US$
506 million).
Payment Services
We offer online electronic payment facilities to our corporate customers
and their suppliers and dealers as a closed user group, where the entire group
is required to maintain bank accounts with us. We use the Internet as the
delivery platform for this product. Under this service, all payments from our
corporate customers to their suppliers and payments from the dealers to our
corporate customers are made electronically. This service offers a high level
of convenience since no physical instruments are required, all transactions are
done online and the information may be viewed on the Internet. This product can
be customized to meet the specific requirements of individual customers. All
transactions are secured using 128 bit encryption technology and secure ID
cards. We do not charge a fee for this service, as it results in large low cost
funds for short durations in checking accounts of customers which we invest
profitably.
We have already partnered with 101 large Indian corporations, many of whom
have come to us as a result of our relationship with members of the ICICI
group. We believe that, based on ICICI's corporate relationship base of over
1,000 customers, we have the potential to grow to service 15,000 small, medium
and large corporate users over the next few years.
Other Corporate Banking Activities
International Banking Business
We provide a wide range of cross-border banking services from our 25
branches spread across the country. Our international business services include
foreign currency loans for imports and exports, documentary credits, standby
letters of credit and collection and funds transfer services. All these
branches are connected directly to the SWIFT network, the Society for Worldwide
Inter-Bank Financial Telecommunication network, to quickly facilitate
transactions. We also have correspondent arrangements with over 105
international banks covering all major countries with which India has trade
relationships. These arrangements facilitate the execution of cross border
transactions including letters of credit and funds transfers. We provide our
customers with information about their trade-related international
counterparties through our correspondent banking relationships and subscription
to reputed international databases. We also provide travel-related services to
our corporate customers including money changing, sale and cashing of
travelers' checks and foreign currency remittances to international travel
destinations. Our customers
39
pay fees to us for substantially all of these products and services.
Treasury Products
We provide liquidity management services to our corporate customers to
enable them to invest their short-term cash surpluses in a variety of
short-term treasury and deposit-based instruments, including treasury bills,
commercial paper and certificates of deposit. These products allow our
customers to earn income on their short-term cash surpluses since deposits for
periods of less than 15 days are non-interest-bearing pursuant to Reserve Bank
of India regulations. We also facilitate the holding of foreign currency
accounts. Our target customers for these products are large public and private
sector companies, provident funds and high net worth individuals.
Products for Other Banks
Various cooperative banks and rural banks in India are limited to
geographic areas. These banks need relationships with banks present in most of
the large cities in India to be able to service the needs of their customers
for country-wide collection and payment mechanisms. We have developed
customized products and solutions for cooperative banks. Although we do not
charge a fee for these products, they result in large amounts being maintained
with us in non-interest-bearing checking accounts that we can invest
profitably.
Corporate Loan Pricing
We price our corporate loans over our prime lending rate based on four
factors:
o our internal credit rating of the company;
o the nature of the banking arrangement (either a single bank, multiple
bank or consortium arrangement);
o the collateral available; and
o market conditions.
Our current credit approval process generally requires a minimum credit
rating of A-. For a description of our credit rating system, see "--Risk
Management--Credit Risk".
Our Asset-Liability Management Committee fixes prime lending rates based
on yield curve factors like interest rate and inflation rate expectations and
business needs. Working capital financing is usually contracted at rates linked
to the prime lending rate for maturities over 365 days. The prime lending rates
relevant to other maturities are used for short-term bills discounting
products.
We have four prime lending rates linked to the term of the loan. At
December 31, 1999, our prime lending rates per annum were as follows:
Term Prime lending rate
- ---- ------------------
Up to 90 days............................................ 11.75%
91 days to 180 days...................................... 12.50%
181 days to 364 days..................................... 13.00%
365 days and over........................................ 13.50%
Under the existing Reserve Bank of India regulations, loan exposures
through corporate debt instruments and bill discounting are not subject to the
prime lending rate regulations. Banks can lend at an interest rate below their
prime lending rates when delivery is through these products.
One of our competitive advantages in the corporate banking industry is our
speed of delivery. We are generally able to preliminarily approve credit
requests within two business days since we study the
40
borrower and its credit rating well in advance of our marketing efforts. The
formal credit approval process, including due diligence generally take about
three to four weeks to complete. We believe this is a key factor in giving us a
substantive competitive advantage and enabling us to charge a premium in
pricing over many of our competitors.
Directed Lending
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend 40.0% of their net bank credit (total domestic loans less marketable debt
instruments and certain exemptions permitted by the Reserve Bank of India from
time to time) to certain specified sectors called priority sectors. Priority
sectors include small-scale industries, the agricultural sector, food and
agro-based industries and small businesses. Out of this, we are required to
lend a minimum of 18.0% to the agriculture sector and the balance to some
specified sectors including small scale industries, which are defined as
manufacturing, processing and services businesses with a limit on investment in
plant and machinery of Rs. 10 million, small businesses, including retail
traders, professional and other self employed persons and road and water
transport operators and loans to state financial corporations and state
industrial development corporations.
Any shortfall in the amount required to be lent to the priority sectors
may be required to be deposited with Indian developmental banks like the
National Bank for Agriculture and Rural Development and the Small Industries
Development Bank of India. These deposits have a maturity of up to five years
and carry interest rates lower than market rates. These deposits would in turn
satisfy part of our priority sector requirement.
The Reserve Bank of India requires us to lend up to 3.0% of our
incremental deposits in the previous fiscal year for housing finance. This can
be in the form of home loans to individuals or subscription to the debentures
and bonds of the National Housing Bank and housing development institutions
recognized by the government of India.
The following table sets forth, for the periods indicated, our priority
sector loans broken down by type of borrower.
% of net
bank credit
At March 31, At December 31, at
-------------------------------------------------------- -------------------- December
1997 1998 1999 1998 1999 31, 1999
--------- --------- -------------------------------- --------- -------- ------------
(in millions, except percentages)
Small scale industries.. Rs. 1,860 Rs. 2,753 Rs. 3,510 US$ 81 Rs. 3,180 Rs. 3,717 US$ 85 13.2%
Other including small
businesses............ 231 513 1,959 45 392 1,022 24 3.6
Agricultural sector..... 252 501 675 16 491 1,912 44 6.8
--------- --------- --------- ------- --------- --------- ------- -----
Total................... Rs. 2,343 Rs. 3,767 Rs. 6,144 US$ 142 Rs. 4,063 Rs. 6,651 US$ 153 23.6%
========= ========= ========= ======= ========= ========= ======= ====
We are required to comply with the priority sector lending requirements at
the end of each fiscal year. At March 31, 1999, our priority sector loans were
Rs. 6.1 billion, constituting 30.2% of net bank credit. This led to a shortfall
of Rs. 1.9 billion in our priority sector lending. The Reserve Bank of India
required us to deposit the above shortfall in the National Bank for Agriculture
and Rural Development as and when they make a demand on us. At the present
time, this bank has taken deposits of only Rs. 19 million from us. We believe
that a large number of Indian commercial banks have had a shortfall in meeting
their directed lending requirements. It is a general practice in the industry
to meet a part of the shortfall by making deposits with specified Indian
development banks.
41
During fiscal 2001, as part of our retail banking activities, we intend to
offer mortgages of less than Rs. 1 million and auto loans to professionals
since they qualify as priority sector lending. ICICI, through its subsidiaries,
has offered these retail loans since fiscal 2000 and intends to continue to
offer these loans in the future other than those that qualify for priority
sector lending.
For a discussion of the asset quality of our priority sector loan
portfolio, see "--Non-Performing Loans--Analysis of Non-Performing Loans by
Directed Lending Sector".
Export Credit
As part of directed lending, the Reserve Bank of India also requires us to
make loans to exporters at concessional rates of interest. We provide export
credit for pre-shipment and post-shipment requirements of exporter borrowers in
rupees and foreign currencies. At the end of our fiscal year, 12.0% of our net
bank credit is required to be in the form of export credit. We have complied
with these requirements since inception. The Reserve Bank of India provides
export refinancing for an eligible portion of total outstanding export loans at
a concessional rate that is 2.0% lower than the concessional rate of interest
on export credit. The interest income earned on export credits is supplemented
through fees and commissions earned from these exporter customers from other
fee-based products and services taken by them from us, such as foreign exchange
products and bill handling. At December 31, 1999, our export credit was Rs. 3.4
billion (US$ 78 million), constituting 11.9% of our net bank credit. At
December 31, 1999, the weighted average interest rate on our export credit was
10.61%.
Corporate Deposits
We take deposits from our corporate clients with terms predominantly
ranging from 15 days to one year. We routinely provide interest quotes for
deposits in excess of Rs. 10 million on a daily basis (uncommon in India),
based on rates in the inter-bank term money market and other money market
instruments such as treasury bills and commercial paper. The Reserve Bank of
India regulates the term of deposits in India but not the interest rates with
some minor exceptions. Pursuant to Reserve Bank of India regulations, deposits
denominated in rupees may be accepted by us for periods ranging from 15 days to
ten years. We currently accept deposits for periods ranging from 15 days to
seven years but a substantial portion of our corporate deposits mature between
15 days and 12 months. We are not permitted to pay interest for periods less
than 15 days. Also, pursuant to the current regulations, we have divided our
deposit interest rate structure into six categories, deposits of less than
Rs. 1.5 million, deposits of between Rs. 1.5 million and less than 10 million,
deposits of between 10 million and less than 100 million, deposits of between
100 million and less than 500 million, deposits of between 500 million and less
than 2 billion and deposits of Rs. 2 billion and over. We are allowed to
change these categories and the interest rates without restrictions. Corporate
deposits include funds taken by us from large public sector corporations,
government organizations, other banks and large private sector companies.
Corporate deposits have grown from Rs. 45.6 billion (US$ 1.0 billion) at March
31, 1999 to Rs. 59.6 billion (US$ 1.4 billion) at December 31, 1999,
constituting 70.1% of our total deposits and 60.5% of total liabilities at
December 31, 1999.
We offer flexible deposit services to our corporate customers. We take
rupee or foreign currency denominated deposits with fixed or floating interest.
Our deposit products for corporations include certificates of deposit, checking
accounts and time deposits. We have also introduced "Quantum Corporate", a
value-added checking account, which provides automatic transfer of idle
balances from current accounts to time deposits. Whenever there is a shortfall
in the current accounts, deposits are transferred back from the fixed deposit
accounts. This offers our corporate customer liquidity as well as high returns.
ICICI is one of our deposit customers. At December 31, 1999, we had Rs.
930 million (US$ 21 million) of current deposits and Rs. 737 million (US$ 17
million) of time deposits from ICICI. We do not pay interest on these current
deposits and we pay interest on these time deposits at rates which we pay all
other customers.
42
We market corporate deposits from all our 25 corporate branches, some of
our retail branches and directly from our corporate office. With the increase
in the number of initial public offerings in the Indian equity markets, we have
been actively participating as bankers to the offerings of select companies.
These companies are required to maintain the subscription funds from the
investors with the bankers to the offering until the allotment of shares and
refund of excess subscription is completed. This process generally takes about
30 days, resulting in short-term deposits with us. This has resulted in
significant growth in our corporate deposits. For effective asset liability
management, we track the daily corporate deposits outstanding. We believe our
management of our corporate deposit customers as well as our ability to offer
competitive rates on large deposits significantly reduces the volatility in our
corporate deposit base. We believe that approximately 65.0% of our corporate
deposits can be considered as core deposits, which are routinely rolled-over.
The growth in corporate deposits has been supplemented by our "anywhere
banking service", which allows multi-locational corporations in India to
receive cash inflows and make payments in various cities by maintaining one
central pooling account.
Our key corporate deposit products are:
o current and no-lien accounts;
o cooperative bank accounts;
o time deposit accounts at fixed interest rates;
o inter-bank call rate-linked fixed or floating rate deposits;
o initial public offering collection funds;
o payout of refund orders, interest and dividend checks issued to
investors and bondholders by corporations; and
o foreign currency deposit accounts.
Client Coverage
A study conducted by the Indian Banks Association in 1997 has estimated
the Indian market for working capital products to be approximately Rs. 1.9
trillion (US$ 43.7 billion). We are focusing our marketing efforts on
increasing our market share in this segment. We believe that the ICICI group's
existing corporate relationships provides us with an opportunity to provide
working capital products to large companies and high growth middle market
customers and increase our fee income.
In fiscal 1999, in an effort to improve corporate client service and
profitability, the ICICI group reorganized its corporate structure and created
two corporate client relationship groups, the Major Clients Group and the
Growth Clients Group. These groups are responsible for offering the full range
of the ICICI group's products and services to its clients with an emphasis on
cross-selling and the generation of fee income.
Relationship managers, who represent the entire ICICI group and include
members of our staff who participate in these client relationship groups, are
responsible for marketing our products and services as well as the products and
services of the ICICI group to corporate customers. The basic principles of
coverage followed by relationship managers include:
o further enhancing the ICICI group's strong customer relationships;
o focusing on a well-defined list of high priority clients;
o increasing the ICICI group's share of clients' total banking
requirements;
o serving the client needs effectively and proactively;
o cross-selling the ICICI group's products to improve client
profitability; and
o facilitating a quick roll-out of new products for the ICICI group.
The group has structured the cross-selling process as follows:
43
o the relationship managers from our company and ICICI make joint
marketing calls to targeted corporations to offer the entire range of
the group's products and services;
o products and services accepted by the targeted customer are then
independently processed and delivered to the customer by the
appropriate ICICI group company; and
o fee and interest income accrue to the company that processes and
delivers the products or services. These amounts are collected
directly from the customer.
Cross-selling is also initiated by our branch managers and operating
officers, who interact with the corporate customer on a regular basis for
operating and maintaining its various cash credit accounts. They also visit the
customer's offices, factories or warehouses periodically. Business
opportunities identified are conveyed to our representatives, group
relationship managers and to other group companies.
We believe that we have benefited significantly from this joint marketing
relationship. While we had eight common customers with ICICI at March 31, 1998,
we had 171 common customers at December 31, 1999. These customers have largely
been top tier Indian corporations and improved the credit quality while
significantly increasing the size of our loan portfolio. We have also been able
to increase fee income from providing cash management services and trust and
retention account services to many of these clients.
Major Clients Group
We work with the Major Clients Group to offer various corporate banking
products and services to the top 150 Indian corporations to further the ICICI
group's objective to function virtually as a universal bank. The Major Clients
Group is made up of a team of client bankers, taken from ICICI, ICICI
Securities and us. The Major Clients Group seeks to build on existing
relationships and also focuses on bringing into our portfolio new multinational
corporations and large profitable public sector corporations. We currently have
four of our employees working as part of the Major Clients Group.
Growth Clients Group
The Growth Clients Group focuses on middle market companies. The Growth
Clients Group is made up of a team of client bankers, from ICICI and us and
geographically dispersed among ICICI's offices across India. Over the past
several years, the middle market segment has grown rapidly, particularly in the
areas of information technology, automobile components, consumer goods and
pharmaceuticals, and traditionally has had less access to financing compared to
our major clients. We expect that continued growth among middle market
companies will result in greater demand in the volume and type of financial
products and services. We believe that rapid growth in the middle market
company segment offers us a significant opportunity to provide a wide variety
of lending and fee-based banking products, including a substantial number of
working capital lines of credit. Our internal estimates indicate that there are
over 7,000 middle market companies in India, of which approximately 1,300 are
believed to meet our benchmark credit risk rating of A or above. The Growth
Clients Group seeks to identify and build relationships with these middle
market clients and build upon existing client relationships to facilitate a
broader distribution of our products. The Growth Clients Group expects to
initially target approximately 800 of these companies, mainly for our loan and
deposit products. This group also seeks to provide other products and services,
including our cash management services. We currently have 17 of our employees
working as a part of the Growth Clients Group at their various locations.
While marketing and relationship functions are undertaken along with
ICICI, the processes of credit appraisal, approval and monitoring are
independent activities done by us. Exposures are governed by the policy
framework prescribed by our board of directors. For a discussion of our credit
approval process, see "--Risk Management".
Delivery Channels
Branch Network
44
We cater to the banking needs of corporate customers primarily through our
corporate banking network of 25 branches out of 71 branches spread across
India. All of our corporate branches are located in cities among the top 55
business centers throughout all of India's states in terms of gross bank
credit. The corporate banking unit at our head office in Mumbai assists and
supervises these branches in the provision of new products, marketing
initiatives and credit administration. In order to provide seamless service to
clients, our corporate branches work in close coordination with the ICICI
group's relationship managers.
Correspondent Banking Networks
We have correspondent banking relationships with commercial and
cooperative banks in India with large physical branch networks to offer a
broader coverage for our funds transfers and remittance related products. As a
result of our correspondent banking associations, we provide remittance and
cash management services at over 750 locations in India.
Internet
Consistent with the ICICI group's strategy to consolidate its position as
the leading provider of financial solutions to corporations based in India, in
August 1999, we launched an Internet banking services called "Corporate
Infinity" to deliver a full range of high quality financial services to
corporate customers at their offices. Corporate Infinity provides
multi-location, multi-user access to the ICICI group's products and services on
a 24-hour basis. This integrated client interface product allows our corporate
customers to have a single point contact for their entire relationship with the
ICICI group. Corporate Infinity offers the following:
o details of transactions with the ICICI group relating to term loans,
working capital accounts, foreign currency positions, investments,
documentary credits and standby letters of credit;
o real-time access to the foreign exchange markets, domestic treasury
and bond markets and the leading stock markets in India;
o system-generated alerts including principal and interest payment
dates, documentary credit and standby letter of credit expiry dates;
o online fund transfers;
o requests for opening of documentary credits, amending of documentary
credits, remittances and stop payment requests;
o generation of output in formats that can be interfaced into the
standard accounting software used by our customers;
o multiple access levels within a corporation to different levels of
data, permissions and authorizations;
o a secure e-mail environment to facilitate communication between the
group's relationship managers
and our customers; and
o robust and advanced security features.
Currently, we do not charge any fee to our customers for using our
Corporate Infinity product. We intend to explore charging our customers a fee
for this service in the future. Based on the response for this product among
large corporations, we believe that we will be able to attract an increasing
number of large corporations to establish banking relationships with us. As a
result, we expect to generate additional interest and fee income.
Retail Banking
General
Retail banking represented 29.9% of our deposits and 2.0% of our gross
loans at December 31, 1999. Our retail loans and deposits represent growth
opportunities for us. We intend to continue to grow our retail deposits for
funding purposes since retail deposits are a good source of low cost, stable
funds. We also intend to introduce new retail loan products on a limited basis,
including car loans, mortgages,
45
personal loans and consumer durable loans, during fiscal 2001 to diversify our
asset base and increase the proportion of retail loans in our gross loan
portfolio.
Retail deposits constituted approximately Rs. 4,669 billion or 66.0% of
total bank deposits in India at March 31, 1998. Traditional players in the
Indian banking sector include nationalized banks and foreign banks. While the
nationalized banks have a large branch network, we believe that the advantages
arising from this network are largely negated by overstaffing, the high cost of
physical infrastructure and poor customer service. Foreign banks have mainly
concentrated on the high net worth segment and their expansion has been
restricted by branch licensing requirements that make it difficult for them to
expand their presence. As a recent entrant in the market, we do not have to
support unprofitable branches and can open branches in locations with growth
potential and, more importantly, use technology to enhance the accessibility of
our products and services to customers and to offer a higher level of service
than generally available in the market.
We have decided to target wage earners, professionals, self-employed
persons and other members of the middle and upper income segments in India. The
National Council for Applied Economic Research, a well established research
institute in India, estimated that, in fiscal 1996, these segments (defined as
those earning an effective income of more than Rs. 50,000 per annum) totaled
approximately 34 million households in India. We have adopted a focused
approach by targeting a limited sub-segment of about six million households
based on a variety of parameters including residence in selected urban areas.
We believe that this sub-segment is underserved and represents an extremely
attractive business opportunity for us. Further, we expect our target market to
experience continued growth in line with the growth of the Indian economy.
Non-resident Indians are another important target market segment for us given
their relative affluence and strong links to family members in India.
According to a March 1999 Reserve Bank of India report, the top 55 cities
in India accounted for 52.5% of total deposits, and define our target market.
We have focused our business activities extensively in the top eight metros
which account for 37.9% of total deposits. We already have branches in 25 out
of these 55 cities and hope to have branches in all 55 target locations by
year-end fiscal 2002.
Deposits
Our deposit products include the following:
o time deposits - fixed term deposits that accrue interest at a fixed
rate and may be withdrawn before maturity by paying penalties
including:
- recurring deposits - periodic deposits of a fixed amount over a
fixed term that accrue interest at a fixed rate and may be
withdrawn before maturity by paying penalties; and
- certificates of deposit;
o savings deposits - demand deposits that accrue interest at a fixed
rate set by the Reserve Bank of India (currently 4.5% per annum); and
o current deposits - non-interest-bearing demand deposits.
We accept time and savings deposits from non-resident Indians, foreign
nationals of Indian origin and foreign nationals working in India. The deposits
are accepted on a repatriable and a non-repatriable basis and are maintained in
rupees and select foreign currencies. The Foreign Exchange Regulation Act and
guidelines of the Reserve Bank of India govern deposits by these persons.
Under Reserve Bank of India regulations, we are permitted to independently
determine interest rates offered on time deposits. Domestic time deposits may
have a minimum term of 15 days and a maximum term of 10 years. Time deposits
from non-resident Indians denominated in foreign currency may have a minimum
term of one year and a maximum term of three years. Rupee time deposits from
non-resident Indians may have a minimum term of six months and a maximum term
of three years. Since April 1998, we have been permitted to offer varying
interest rates on domestic deposits of the same maturity subject to certain
conditions. For a more detailed discussion of the regulations relating to our
deposits, see "Supervision and Regulation--Regulations Relating to Deposits".
46
Demand and time deposits of up to Rs. 100,000 (US$ 2,300) must be insured
with the Deposit Insurance and Credit Guarantee Corporation, a wholly-owned
subsidiary of the Reserve Bank of India.
In addition to our conventional deposit products, we offer a variety of
special value-added products and services which enable the customer to maximize
returns as well as convenience.
Power Pay
In September 1996, we introduced "Power Pay", a direct deposit product for
a select group of our corporate customers, to help them streamline their salary
payment systems. Currently, over 850 corporate clients are using this product,
which allows their employees' salaries to be directly credited to a special
savings account established just for this purpose. This arrangement is
convenient for the employee, as he does not have to wait for payroll checks to
be deposited and cashed and funds can be withdrawn on pay days using an ATM
card.
To enhance the attractiveness of this product, the following features were
added to the savings accounts maintained by the employees:
o automatic overdraft up to 50.0% of monthly salary;
o personal loans up to Rs. 100,000;
o free remittance facility up to Rs. 25,000;
o depositary share accounts; and
o pre-approved credit cards.
We intend to leverage on ICICI's relationships with over 1,000 corporates
to sell our payroll account "Power Pay" to their employees. On December 31,
1999, the number of "Power Pay" accounts stood at over 106,000, constituting
21.4% of our total account base. The share of new "Power Pay" accounts among
all new savings accounts during the nine-month period ended December 31, 1999
was 42.0%.
Quantum Optima
We have introduced a savings account product that offers the customer
liquidity as well as high returns. This product provides automatic transfer of
idle balances from savings accounts to time deposits in units of Rs. 5,000,
resulting in higher yields. Whenever there is a shortfall in the customer's
savings accounts, deposits are transferred back from the fixed deposit account,
automatically in units of Rs. 1,000 to meet the shortfall.
Premium Current Account
We launched our premium current account product in August 1999 to meet the
needs of the small business segment. In addition to conventional banking
facilities, this account offers a free cash transfer remittance facility, free
cash pick-up and delivery, pick-up of checks and documents and a sweep facility
to automatically transfer any excess balance in their current account to a time
deposit.
Internet Banking Services
Infinity
In October 1997, we launched Infinity, India's first Internet banking
service. In September 1999, we introduced an online account opening facility
for non-resident Indians. We believe that the increasing number of Internet
users, the demographic characteristics of those users and the relative
flexibility and convenience of Internet banking provides an opportunity for us
to capitalize on our experience in this area and gain market share in the
retail banking sector.
47
The number of our Internet banking customers has increased from 4,000 at
March 31, 1999 to approximately 24,000 at December 31, 1999. We believe that
the expected increase in Internet usage will accelerate business-to-business
and business-to-consumer transactions, which will ensure our deposit growth
through this channel.
We currently offer the following services to our customers:
o access to account information;
o transaction tracking;
o transfer of funds between accounts of the customer and to any other
account our bank;
o placement of fixed deposits;
o secure e-mail facility for with an accounts manager; and
o check book and stop payment requests.
We expect Internet banking services to be a value differentiator and
attract new customers, from our target segment. We are constantly enhancing our
offering to include more functionality for our customers.
Online Bill Payment
On August 15, 1999, we became the first Indian company to introduce
utility bill payments through the Internet. We now have tie-ups with leading
telecommunications companies like Mahanagar Telephone Nigam Limited or MTNL and
Tata Teleservices, Internet service providers like Videsh Sanchar Nigam Limited
or VSNL and cellular operators like BPL Mobile and Usha Martin. We are
currently offering this service free to our customers with the intention of
building a base of users, based on cost sharing arrangements with utility
companies. In the future, we expect this facility to be a significant source of
fee income from the utility companies and the customers who use the service. We
are also in the process of implementing a bill receipt module, which will allow
the customer to receive the utility bill online.
Money2India Remittance Facility
For easy transfer of funds to India, we have introduced Money2India, a
web-based remittance facility. Non-resident Indians can send money to over 173
locations in India. Neither the customer nor the beneficiary needs to have an
account with us, and the remittance can be tracked on the web from origin to
destination. This facility was launched in October 1999.
Sawal Jawab - An Online Advisory Service
In order to invest in India, non-resident Indians often require
information relating to financial and tax matters. To meet this need, we have
introduced a free advisory service called "Sawal Jawab". This service allows
non-resident Indians to post any query related to investment opportunities in
India, Indian tax laws, banking and other related issues on the net. Our
consultant, who is an expert in the field, replies to these queries and the
reply is posted on our website.
Web Brokering
Our parent ICICI has recently started a wholly owned subsidiary, ICICI Web
Trade Limited, which will facilitate online integration of a customer's various
accounts with the ICICI group: book entry share account, bank account and
brokering account. Guidelines for e-broking have been announced by the
Securities and Exchange Board of India. In line with these guidelines, ICICI
Web Trade must obtain various statutory approvals, for which it has applied. It
expects to obtain these approvals by early March 2000 and to make this service
operational after that. For a description of these guidelines, see "Nature
of Indian Securities Market--The Indian Securities Market--Internet Based
Securities Trading and Services". We expect this service to significantly aid
us in our efforts to acquire new customers and low cost savings deposits as we
will provide each e-broking customer with a bank account and a book entry share
account.
48
We also expect web broking to enhance customer retention and provide
opportunities to earn fee income by cross-selling other products like loans
against subscriptions for initial public offerings and mutual fund units.
Credit Cards
We believe that our credit card business will be one of our core retail
products and will help us attract and retain customers and generate interest
and fee income. As the Indian economy develops, we expect that the retail
market will increasingly seek short-term credit for personal use. We believe
that the low penetration of credit cards in India presents us with a
significant business opportunity while foreign banks today dominate the Indian
credit card market. We believe that that there exists a significant population,
which prefers to deal with an Indian company. To capitalize on this business
opportunity, on January 21, 2000 we launched our credit card business by
offering a VISA credit card to retail customers in Mumbai and intend to
introduce this product in other cities. We believe our credit card business
will facilitate the expansion of our retail banking business and the ongoing
development of our retail customer database with information on spending
patterns, repayment patterns and credit histories. We will apply our current
credit evaluation standards and maintain strict monitoring of repayment
patterns to minimize the risks associated with this business.
Our credit card operations have been outsourced to ICICI Personal
Financial Services on a cost plus 10% basis. ICICI Personal Financial Services
manages the operations on the basis of guidelines approved by us. A
comprehensive credit and operations policy has been laid down for processing
card applications and transactions. Credit approval is done by ICICI Personal
Financial Services employees seconded to us, on the basis of a variety of
factors including the demographic profile of the applicant, stability of
earnings and the nature of employment. Physical verification of the applicant's
details like residence, office location and the documents submitted by the
applicant, is carried out to ensure that only genuine applications are
accepted. Card issue, transaction processing and service activities are also
carried out by ICICI Personal Financial Services. There are no credit bureaus
in India but we are in the process of implementing our own internal credit
scoring model.
We are working closely with Visa International in areas of fraud and risk
management. An in-house fraud unit has been set up to proactively detect
control and mange frauds. We have also set up a 24 hours by 7 days
authorization unit which enables us to track spending patterns of card holders
and trigger alerts. Our Vision Plus software system has an elaborate
delinquency management functionality, which, we believe, would enable us to
actively follow up on delinquent customers. The portfolio quality would be
maintained by relying on advanced technology to deliver timely information and
analytics.
We are the first Indian company to provide credit card account information
through the Internet. Our card holders have the convenience of applying for
their card, accessing card-related information, viewing their statement,
checking their balance and making payments online. Another innovation of our
credit cards is the flexibility of the cardholder to set different spending
limits on supplementary cards. This enables customers to control the spending
of their supplementary card holders.
We offer three credit card products targeted at different customer
segments.
True Blue. Positioned as an entry level offering, the "True Blue" card is
a value for money card. Targeted at the mass market, the card is competitively
priced with an application fee of Rs. 100 and an annual fee of Rs. 300.
Interest is charged on the amount rolled-over to the next month at 2.95% per
month. The credit limit is a function of the monthly income of the cardholder
and is subject to a maximum limit.
Sterling Silver. This credit card is a family offering with a free add-on
card, along with comprehensive insurance benefits for both primary as well as
supplementary card members. Targeted at the upwardly mobile customer, this card
is available at an application fee of Rs. 150 and an annual fee of Rs. 600.
Interest is charged on the amount rolled-over to the next month at 2.5% per
month. The credit limit is subject to a maximum limit.
49
Solid Gold. The Solid Gold credit card is presently offered at a special
invitation price comprising an application fee of Rs. 300 and an annual fee of
Rs. 1200. Interest is charged on the amount rolled-over to the next month at
2.5% per month. The credit limit is subject to a maximum limit based on their
income. This globally accepted card offers additional comprehensive travel
insurance, as well as a Global One Calling Card, which enables the holder to
make telephone calls while travelling abroad.
Customers do not need to have either a bank account or collateral
securities with us to obtain a credit card. For customers with a bank account
with us, we have the right to offset any delinquencies in the credit card
account against balances in the bank account.
Retail Loan Products
Our retail loans were 2.0% of our gross loans at December 31, 1999. In
fiscal 2001, we plan to market, sell and book retail loan products, including
car loans, mortgages, personal loans and consumer durable loans presently being
offered by the ICICI group. Increasing the volume of retail banking will allow
us to diversify our asset base and will better enable us to meet the priority
sector lending requirements specified by the Reserve Bank of India. Both
housing loans up to Rs. 1 million and car loans for a number of categories of
professionals qualify as priority sector lending.
Loans Against Time Deposits
We provide overdraft and demand loans against the security of time
deposits. The loan can be up to 85.0% of the deposit amount. The interest rate
is linked to the interest rate on the underlying deposits and our prime lending
rate.
Loans against Shares for Subscription to Initial Public Offerings
We make short-term loans to individuals to permit them to invest in
initial public offerings of select companies, whose share offerings are
expected to be significantly oversubscribed. These loans are secured by a lien
on the shares to be allotted in the offering.
Overdrafts and Personal Loans
We provide overdraft and personal loans to our Power Pay account holders.
Roll-Over Credit to Credit Card Customers.
Credit card holders have the option to pay only 5.0% of their monthly bill
and roll-over the balance to the next month. Interest is charged at the monthly
percentage rate. We also offer a balance transfer facility to our Sterling
Silver and Solid Gold cardholders with a monthly percentage rate of 1.75% and
1.5%, respectively, for the first six months.
Fee-Based Products and Services
Mutual Fund Sales
We have entered into arrangements with a few mutual funds, including
Prudential ICICI Mutual Fund, Templeton and Kothari, to distribute their
products through our branches a franchisee network and our website, for which
we earn front-end and back-end commissions. We believe that due to the growing
popularity of mutual funds in India, this service has the potential to generate
a significant fee income and strengthen customer relationships.
Depositary Share Accounts
Our parent ICICI is a depositary participant with the National Securities
Depository Limited. We have been offering depositary share accounts to our
customers since January 1999, and this has enabled us
50
to earn fees, attract and retain customers and increase balances in the savings
and current accounts of our customers. These depositary share accounts hold the
customer's equity securities that are in book-entry form and handle purchase
and sale transactions. At December 31, 1999, ICICI had approximately 64,000
depositary share accounts with a custody value of over Rs. 20.0 billion.
Life Insurance
The Insurance Regulatory and Development Authority Bill has been enacted
by the Parliament. This authority is expected to issue guidelines for new
players by April 2000. New players are expected to be operational by end 2000.
ICICI has signed a memorandum of understanding with Prudential Insurance
Plc, UK for entering the life insurance business. The Life Insurance products
would be distributed through the group's distribution channels including our
network of branches, subject to obtaining necessary approvals. We expect this
to be another source of fee income in the future.
Distribution Channels
We deliver our products and services through a variety of distribution
outlets, ranging from traditional bank branches to ATMs and website access. We
believe that India's vast geography necessitates a variety of distribution
channels to best service our customers' needs. The key components of our
distribution network are described below.
Branches
At December 31, 1999, we had a fully computerized network of 71 branches
(including 25 corporate branches) and 13 extension counters in 40 cities.
Extension counters are small areas primarily within office buildings that
provide commercial banking services. Before opening a branch, we conduct a
detailed study in which we assess the lending potential as well as market
demand for deposits. We believe that we have achieved the basic geographic
spread for our branch network and now propose to consolidate the branch network
in the top eight metropolitan cities. Branch locations are largely leased
rather than owned. We are in the process of centralizing back office operations
at regional processing centers. This is expected to reduce the number of
employees required at the branch office, enabling us to create a more efficient
branch network.
As a part of its branch licensing conditions, the Reserve Bank of India
has stipulated that at least 25.0% of our branches must be located in
semi-urban and rural areas. A semi-urban area is defined as a center with a
population of greater than 10,000 but less than 100,000. A rural area is
defined as a center with a population of less than 10,000. The population
figures relate to the 1991 census. We have adhered to this requirement as shown
in the table below.
The following table sets forth, for the period indicated, the number of
branches broken down by area.
At December 31, 1999
---------------------------------
% of
Number of branches total
------------------ -----
Metropolitan/urban............. 49 69.0
Semi-urban/rural............... 22 31.0
-- -----
Total.......................... 71 100.0
== =====
We expect to open 16 branches before the end of this fiscal year to reach
a total number of 100 branches and extension counters, subject to issuance of
the necessary licenses by the Reserve Bank of India.
ATMs
51
We have the largest network of ATMs in the country. Of the 121 ATMs we
operate, 89 are located at our branches and extension counters. The remaining
32 are located at the offices of select corporate clients, large residential
colonies, airports and on major roads in metropolitan cities. At December 31,
1999, we had 183,470 ATM cardholders. We currently lease substantial part of
our ATMs from ICICI. See "Related Party Transactions".
To increase the number of off-site ATMs, we have entered into agreements
with three major public sector petroleum companies in India. Under these
agreements, we propose to deploy ATMs at the gas station outlets of these oil
companies at strategic locations in metropolitan cities. We also propose to
install ATMs at cyber cafes and at the outlets of consumer durable companies
and retail chain stores.
By the end of fiscal 2001, we intend to grow our ATM network to 500 ATMs.
The capital expenditure required to complete this expansion project is
approximately Rs. 1,300,000 per new ATM. We intend to lease these new ATM
facilities from ICICI. See "Related Party Transactions".
We propose to issue electronic debit cards as an associate member of VISA.
We also plan to join "Swadhan", a Mumbai based shared payment network of ATMs
promoted by the Indian Banks Association. We may also offer our ATM network for
third party transactions.
Internet
We believe that many of our corporate and retail customers demand Internet
banking services as a convenient and cost effective mean of conducting
financial transactions. We offer online banking services through our website.
Market Potential of the Internet in India. In India, the delivery of
banking products has traditionally been through large physical branch networks.
Rapid developments in telecommunications and the Internet are reducing the
importance of physical channels. Internet banking is relatively new in India
and the market for Internet banking services is underdeveloped.
The growth of the Internet in India was inhibited by high costs of
Internet access and an inadequate telecommunications infrastructure. With the
liberalization of the telecommunications sector and the entry of private
Internet service providers, the quality of infrastructure has improved. The
International Data Corporation has predicted that the number of Internet users
in India will grow from approximately 1.5 million in 1999 to 4.5 million in
2002 and 12.3 million by 2005. Approximately 22 million persons of Indian
origin live overseas and many of these persons are Internet users. India has
about 175 licensed Internet service providers, 30 of which have commenced
operations. At present, there are 450,000 Internet subscribers in India.
At March 31, 1999, there were 3.2 million personal computers in India.
Most of which were in the corporate segment. High telecommunications charges
and high Internet access fees charged by service providers make Internet access
from homes expensive. Although the penetration of personal computers is not
widespread in India, other means of Internet access are gradually being
developed. Cyber cafes, providing Internet access to the public are opening up
in all parts of the country and have the potential to be an important
distribution channel in the future since customers can access the Internet by
paying only for actual Internet usage. Also, India has about 25 million homes
having access to cable television. The introduction of set-top boxes, which
enable Internet access through cable television, is expected to increase the
number of people having access to the Internet and to promote its reach into
semi-urban and rural areas. The increase in Internet usage is expected to be
driven by cyber-cafes and cable television.
Strategic Alliances. We believe that we can gain significant advantages by
entering into strategic alliances with various parties. We have recently signed
a memorandum of understanding with a leading portal and private Internet
service provider in India for online distribution of our retail banking
products and services.
52
We use online banner advertising with other Internet service providers and
leading Indian Internet sites like samachar.com, rediff.com, and
indiatimes.com.
See "Technology--Market Trends in India" for a discussion of the Internet
market in India.
Call Centers
We provide telephone banking services to our customers through call
centers at Mumbai and Pune. The call centers have an interactive voice response
system as well as call agents. Both call centers work for 24 hours a day, 7
days a week and are managed by ICICI Personal Financial Services Limited. We
pay ICICI Personal Financial Services on the basis of the actual call volume.
See "Related Party Transactions". The Mumbai call center was launched in
September 1999 and Pune call center was launched in January 2000. At December
31, 1999, about 2,790 of our customers had registered for the telephone banking
service. A team of 19 customer service officers and four supervisors manage the
call center at Mumbai. This call center currently handles about 1,000 calls a
day, which includes service calls, and other inbound and outbound marketing
calls. Seven customer service officers and one supervisor manage the call
center at Pune. Four more call centers are planned and expected to be
operational by the end of the first quarter of fiscal 2001. Currently, long
distance telecommunications tariffs and regulations do not make a centralized
call center attractive. We expect that with continued liberalization and
convergence taking place in the telecom sector, this scenario will change. We
will then consolidate the call centers into two or three regional centers.
Our Customer Information File is extensively used at the call center. This
database issues a unique relationship number to each customer relationship that
enables the call agent to cross-sell other products to the customer. For
example, if a customer calls to pay his last auto loan installment, this
database will signal the call agent to sell him either a loan to upgrade the
car, a mortgage, a tax saving investment product or a recurring deposit. A
rules engine is being tested that, when operational, will check the customer's
profile, apply a set of business rules and display the product to be cross-sold
on the call agent's screen.
Franchisee Network
Our parent ICICI has a franchisee network consisting of 31 agents in 15
cities at December 31, 1999 to sell the retail products of the group. We use
the same franchisee network for distributing our retail deposit products. The
franchisees have a dedicated work force for each line of products. These
franchisees are unaffiliated entities acting as agents on behalf of ICICI. They
will supplement our growing network of branches and other electronic delivery
channels and enable us to achieve deeper penetration by offering doorstep
account opening facilities to the customer. These agents market ICICI group's
products exclusively and are not expected to market or act on behalf of any of
our competitors. Agents receive a fee based on the volume of business and the
number of client relationships generated.
Mobile Banking
We are in the process of finalizing an agreement with several
telecommunications companies, after which customers will be able to conduct
banking operations through their mobile phones. We expect to provide mobile
banking services by the end of fiscal 2000. This service will enable customers
to view their account details. Gradually, this application is scheduled
to adopt wireless application protocol technology to provide greater
functionality to users.
Treasury
Our treasury is one of our three independent business units. Its
objectives are to manage our balance sheet through the maintenance of required
regulatory reserves and to optimize profits from both our regulatory portfolio
and our trading portfolio by taking advantage of market opportunities using
funds acquired from the inter-bank markets and corporate deposits.
53
Due to regulatory requirements, a substantial portion of our trading
portfolio is government of India securities. At March 31, 1999, government of
India securities represented 91.3% of our trading portfolio. The remainder
included domestic debt and equity securities and foreign currency assets. The
Reserve Bank of India requires us to maintain 9.0% of our demand and time
liabilities in a current account with the Reserve Bank of India. This is called
the cash reserve ratio. The Reserve Bank of India pays no interest on cash
reserves up to 3.0% of the demand and time liabilities and pays 4.0% on the
balance. In calculating the cash reserve requirements, we exclude the following
liabilities from demand and time liabilities:
o inter-bank liabilities;
o liabilities to primary dealers;
o deposits from non-resident Indians, both repatriable and
non-repatriable ;
o foreign currency deposits from non-resident Indians; and
o from the Reserve Bank of India and other institutions permitted to
offer refinancing to banks.
We are also required to maintain 25.0% of our total demand and time
liabilities by way of approved securities, such as government of India
securities and state government securities. This is called the statutory
liquidity ratio. We maintain the statutory liquidity ratio through a portfolio
of government of India securities that we actively trade to optimize the yield
and benefit from price movements to increase our trading income from this
portfolio.
For further discussion of these regulatory reserves, see "Supervision and
Regulation--Legal Reserve Requirements".
As part of our treasury activities, we maintain proprietary trading
portfolios in domestic debt and equity securities and in foreign currencies. We
have a limited equity portfolio because the Reserve Bank of India restricts our
incremental investment in equity securities in a fiscal year to 5.0% of the
increase in deposits in the previous fiscal year.
Our treasury engages in domestic and foreign exchange operations from a
centralized trading floor in Mumbai. We believe that our dealing room is one of
the best in India in terms of technological capability and skills. The
infrastructure includes the latest voice systems and electronic dealing
terminals with access to real time market information feeds. We are upgrading
our decision support systems.
The treasury has access to the ICICI group's research teams that regularly
track the debt, equity and currency markets. This helps us to respond quickly
to capitalize on market opportunities.
The treasury consists of two divisions, domestic treasury and foreign
exchange treasury.
Domestic Treasury
Our domestic treasury manages our liquidity and regulatory reserves with
an objective of optimizing yield on our investment portfolio.
Our investment policy was instituted in June 1994 and is updated
periodically. This policy sets out the broad guidelines for transactions in
securities and incorporates the various regulatory requirements. These
guidelines include several checks on risk, including a duration limit, holding
period limits and stop-loss limits. Our investment policy vests the Investment
Committee, dealers and other officers with different levels of authority for
investment decisions.
Liquidity management involves maintaining an optimum level of liquidity
and complying with the cash reserve ratio. The objective is to ensure the
smooth functioning of all our branches and at the same time avoid holding of
excessive cash. Our domestic treasury maintains a fine balance between
interest-earning liquid assets and cash to optimize earnings.
54
Reserve management involves maintaining statutory reserves, including the
cash reserve ratio and the statutory liquidity ratio.
Our domestic treasury division undertakes transactions in fixed income
securities and equity securities. The fixed income securities include
short-term money market instruments and medium to long-term instruments. The
money market instruments mainly consist of treasury bills, commercial paper,
inter-bank deposits and certificates of deposit. The medium to long-term
instruments consist of government of India securities, zero coupon bonds,
inflation-linked bonds, state government securities, public sector undertaking
bonds and corporate debentures. The equity securities include equity securities
and units of mutual funds.
Our proprietary trading portfolio consists mainly of fixed income
securities. At March 31, 1999, fixed income securities were 96.1% of our
proprietary trading portfolio.
The domestic money markets in India are telephone-based and require our
dealers to continuously interact with market participants and intermediaries.
We believe that the trading skills of the dealers have helped to optimize the
performance of the domestic treasury.
Our securities are classified into two categories, trading securities and
available for sale securities. Trading securities contribute a major portion of
our portfolio. The following table sets forth, for the periods indicated,
certain information related to our trading portfolio.
At March 31, At December 31,
---------------------------------------- -------------------------
1998 1999 1999
--------- ------------------------- -------------------------
(in millions)
Government of India securities......... Rs. 6,987 Rs. 14,449 US$ 332 Rs. 28,100 US$ 646
Equity securities...................... 101 198 5 165 4
--------- ---------- ------- ---------- -------
Total.................................. Rs. 7,088 Rs. 14,647 US$ 337 Rs. 28,265 US$ 650
========= ========== ======= ========== =======
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on trading securities, net gain
from the sale of these securities and unrealized gain/(loss) on these
securities:
Year ended March 31, Nine months ended
---------------------------------------- December 31,
1998 1999 1999
--------- ------------------------- -------------------------
(in millions)
Interest and dividends...................... Rs. 865 Rs. 2,247 US$ 52 Rs. 2,079 US$ 48
Gain on sale of trading securities.......... 274 111 3 364 8
Unrealized gain/(loss) on trading securities (127) 23 1 334 8
--------- --------- ------ --------- ------
Total....................................... Rs. 1,012 Rs. 2,381 US$ 56 Rs. 2,777 US$ 64
========= ========= ====== ========= ======
In addition to trading securities, we also hold available for sale
securities, primarily corporate debt securities. The following tables set
forth, for the periods indicated, certain information related to our available
for sale securities.
At March 31,
--------------------------------------------------------------------------------------------------
1997 1998
------------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Amortized unrealized unrealized
cost gain loss Fair value cost gain loss Fair value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Corporate debt
Securities......... Rs. 580 - Rs. (9) Rs. 571 Rs. 1,117 Rs. 33 Rs. (14) Rs.1,136
Government of
India securities... 3,156 - (10) 3,146 59 1 - 60
-------- ----- ------- -------- --------- ------ ------- --------
Total debt securities 3,736 - (19) 3,717 1,176 34 (14) 1,196
55
Mutual fund
Securities......... - - - - 280 - - 280
--------- ----- ------- ---------- --------- ------ ------- --------
Total ............... Rs. 3,736 - Rs. (19) Rs. 3,717 Rs. 1,456 Rs. 34 Rs. (14) Rs.1,476
========= ===== ======= ========== ========= ====== ======= ========
At March 31, At December 31,
---------------------------------------------- ----------------------------------------------
1999 1999
---------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Amortized unrealized unrealized
cost gain loss Fair value cost gain loss Fair value
---------- ---------- ----------- ---------- --------- ---------- ---------- ----------
(in millions) (in millions)
Corporate debt
Securities......... Rs.2,860 Rs. - - Rs. 2,860 Rs. 2,218 Rs. 45 - Rs.2,263
Government of
India securities... 775 50 - 825 916 75 - 991
-------- ------ ------ --------- --------- ------- -------- --------
Total debt securities 3,635 50 - 3,685 3,134 120 - 3,254
Mutual fund
Securities......... 266 12 - 278 1,158 - (10) 1,148
-------- ------ ------ --------- --------- ------- -------- --------
Total ............... Rs.3,901 Rs. 62 - Rs. 3,963 Rs. 4,292 Rs. 120 Rs. (10) Rs.4,402
======== ====== ====== ========= ========= ======= ======== ========
The following table sets forth, for the periods indicated, an analysis of
the maturity profile of our investments in corporate debt securities classified
as available for sale securities and the yields thereon.
At December 31, 1999
----------------------------------------------------------------------------------------------
Up to one year One to five years Five to ten years More than ten years
-------------------- -------------------- ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- --------- ----- ------- ------ ------ -----
(in millions)
Corporate debt securities... Rs. 263 9.37% Rs. 1,492 8.69% Rs. 455 10.88% Rs. 53 14.15%
Other debt securities....... - - - - - - - -
------- ----- --------- ----- ------- ------ ------ ------
Total interest-earning
securities................ Rs. 263 9.37% Rs. 1,492 8.69% Rs. 455 10.88% Rs. 53 14.15%
======= ===== ========= ===== ======= ====== ====== ======
Total amortized cost........ Rs. 263 Rs. 1,467 Rs. 438 Rs. 50
Total market value.......... 263 1,492 455 53
Foreign Exchange Treasury
Our foreign exchange treasury manages our foreign currency exposures,
offers foreign exchange and risk hedging derivative products to our customers
and engages in proprietary trading of currencies.
Managing our Foreign Currency Exposures
We deal in 15 major foreign currencies. The nature of treasury operations
requires us to maintain non-interest-earning nostro accounts in each of these
currencies at various locations across the world. Nostro accounts are our
foreign exchange-denominated current accounts with our correspondent banks. The
foreign exchange treasury tracks balances on a real time basis to optimize the
yield on funds across all currencies, using foreign exchange swaps and
short-term deposits with correspondent banks.
We take deposits from non-resident Indians in four major foreign
currencies. We also manage onshore accounts in foreign currencies. The foreign
exchange treasury manages the portfolio through money market and foreign
exchange instruments to optimize yield and liquidity.
We control the market risk and credit risk on our foreign exchange trading
portfolio through an internal model which sets counterparty limits, stop-loss
limits and limits on the loss of the entire foreign exchange trading operations
and exception reporting. We also use a Value at Risk model to monitor our spot
positions.
Corporate Foreign Exchange
56
We provide customer specific transactions and risk hedging solutions in 15
currencies. These are offered to meet the trade and service-related
requirements of our corporate clients. The products and services offered
include:
o spot foreign exchange for conversion of foreign currencies without
any value restrictions;
o forward foreign exchange for hedging future receivables and payables,
without any value restriction, up to a maximum period of three years;
and
o foreign exchange and interest rate derivatives for hedging long-term
exposures
We earn commissions on these products and services from our corporate
customers.
Proprietary Trading in Currencies
We are active in the proprietary trading of currencies. We are among the
few Indian banks to be approved by the Reserve Bank of India to initiate cross
currency positions abroad. Our trading is focused on US dollar, the Euro, the
Japanese yen and the UK pound sterling. The average monthly inter-bank volumes
in the nine months ended December 31, 1999 was US$ 1,860 million increasing
from US$ 1,764 million in fiscal 1999.
The following table sets forth, for the periods indicated, our growth in
turnover in various segments of our foreign exchange operations.
Year ended March 31, Nine months ended December 31,
--------------------------------------- ----------------------------------------
1998 1999 1998 1999
--------- ------------------------- ---------- --------------------------
(in billions, except number of currencies and nostro accounts)
Turnover:
Inter-bank................. Rs. 422.6 Rs. 898.7 US$ 20.7 Rs. 551.3 Rs. 971.4 US$ 22.3
Merchants.................. 38.8 57.4 1.3 35.9 76.6 1.8
--------- --------- -------- --------- ----------- --------
Total turnover................. Rs. 461.4 Rs. 956.1 US$ 22.0 Rs. 587.2 Rs. 1,048.0 US$ 24.1
========= ========= ======== ========= =========== ========
Size of foreign currency book.. Rs. 59.0 Rs. 86.6 US$ 0.2 Rs. 90.1 Rs. 99.6 US$ 0.2
Number of currencies........... 12 15 15 15
Number of nostro accounts...... 14 20 20 21
Funding
Our funding operations are designed to ensure both stability of funding
and effective liquidity management. The primary source of funding is deposits
raised from corporate customers, which were over 70% of total deposits at
December 31, 1999. Retail deposits, which provide a cheaper source of funds,
are the other source of deposits. We expect retail deposits to account for a
greater share of deposits in the coming years on account of several initiatives
undertaken at the group level. We adjust our funding strategy with a view to
minimizing funding costs and matching maturities with our loan portfolio.
Corporate Deposits
We take deposits from our corporate clients with terms predominantly
ranging from 15 days to one year. We provide interest quotes for deposits in
excess of Rs. 10 million on a daily basis (not very common in India), based on
rates in the inter-bank term money market and for other money market
instruments such as treasury bills and commercial paper. Corporate deposits
include funds taken by us from large public sector corporations, government
organizations, other banks and large private sector companies and include
certificates of deposit, checking accounts and time deposits. Corporations are
also serviced through flexible deposit products. We take rupee or foreign
currency denominated deposits with fixed or floating rate interest bases.
Corporate deposits have grown from Rs. 45.6 billion (US$ 1.0 billion) at March
31, 1999 to Rs. 59.6 billion (US$ 1.4 billion) at December 31, 1999, and were
70.1% of our total deposits at December 31, 1999.
The following table sets forth, for the periods indicated, our corporate
deposits by product.
57
At March 31,
--------------------------------------------------- At December 31,
1997 1998 1999 1999 1999
--------- ---------- ---------- --------- ----------------------
(in millions)
Current accounts.............. Rs.2,990 Rs. 3,345 Rs. 5,162 US$ 118 Rs. 6,873 US$ 158
Current accounts-banks........ 34 37 74 2 267 6
Fixed deposits-others......... 4,036 9,917 25,883 595 42,910 986
Fixed deposits-banks.......... 945 2,586 13,140 302 9,200 211
Certificates of deposits...... 1,335 3,169 1,330 31 330 8
--------- ---------- ---------- --------- ---------- ---------
Total......................... Rs. 9,340 Rs. 19,054 Rs. 45,589 US$ 1,048 Rs. 59,580 US$ 1,369
========= ========== ========== ========= ========== =========
The following table sets forth, for the periods indicated, our corporate
deposits by type of customer.
At March 31,
--------------------------------------------------- At December 31,
1997 1998 1999 1999 1999
--------- ---------- ---------- --------- -------------------------
(in millions)
Banks......................... Rs. 978 Rs. 2,623 Rs. 13,214 US$ 304 Rs. 9,467 US$ 218
Corporations.................. 8,063 14,384 28,297 650 45,952 1,055
Others(1)..................... 299 2,047 4,078 94 4,161 96
---------- ---------- ---------- --------- ----------- -----------
Total......................... Rs. 9,340 Rs. 19,054 Rs. 45,589 US$ 1,048 Rs. 59,580 US$ 1,369
========== ========== ========== ========= =========== ===========
- ---------
(1) Others include government agencies, charitable trusts, societies and
institutions.
The following table sets forth, for the period indicated, the maturity
profile of our corporate deposits of Rs. 10 million (US$ 230,000) or more:
At December 31, 1999
------------------------------------
% of total
deposits
----------
(in millions, except percentages)
Less than three months....................................... Rs. 31,320 US$ 720 36.9%
Above three months and less than six months.................. 3,720 86 4.4
Above six months and less than twelve months................. 7,850 180 9.2
More than twelve months...................................... 630 14 0.7
---------- --------- ----
Total deposits of Rs. 10 million and more.................... Rs. 43,520 US$ 1,000 51.2%
========== ========= ====
Retail Deposits
We offer a range of retail deposit products tailored to meet each customer
segment's financial profile. These include demand deposits and time deposits,
and also some special retail deposit products. We also accept deposits from
non-resident Indians, foreign nationals of Indian origin and foreign nationals
working in India on a repatriable and non-repatriable basis in rupees and
select foreign currencies. Retail deposits have grown from Rs 15.1 billion (US$
0.4 billion) at March 31, 1999 to Rs 25.4 billion (US$ 0.6 billion) at December
31, 1999 and were 29.9% of our total deposits at December 31, 1999.
The following table sets forth, for the periods indicated, our retail
deposits.
At March 31, At December 31,
---------------------------------------------------- ------------------------
1997 1998 1999 1999
---------- ---------- ------------------------ ------------------------
(in millions)
Retail deposits....... Rs. 4,140 Rs. 7,240 Rs. 15,140 US$ 348 Rs. 25,422 US$ 584
Out of the retail deposits of Rs. 25.4 billion at December 31, 1999,
demand deposits (savings and current) were Rs. 5.2 billion or 20.4% of our
total retail deposits.
58
At December 31, 1999, we had 219,326 savings account customers maintaining
an average balance of approximately Rs. 20,000 in each account.
The following table sets forth, for the period indicated, the number of
retail deposit accounts and the balance outstanding by type of deposit.
At December 31, 1999
-------------------------------------------------
Number of
Balance outstanding accounts % of total
---------------------- --------- ----------
(in millions)
Current.................................... Rs. 880 US$ 20 6,167 1.3%
Savings.................................... 4,310 99 219,326 44.3
Time deposits.............................. 20,230 465 268,987 54.4
---------- ------- ------- -----
Total retail deposits...................... Rs. 25,420 US$ 584 494,480 100.0%
========== ======= ======= =====
The following table sets forth, for the periods indicated, the amount of
retail deposits outstanding by type of account holder.
At March 31,
------------------------------------ At December 31,
1998 1999 1999
--------- ----------------------- -----------------------
Individuals............................ Rs. 6,090 Rs. 12,590 US$ 289 Rs. 20,470 US$ 470
Associations........................... 310 530 12 1,112 26
Clubs................................. 10 80 2 70 2
Partnership and proprietorship
concerns......................... 530 1,120 26 1,710 39
Societies and trusts.................. 300 820 19 2,060 47
--------- ---------- -------- ---------- --------
Total retail deposits................. Rs. 7,240 Rs. 15,140 US$ 348 Rs. 25,422 US$ 584
========= ========== ======== ========== ========
The following table sets forth, the amount of retail deposits outstanding
by type of product.
At March 31,
---------------------------------------- At December 31,
1998 1999 1999
--------- -------------------------- -----------------------
Non-resident Indian deposits.... Rs. 1,766 Rs. 2,805 US$ 64 Rs. 4,282 US$ 98
Quantum Optima.................. 450 2,240 52 4,600 106
Power Pay....................... 250 780 18 2,140 49
Others.......................... 4,774 9,315 214 14,400 331
--------- ---------- -------- ---------- -------
Total retail deposits........... Rs. 7,240 Rs. 15,140 US$ 348 Rs. 25,422 US$ 584
========= ========== ======== ========== =======
Total Deposits
The following table sets forth, for the periods indicated, our average
outstanding deposits based on daily balances and the percentage composition by
each category of deposits. The average cost (interest expense divided by
average of daily balances) for each category of deposits is provided in the
footnotes.
Year ended March 31,
-----------------------------------------------------------------------------
1997 1998 1999
--------------------- ------------------------ ----------------------
Amount % of total Amount % of total Amount % of total
------ ---------- -------- ---------- -------- ----------
(in millions)
Non-interest-bearing demand
deposits..................... 2,170 21.87% 3,399 18.33% 3,539 8.97%
Savings deposits (1)............ 304 3.06 815 4.40 1,569 3.98
Time deposits(2)................ 7,449 75.07 14,325 77.27 34,347 87.05
----- ------ ------ ------ ------ ------
59
Total .......................... 9,923 100.0% 18,539 100.0% 39,455 100.0%
===== ====== ====== ====== ====== ======
- ---------
(1) With an average cost of 3.29% in fiscal 1997, 3.44% in fiscal 1998 and
3.44% in fiscal 1999.
(2) With an average cost of 12.91% in fiscal 1997, 11.10% in fiscal 1998 and
10.64% in fiscal 1999.
Short-Term Borrowings
The following table sets forth for the periods indicated, certain
information related to our short-term rupee borrowings from banks, primary
dealers and financial institutions.
Nine
months
ended
Year ended March 31,(1) December
------------------------------------------ 31,
1997 1998 1998 1999
--------- ---------- ------- --------
(in millions, except percentages)
Year end balance............................... Rs. 100 Rs. 1,500 Rs. 325 Rs. 633
Average balance during the year(2)............. 1,024 1,250 2,193 2,576
Maximum month-end balance...................... 2,476 3,195 3,968 6,172
Average interest rate during the year(3)....... 12.70% 14.56% 10.31% 9.90%
Average interest at year end/Quarter end(4).... 7.00 10.30 10.64 5.88
- ---------
(1) Short-term borrowings include trading liabilities, such as borrowings
in the call market and repurchase agreements.
(2) Average of daily balances outstanding.
(3) Represents the ratio of interest expense on short-term borrowings to
the average of daily balances of short-term borrowings.
(4) Represents the weighted average rate of the short-term borrowings
outstanding at fiscal year end for 1996-97, 1997-98 and 1998-99 and at
quarter ended December 1999.
Other Sources of Funds
We also obtain funds from issuances of subordinated debt securities. In
May 1998, we issued Rs. 1.0 billion of subordinated debt due August 2003. In
January 1999, we issued an additional Rs. 680 million of subordinated debt due
April 2006. This debt is also classified as Tier 2 capital in calculating our
capital adequacy ratio. Under the Reserve Bank of India's capital adequacy
requirements, we are required to maintain a minimum ratio of capital to risk
adjusted assets and off-balance sheet items of 8.0% (9.0% effective March 31,
2000), at least half of which must be Tier 1 capital. Total subordinated debt
classified as Tier 2 capital cannot exceed 50.0% of Tier 1 capital.
Loan Portfolio
At December 31, 1999, our gross loan portfolio, which includes our
holdings of corporate debt instruments was Rs. 38.8 billion (US$ 893 million)
and included a total of approximately 1,400 loans outstanding. Corporate debt
instruments amounted to Rs. 8.5 billion (US$ 195 million) at December 31, 1999,
constituting 21.8% of our gross loans. No trading market exists for these
corporate debt securities, but we believe that as the secondary debt markets in
India become more active, lenders will be able to more easily sell these
corporate debt securities, thereby allowing for better management of mismatches
in the maturity of assets and liabilities and providing additional liquidity.
Almost all of our loans are to Indian borrowers.
The following table sets forth, for the periods indicated, our gross loan
portfolio classified by product group.
60
At March 31, At December 31,
------------------------------------ -----------------------
1997 1998 1999 1999 1999
--------- --------- ---------- ---------- -------
(in millions)
Working capital................. Rs. 6,705 Rs. 9,256 Rs. 17,508 Rs. 26,005 US$ 598
Term loans(1)................... 1,477 3,344 9,859 12,047 277
Retail loans.................... 380 590 1,110 780 18
--------- --------- ---------- ---------- -------
Gross loans..................... Rs. 8,562 Rs.13,190 Rs. 28,477 Rs. 38,832 US$ 893
========= ========= ========== ========== =======
Of which:
Corporate debt instruments... Rs. 153 Rs. 1,424 Rs. 6,762 Rs. 8,471 US$ 195
- ---------------
(1) Includes lease finance products and corporate debt instruments. We had
lease finance of Rs. 339 million (US$ 8 million) at December 31, 1999,
representing 0.9% of our gross loans. We discontinued all of our lease
finance activities in fiscal 1997.
Credit Policy
Our credit policy includes, among others, the following internal
restrictions:
o All credit exposures will be subject to our internal credit risk
rating. Since April 1999, all new credit exposures have been
generally subject to a benchmark credit risk rating of "A", as per
our internal credit rating model, prior to that time, our benchmark
credit risk rating was BBB.
o Our focus will continue to be on short-term working capital
financing. We focus on corporate lending to large and medium-sized
industries and trade and service sectors.;
o Term loan exposure will be limited to 15.0% to 25.0% of our loan
portfolio, in line with our resources profile;
o Credit exposure to a particular industry is restricted to 15.0% of
our gross loan assets;
o We will extend credit to non-banking finance companies selectively -
only to those who are registered with the Reserve Bank of India and
having an acceptable credit rating from reputed credit rating
agencies;
o We normally do not grant fixed rate loans except for credit in the
form of marketable corporate debt investments;
o Rates of interest on foreign currency loans are generally with
reference to London Inter-Bank Offer Rate;
o We have set a benchmark level current ratio (current assets to
current liabilities) of 1.25 and a benchmark level ratio of total
liabilities to tangible net worth of 2.50 for our borrowers.
Deviation from these levels are permitted by us only in exceptional
cases.
Over the past year, consistent with our strategy of focusing on quality
growth opportunities, we have concentrated on financing large, highly-rated
corporations by taking advantage of the corporate relationships of the ICICI
group.
The following table sets forth, for the periods indicated, the volume of
our corporate loan business to new customers broken down by the turnover of
these new customers. This table demonstrates the shift in our loan portfolio
from small to medium-sized enterprises to large corporations.
Nine months ended December 31,
-----------------------------------------------------------------------
1998 1999
---------------------------------- ----------------------------------
Loans to Loans to
Number of new Number of new
Turnover companies customers % of total companies customers % of total
- ----------------------------- --------- --------- ---------- --------- --------- ----------
(in millions, except number of companies and percentages)
Below Rs. 5 million.......... 5 Rs. 36 0.7% 6 Rs. 28 0.3%
Rs. 5 to 100 million......... 30 544 10.7 48 481 4.9
Rs. 100 to 1,000 million..... 40 904 17.8 76 1,402 14.4
Rs. 1 to 10 billion.......... 21 3,107 61.2 74 5,629 57.7
Rs. 10 to 20 billion......... - - - 6 1,004 10.3
Above Rs. 20 billion......... 3 488 9.6 7 1,210 12.4
--------- --------- ---------- --------- --------- ----------
Total........................ 99 Rs. 5,079 100.0% 217 Rs. 9,754 100.0%
========= ========= ========== ========= ========= ==========
61
Collateral - Completion, Perfection and Enforcement
Our loan portfolio consists predominantly of working capital loans. These
loans are typically secured by a first lien on current assets, which normally
consist of inventory and receivables. Additionally, in some cases, we may take
further security of a first or second lien on fixed assets, a pledge of
financial assets like marketable securities, corporate guarantees and personal
guarantees. These security interests are perfected by the registration of these
interest within 30 days with the Registrar of Companies pursuant to the
provisions of the Indian Companies Act. This registration amounts to a
constructive public notice to other business entities. At December 31, 1999,
93.3% of our gross loans were secured. In general, our loans are over secured.
In India, there are no regulations stipulating any loan-to-collateral limits.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a decrease
in the value of the collateral. These delays can last for several years leading
to deterioration in the physical condition and market value of the collateral.
In the event a borrower makes a reference to a specialized quasi-judicial
authority called the Board for Industrial and Financial Reconstruction,
foreclosure and enforceability of collateral is stayed. For a discussion of the
activities of the Board of Industrial and Financial Reconstruction, see
"Republic of India--The Indian Economy--Legislative Framework for Restructuring
Sick Companies".
We recognize that our ability to realize the full value on our collateral
in respect of current assets is difficult, due to, among other things, delays
on our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers
by borrowers. However, we can rely upon their cashflows in their cash credit
facility for recovery of past due amounts. In addition, we have a right of
set-off for amounts due to us on this facility. Also, we monitor the cashflows
of our working capital loan customers on a daily basis so that we can take any
actions required before the loan becomes non-performing. On a case-by-case
basis, we may also stop or limit the borrower from drawing further credit from
its facility.
Most of our corporate borrowers having large working capital requirements
borrow from more than one bank either under a consortium arrangement or under a
multiple banking arrangement. Under a consortium arrangement, the financial
banks formally decide on the credit proposal of the company and decide how the
funding should be distributed among the consortium banks. A lead bank, usually
the bank providing the largest share of the overall credit, is appointed under
a consortium lending arrangement. The lead bank coordinates credit appraisals,
execution of joint documents, regular review meetings and security inspections.
Under a consortium arrangement, typically the security is in the form of a
first lien on current assets, which is shared on a proportionate basis among
the participating banks. Theoretically, a member can exit from a consortium,
with its share taken either by an existing member or by induction of a new
member in the consortium. However, in the case of a non-performing loan, this
exit route is generally not available since the other members of the consortium
are not likely to take up additional credit that is impaired. Further, a member
is generally not allowed to take recovery action independent of the consortium
in the case of a non-performing loan. Hence, recovery from non-performing
companies that are under a consortium arrangement may be delayed.
Under a multiple banking arrangement, each bank stipulates its own terms
and obtains distinct and identifiable collateral. Individual documents are also
obtained and requisite liens created. Unlike in the case of a consortium
arrangement lending, in the case of multiple lending and sole bank lending, we
can independently pursue recovery of past due amounts either through full cash
recovery, a negotiated settlement or through a legal suit. At December 31,
1999, loans with consortium arrangements accounted for 46.0% of our gross
non-performing loans, loans with multiple banking arrangements accounted for
29.5% of our gross non-performing loans and sole bank lending accounted for
24.5% of our gross non-performing loans.
62
Loan Concentration
Pursuant to the guidelines of the Reserve Bank of India, our credit
exposure to individual borrowers must not exceed 25.0% (20.0% effective April
1, 2000) of our capital funds calculated under Indian GAAP. Our exposure to a
group of companies under the same management control must not exceed 50.0% of
our capital funds unless the exposure is in respect of an infrastructure
project. In that case, the exposure to a group of companies under the same
management control may be up to 60.0% of our capital funds. Pursuant to the
Reserve Bank of India guidelines, an exposure is calculated as the sum of
100.0% of the committed funded amount or the outstanding funded amount, which
ever is higher, and 50.0% of the committed non-funded amount or the outstanding
non-funded amount which ever is higher. Our loan exposures to individual
borrowers and group borrowers have been generally within the percentages
prescribed by the Reserve Bank of India based on the capital funds calculated
under Indian GAAP. In exceptional cases, where we have exceeded these
percentages, we have obtained the ratification of the Reserve Bank of India as
required.
We follow a policy of portfolio diversification and evaluate our total
financing exposure in a particular industry in light of our forecasts of growth
and profitability for that industry. Our economists monitor all major sectors
of the economy and specifically follow industries in which we have credit
exposures. We respond to any stress in an industrial segment by restricting new
credits to that industry segment and any growth in an industrial segment by
increasing new credits to that industry segment, resulting in active portfolio
management.
The following table sets forth, for the periods indicated, our gross loans
outstanding by the borrower's industry or economic activity and as a percentage
of our gross loans.
At March 31, At December 31,
----------------------------------------------------------------------- ------------------------------
1997 1998 1999 1999
----------------- ----------------- --------------------------- ------------------------------
(in millions, except percentages)
Agriculture.............. Rs. 252 3.0% Rs. 501 3.8% Rs. 675 US$ 15 2.4% Rs. 1,912 US$ 44 4.9%
Auto including trucks.... - - 600 4.5 1,006 23 3.5 1,518 35 3.9
Cement................... 60 0.7 170 1.3 540 12 1.9 1,060 24 2.7
Chemicals, drugs and
pharmaceuticals...... 490 5.7 1,092 8.3 2,420 56 8.5 4,221 97 10.9
Computer software........ - - 230 1.7 460 11 1.6 650 15 1.7
Construction(1).......... 510 6.0 770 5.8 740 17 2.6 940 22 2.4
Electricity.............. 470 5.5 540 4.1 1,488 34 5.2 1,645 38 4.2
Finance.................. 890 10.4 780 5.9 1,949 45 6.9 2,700 62 7.0
Iron and steel........... 380 4.4 460 3.5 620 14 2.2 715 16 1.8
Light manufacturing...... 1,280 14.9 1,300 9.9 2,800 64 9.8 4,528 104 11.7
Other industries(2)...... 2,390 27.9 4,057 30.8 11,362 261 39.9 14,894 342 38.4
Other metals and metal
products............... 220 2.6 330 2.5 1,370 31 4.8 1,120 26 2.9
Other personal loans..... 380 4.4 590 4.5 1,110 26 3.9 780 18 2.0
Paper and paper products. 150 1.8 240 1.8 373 9 1.3 663 15 1.7
Textiles................. 860 10.0 1,170 8.9 1,405 32 4.9 1,375 32 3.5
Transport................ 230 2.7 360 2.7 159 4 0.6 111 3 0.3
-------- ------ --------- ------ --------- -------- ------ --------- ------- ------
Gross loans.............. Rs.8,562 100.0% Rs.13,190 100.0% Rs.28,477 US$ 654 100.0% Rs.38,832 US$ 893 100.0%
======== ====== ========= ====== ========= ======== ====== ========= ======= ======
- ---------
(1) Includes light manufacturing, procurement and construction projects and
building construction.
(2) Includes over 40 different industries.
At December 31, 1999, no single industry accounted for more than 15% of
our gross loan portfolio.
In fiscal 1998 and 1999, there was an increase in the proportion of assets
in the chemicals, drugs and pharmaceuticals and other metals and metal products
sectors, while there was a decrease in the proportion of assets in the
construction, iron and steel, and textiles sectors. In fiscal 1995 and 1996 our
63
gross loans were significantly less than our gross loans at year-end fiscal
1998 and 1999 and there were no distinct trend in sectoral distribution of
assets.
Our ten largest loan exposures at December 31, 1999 totaled approximately
Rs. 4.3 billion (US$ 100 million) and represented 11.2% of our total gross loan
portfolio. The largest group of companies under the same management control
accounted for approximately 2.1% of our portfolio.
Non-Performing Loans
The following discussion on non-performing loans is based on US GAAP. For
classification of non-performing loans under Indian regulatory requirements,
see "Supervision and Regulation".
Impact of Economic Environment
The Indian economy was adversely affected by negative trends in the global
marketplace, particularly in the commodities markets, in fiscal 1998 and 1999,
which caused a slowdown in the industrial sector. The Indian industrial sector
has been subject to competitive pressures, and Indian corporations have had to
respond to these pressures through a process of restructuring and
repositioning. This restructuring process is taking place in several
industries, primarily in sectors where many small, uneconomic manufacturing
facilities have existed, principally the iron and steel and textiles
industries. This has led to stress on the operating performance of Indian
corporations and the impairment of related loan assets in the financial system,
including some of our assets. In fiscal 1999 gross non-performing loans
increased primarily due to an increase in non-performing loans to light
manufacturing, iron and steel and textiles industries.
At December 31, 1999, our gross non-performing loans as a percentage of
gross loan assets was 5.1% and our gross non-performing loans net of valuation
allowances as a percentage of net loan assets was 2.3%. We have made total
valuation allowances for 72.3% of our gross non-performing loans on which we
have made valuation allowances based on the expected realization of cash flows
from these assets. We had not made valuation allowances on 23.8% of our gross
non-performing loans at December 31, 1999 based on the fact that the discounted
cash flows from these borrowers were sufficient to cover the entire exposure of
these loans. At December 31, 1999, we had 70 non-performing loans outstanding
of which the top ten represented 59.8% of all non-performing loans and 3.0% of
our gross loan portfolio.
The following table sets forth, for the periods indicated, certain details
of our gross non-performing portfolio.
At March 31, At December 31,
------------------------------------------ ---------------------
1997 1998 1999 1999
------ ------- -------------------- --------------------
(in millions, except percentages)
Non-performing working capital loans........ Rs. 66 Rs. 558 Rs. 1,158 US$ 27 Rs.1,408 US$ 32
Non-performing term loans................... 121 46 236 5 245 6
Non-performing lease loans.................. - - 144 3 237 5
Non-performing corporate debt
instruments(1)............................ - - 75 2 75 2
------ ------- --------- ------ -------- ------
Gross non-performing loans.................. Rs.187 Rs.604 Rs.1,613 US$ 37 Rs.1,965 US$ 45
====== ======= ========= ====== ======== ======
Gross non-performing loans without Rs. - Rs. 26 Rs. 466 US$ 11 Rs. 467 US$ 11
valuation allowances(2)................
Gross non-performing loans with valuation
allowances(3).......................... 187 578 1,147 26 1,498 34
Total valuation allowances.................. 187 425 880 20 1,083 25
Non-performing loans net of valuation
allowances............................. - 179 733 17 882 20
Gross loan assets.......................... 8,562 13,190 28,477 654 38,832 893
Net loan assets............................. 8,375 12,765 27,597 634 37,749 868
Gross non-performing loans as a percentage
of gross loan assets................... 2.2% 4.6% 5.7% 5.1%
64
Gross non-performing loans with valuation
allowances as a percentage of gross loan
assets................................. 2.2 4.4 4.0 3.9
Non-performing loans net of valuation
allowances as a percentage of net
loan assets............................ - 1.4 2.7 2.3
Total valuation allowances as a percentage
of non-performing loans with valuation
allowances............................. 100.0 73.5 76.7 72.3
- ---------
(1) Includes debentures, preferred stock and bonds.
(2) Includes non-performing loans on which we have not made a valuation
allowance.
(3) Includes non-performing loans on which we have made a valuation
allowance.
Recognition of Non-Performing Loans
We identify loans as non-performing and place them on a non-accrual basis
once we determine that interest or principal is past due beyond specific
periods or that the payment of interest or principal is doubtful. Regarding
interest or principal that is past due beyond specified periods, we classify
loans as non-performing when interest or principal is past due for 180 days
(typically two payment periods). We may consider the payment of interest or
principal to be doubtful if the borrower has ceased operations or has incurred
cash losses and the probability of revival is uncertain or the borrower's
industry is under stress. We provide for loan losses based on our internal
subjective assessment of the possibility of recovery of such loans based
principally on the realizable value of collateral.
We do not recognize interest on non-performing loans or credit interest to
our income account unless it is collected. Any interest accrued and not
received on non-performing loans is reversed and charged against current
earnings. We return non-performing loans to accrual status when all contractual
principal and interest amounts are reasonably assured of repayment and, in the
case of term loans, there is a sustained period of repayment performance in
accordance with the contractual terms for at least one year.
Our non-performing loans, net of allowances for credit losses increased by
Rs. 554 million (US$ 13 million) in fiscal 1999 to Rs. 733 million (US$ 17
million) at March 31, 1999. Net non-performing loans were 2.7% of our total net
loan assets at March 31, 1999 compared to 1.4 % at March 31, 1998. At December
31, 1999, net non-performing loans increased to Rs. 882 million (US$ 20
million) and net non-performing loans as a percentage of total net loan assets
reduced to 2.3%.
Under Indian GAAP, net non-performing loans outstanding (determined in
accordance with the Reserve Bank of India guidelines applicable at that time)
increased from Rs. 121 million (US$ 3 million) at March 31, 1998 to Rs. 608
million (US$ 14 million) at March 31, 1999 to Rs. 686 million (US$ 16 million)
at December 31, 1999. We did not have any net non-performing loans at March 31,
1995, 1996 and 1997 under Indian GAAP. For a description of the differences
between Indian GAAP and US GAAP, see "Significant Differences Between Indian
GAAP and US GAAP".
Analysis of Non-Performing Loans by Directed Lending Sector
In lending to priority sector required under Indian regulatory
requirements, we follow the same credit risk assessment and credit approval
processes as in all our lending. In view of the higher incidence of impairment
in priority sector lending, we maintain the option of fulfilling our priority
sector obligations by subscribing to eligible bonds as these yield a better
risk adjusted return on capital, though the nominal returns are much lower than
in making loans.
The following table sets forth, for the periods indicated, our gross loans
and our gross non-performing loans by segment and our gross non-performing
loans as a percentage of our gross loans in the same segment.
65
At March 31,
------------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ----------------------------- ------------------------------------
Non- Non-
Gross performing Gross performing Gross Non-performing
loans loans % loans loans % loans loans %
-------- ---------- ---- -------- ---------- ---- --------- --------------- ----
(in millions, except percentages)
Priority sector:
Agriculture.............. Rs. 252 Rs. 10 4.0% Rs. 501 Rs.33 6.6% Rs.675 Rs.96 US$2 14.2%
Small scale industries... 1,860 37 2.0 2,753 170 6.2 3,510 209 5 6.0
Others................... 231 - - 513 - - 1,959 - - -
-------- ------- ---- --------- --------- ---- --------- -------- ----- ------
Total priority sector...... 2,343 47 2.0 3,767 203 5.4 6,144 305 7 5.0
Other sectors.............. 6,220 140 2.3 9,423 401 4.3 22,333 1,308 30 5.9
-------- ------- ---- --------- --------- ---- --------- -------- ----- ------
Total...................... Rs.8,562 Rs.187 2.2% Rs.13,190 Rs.604 4.6% Rs.28,477 Rs.1,613 US$37 5.7%
======== ======= ==== ========= ========= ==== ========= ======== ===== ======
Allowance for credit
losses................... Rs.(187) Rs. (425) Rs.(880) (20)
------- --------- -------- -----
Net non-performing loans... - Rs. 179 Rs.733 US$17
======= ========= ======== =====
At December 31,
----------------------------------------------------
1999
----------------------------------------------------
Gross loans Non-performing loans %
----------- -------------------------- -----
(in millions, except percentages)
Priority sector:
Agriculture................................ Rs. 1,912 Rs. 137 US$ 3 7.2%
Small scale industries..................... 3,717 231 5 6.2
Others..................................... 1,022 - - -
----------- ------------- ---------- ----
Total priority sector.......................... Rs. 6,651 Rs. 368 US$ 8 5.5%
Other sectors.................................. 32,181 1,597 37 5.0
----------- ------------- ---------- ----
Total.......................................... Rs. 38,832 Rs. 1,965 US$ 45 5.1%
=========== ============= ========== ====
Allowance for credit losses.................... Rs. (1,083) US$ (25)
------------- ----------
Net non-performing loans....................... Rs. 882 US$ 20
============= ==========
As shown by these tables, the quality of our priority sector loan
portfolio is in line with the quality of the rest of our loan portfolio. At
December 31, 1999, non-performing loans in the priority sector as a percentage
of gross loans was 5.5% and non-performing loans in the other sectors as a
percentage of gross loans was 5.0%.
Analysis of Non-Performing Loans by Product
The following tables set forth, for the periods indicated, our
non-performing loans by product, and as a percentage of our non-performing
loans.
At March 31,
--------------------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------------------
(in millions, except percentages)
Working capital loans:
Cash credits/demand loans Rs. 66 35.3% Rs. 537 88.9% Rs. 1,130 US$ 26 70.1%
Bill discounting......... - - 21 3.5 28 1 1.7
Term loans.................... 121 64.7 46 7.6 236 5 14.7
Lease finance................. - - - - 144 3 8.8
Marketable corporate debt
instruments................. - - - - 75 2 4.7
-------- ------ -------- ------ --------- -------- ------
Total non-performing loans.... Rs. 187 100.0% Rs. 604 100.0% Rs. 1,613 US$ 37 100.0%
======== ====== ======== ====== ========= ======== ======
Allowance for credit losses... Rs. (187) Rs. (425) Rs. (880) US$ (20)
-------- -------- --------- --------
Net non-performing loans...... - Rs. 179 Rs. 733 US$ 17
======== ======== ========= ========
66
At December 31, 1999
----------------------------------------
(in millions, except percentages)
Working capital loans:
Cash credits/demand loans................................. Rs. 1,339 US$ 31 68.1%
Bill discounting.......................................... 69 2 3.5
Term loans..................................................... 245 5 12.5
Lease finance.................................................. 237 5 12.1
Marketable corporate debt instruments.......................... 75 2 3.8
---------- -------- ------
Total non-performing loans..................................... Rs. 1,965 US$ 45 100.0%
========== ======== ======
Allowance for credit losses.................................... Rs. (1,083) US$ (25)
---------- --------
Net non-performing loans....................................... Rs. 882 US$. 20
========== ========
Although lease finance represented 0.9% of our gross loans at December 31,
1999, it represented 12.1% of our gross non-performing loans. In 1995-1996, we
engaged in some lease finance activities due to the tax advantages to us from
these transactions. We discontinued these activities in 1997 once the Indian
tax authorities disputed this tax treatment. For a discussion of this dispute,
see "--Legal and Regulatory Proceedings". In our initial years, we offered
these lease finance products to small and medium sized companies, including
companies in certain industry sectors that have experienced a slowdown, such as
the textiles sector. Due to the small size of these borrowers and their
industry concentration, we believe that our gross non-performing loans are
greater for this type of exposure compared to others.
Analysis of Non-Performing Loans by Industry Sector
The following table sets forth, for the periods indicated, our
non-performing loans by borrowers' industry or economic activity and as a
percentage of our loans in the respective industry or economic activity sector.
At March 31,
------------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ------------------------------ ------------------------------------
Non- Non-
Gross performing Gross performing Gross Non-performing
loans loans % loans loans % loans loans %
-------- ---------- ---- -------- ---------- ----- -------- ------------------ -----
(in millions, except percentages)
Agriculture........... Rs.252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6% Rs. 675 Rs. 96 US$ 2 14.2%
Auto including trucks. - - - 600 - - 1,006 - - -
Cement................ 60 - - 170 - - 540 - - -
Chemicals, drugs and
pharmaceuticals... 490 - - 1,092 58 5.3 2,420 79 2 3.3
Computer software..... - - - 230 - - 460 - - -
Construction.......... 510 - - 770 24 3.1 740 24 1 3.2
Electricity........... 470 - - 540 - - 1,488 - - -
Finance............... 890 - - 780 - - 1,949 61 1 3.1
Iron and steel........ 380 - - 460 56 12.2 620 268 6 43.2
Light manufacturing... 1,280 148 11.6 1,300 94 7.2 2,800 400 9 14.3
Other industries...... 2,390 29 1.2 4,057 277 6.8 11,362 372 9 3.3
Other metals and
metal products...... 220 - - 330 - - 1,370 - - -
Other personal loans.. 380 - - 590 - - 1,110 - - -
Paper and paper
products.......... 150 - - 240 - - 373 - - -
Textiles.............. 860 - - 1,170 62 5.3 1,405 313 7 22.3
Transport............. 230 - - 360 - - 159 - - -
-------- -------- ----- --------- --------- ----- --------- --------- ------- -----
Total................. Rs.8,562 Rs. 187 2.2% Rs.13,190 Rs. 604 4.6% Rs.28,477 Rs.1,613 US$ 37 5.7%
======== ======== ===== ========= ========= ===== ========= ========= ======= =====
Allowance for credit
losses.............. Rs. (187) Rs. (425) Rs. (880) US$ (20)
-------- --------- --------- -------
Net non-performing
loans............... Rs. - Rs. 179 Rs. 733 US$ 17
======== ========= ========= =======
67
At December 31, 1999
----------------------------------------------------------
Gross loans Non-performing loans %
------------ --------------------------- -----
(in millions, except percentages)
Agriculture.................................. Rs. 1,912 Rs. 137 US$ 3 7.2%
Auto including trucks........................ 1,518 - - -
Cement....................................... 1,060 - - -
Chemicals, drugs and
pharmaceuticals............................ 4,221 90 2 2.1
Computer software............................ 650 - - -
Construction................................. 940 6 - 0.6
Electricity.................................. 1,645 - - -
Finance...................................... 2,700 56 1 2.1
Iron and steel............................... 715 274 6 38.3
Light manufacturing.......................... 4,528 581 13 12.8
Other industries............................. 14,894 522 13 3.5
Other metals and metal products.............. 1,120 - - -
Other personal loans......................... 780 - - -
Paper and paper products..................... 663 - - -
Textiles..................................... 1,375 299 7 21.7
Transport.................................... 111 - - -
--------- ----------- --------- -----
Total........................................ Rs.38,832 Rs. 1,965 US$ 45 5.1%
========= ========== ========= =====
Allowance for credit losses.................. Rs. (1,083) US$ (25)
---------- --------
Net non-performing loans..................... Rs. 882 US$ 20
========== ========
Our gross non-performing loans as a percentage of gross loans in the
respective industries was the highest in the iron and steel, textiles and light
manufacturing industries.
Iron and Steel. Over the last few years, a sharp reduction in
international steel prices to historic lows has had a significant impact on the
companies in this sector. In addition, a substantial reduction in import
tariffs over the last three years led to price competition from certain
countries, significantly reducing domestic prices. Our outlook for the
medium-term for the sector is positive due to the anticipated increase in
prices from the historic lows reached in fiscal 1999 and an increase in
domestic consumption. The majority of our loans to small steel plants and small
re-rolling mills have already been classified as non-performing, and the
balance of loans in this sector is primarily to economically sized plants with
advanced technology. At December 31, 1999, we had classified 38.3% of our loans
in this sector as non-performing.
Textiles. The textiles industry saw a reduction in exports following the
devaluation of the south-east Asian currencies in 1998. This resulted in Indian
textile exports being less competitive. The reduction in exports was also due
to reduced demand in the entire region. High cotton prices in the last two
years also increased the costs for Indian manufacturers. The majority of our
loans to small entities in this sector have been classified as non-performing,
and the balance of our exposure is primarily to large economically sized
plants. Our total exposure to this sector declined to Rs. 1,375 million at
December 31, 1999 from Rs. 1,610 million at December 31, 1998. At December 31,
1999, we had classified 21.7% of total loans in this sector as non-performing.
Light Manufacturing. The light manufacturing industry category includes
manufacturers of electronic equipment, electrical cables, fasteners, watches
and light manufacturing items. At December 31, 1999, 80.0% of the
non-performing loans in this sector were to middle market companies. The
downturn in certain sectors of the Indian economy during the last few years
affected the middle market companies to a greater extent in view of their
higher vulnerability to external factors. At December 31, 1999, of the
non-performing loans in the light manufacturing sector, 51.0% were six
companies engaged in the manufacture of equipment, 15.0% were three companies
in the forging sector, and 8.0% were two manufacturers of electronic equipment.
The lesser number of new projects during the last three years has led to the
depressed performance of companies engaged in the manufacture of equipment. The
increase in our exposure to this sector at December 31, 1999 over March 31,
1999 has been to large sized companies with a diversified product range. At
December 31, 1999, we had classified 12.8% of our gross loans in this sector as
non-performing.
68
Top Ten Non-Performing Loans
At December 31, 1999, we had 70 non-performing loans outstanding, of which
the top ten represented 59.8% of our gross non-performing loans, 84.5% of our
net non-performing loans and 3.0% of our gross loan portfolio. None of our top
ten non-performing loans has been restructured so far. We are currently working
out detailed restructuring packages for four borrowers along with other term
lenders and other working capital consortium members. Four other borrowers have
made a reference to the Board for Industrial and Financial Reconstruction. For
a discussion of the activities of the Board for Industrial and Financial
Reconstruction, see "Republic of India--The Indian Economy--Legislative
Framework for Restructuring Sick Companies".
The following table sets forth, for the period indicated, certain
information regarding our ten largest non-performing loans.
At December 31, 1999
----------------------------------------------------------------------------------------------------
Principal Currently
outstanding net Servicing
Gross of allowance All
Type of banking principal for credit Interest
Industry arrangement outstanding losses(1) Collateral(2)(3) Payments
-------------------- ------------------ ----------- ---------------- --------------- --------------
(in millions)
Borrower A ....... Textile Consortium Rs. 210 Rs. 210 Rs. 237 Yes
Borrower B........ Steel Multiple 172 172 218 Yes
Borrower C ....... Light manufacturing Consortium 161 65 146 Yes
Borrower D ....... Light manufacturing Multiple 104 104 40 No
Borrower E........ Energy Multiple 96 84 96 Yes
Borrower F ....... Textile Consortium 93 19 59 No
Borrower G ....... Steel Consortium 92 - 66 No
Borrower H ....... Light manufacturing Multiple 90 63 105 No
Borrower I........ Sugar Multiple 82 - - No
Borrower J ....... Hotels/Resorts Consortium 75 28 56 No
--------- ------- ---------
Total Rs. 1,175 Rs. 745 Rs. 1,023
========= ======= =========
- ---------
(1) The net realizable value of these loans on a present value basis is
determined by discounting the estimated cash flow over the expected period
of repayment by the rate implicit in the loan. Under US GAAP, the net
present value of a non-performing loan includes the net present value, to
the extent realizable, of the underlying collateral, if any.
(2) Collateral value is that reflected on the borrower's books, or that
determined by third party appraisers to be realizable, whichever is lower
or available. We have collateral in the form of first charge on current
assets for nine of these borrowers. Exposure to one borrower is
additionally secured by fixed assets. The exposure to the remaining
borrowers is secured by a charge on fixed assets.
(3) Out of the above 10 cases, collection in the cases of borrower G and J are
collateral dependent. In all other cases, we are primarily dependent on
recovery through cash flows, collateral being of secondary importance.
Five of our top ten non-performing loans were to borrowers where we acted
together with other banks or as part of a consortium of banks with our share of
exposure being a maximum of 10.0% of the total exposure of all banks to these
borrowers.
Interest Foregone
Interest forgone is the interest due on non-performing loans that has not
been accrued in our books of accounts. Interest actually received is included
in interest foregone since borrowers of some of our non-performing loans are
still making interest payments. The following table sets forth, for the periods
indicated, the amount of interest foregone.
69
Interest foregone
-----------------------------
(in millions)
Fiscal 1997................................... Rs. 26 US$ 1
Fiscal 1998................................... 81 2
Fiscal 1999................................... 93 4
Nine months ended December 31, 1999........... 74 5
Restructuring of Non-Performing Loans
Our non-performing loans are restructured on a case-by-case basis after
our management has determined that restructuring is the best means of realizing
repayment of the loan. These loans continue to be on a non-accrual basis and
will be reclassified as performing loans only after sustained performance under
the loan's renegotiated terms for at least a period of one year.
The following table sets forth, for the periods indicated, our
non-performing loans that have been restructured through rescheduling of
principal repayments and deferral or waiver of interest.
At March 31,
---------------------------------------- At December 31,
1997 1998 1999 1999
---- ---- ------------------- -----------------
(in millions)
Gross restructured loans.... - - Rs. 38 US$ 0.9 Rs. 44 US$ 1.0
Allowance for credit losses. - - (22) (0.5) (26) 0.6
Net restructured loans...... - - 16 0.4 18 0.4
Gross restructured loans as
a percentage of gross
non-performing loans..... - - 2.4% - 2.2% -
Net restructured loans as a
percentage of net non-
performing loans......... - - 2.2% - 2.2% -
We are currently working out restructuring packages for six borrowers
along with other term lenders and working capital consortium members in the
case of our non-performing loans under a consortium arrangement, and in the
case of three borrowers who are under sole banking arrangements. Five other
borrowers have made a reference to the Board for Industrial and Financial
Reconstruction. For a discussion of the activities of the Board for Industrial
and Financial Reconstruction, see "Republic of India--The Indian
Economy--Legislative Framework for Restructuring Sick Companies".
Non-Performing Loan Strategy
The recovery and settlement of non-performing loans is of high priority to
us. In fiscal 1999, we set up a Special Asset Management Group for finding
early solutions and pursuing recovery in non-performing loans. The group,
centralized at our corporate office in Mumbai, is headed by one of our senior
employees with over 20 years of experience in the banking sector, and has
representatives located at two branches having a higher concentration of
non-performing loans. The branch managers at the branches having non-performing
loans are also actively involved in supporting the efforts of the Special Asset
Management Group. This group works closely with the special asset management
group established in ICICI to work on restructuring and settlement packages for
common customers and to adapt successful recovery strategies of ICICI. The
group also uses the services of outside legal experts, accountants and
specialized agencies for due diligence, valuation and legal advice to expedite
early settlements.
We closely monitor migration of the credit ratings of our borrowers so we
can take proactive remedial measures to prevent loans from becoming
non-performing. We constantly review the industry outlook and also analyze the
impact of changes in the regulatory and fiscal environment. This also helps us
to contain the non-performing loans. Our quarterly review systems help us to
monitor the health of accounts and to take prompt remedial measures.
Methods for resolving non-performing loans include the following:
o negotiated or compromise settlements on a one-time settlement basis;
70
o encouraging the financial restructuring of troubled but viable
corporations;
o encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants; and
o early enforcement of collateral through judicial means.
In the last 14 months, we fully recovered the principal outstanding of Rs.
62 million from six non-performing borrowers. In six other non-performing loan
accounts, we negotiated settlements of Rs. 40 million.
Our current approval process generally requires a minimum credit rating
of A-. However, prior to our organizational restructuring in April 1999, our
minimum credit rating was BBB. Given our close monitoring of the credit rating
of our borrowers, our rerating of credits that show any signs of deterioration
and our prior minimum credit rating, some of our gross non-performing loans are
rated BBB or below.
Allowance for Credit Losses
The following table sets forth, for the periods indicated, movements in
our allowance for credit losses.
At March 31,
------------------------------------------ At December 31,
1997 1998 1999 1999
--------- -------- ------------------ -------------------
(in millions)
Allowance for credit losses at the beginning Rs. - Rs. 187 Rs. 425 US$ 10 Rs. 880 US$ 20
of the period
Add:
Provisions for credit losses:
Working capital............................ 66 256 349 8 196 5
Term loans................................. 121 104 17 - 10 -
Leasing finance............................ - - 144 3 12 1
Marketable corporate debt instruments...... - - 30 1 - -
--------- ------- ------- ------- --------- -------
Total provisions for credit losses.............. 187 360 540 12 218 6
--------- ------- ------- ------- --------- -------
Less:
Write-offs.................................... - (122) (85) (2) (15) (1)
--------- ------- ------- ------- --------- -------
Allowances for credit losses at the end of the
Period...................................... Rs. 187 Rs. 425 Rs. 880 US$ 20 Rs. 1,083 US$ 25
========= ======= ======= ======= ========= =======
We conduct a comprehensive analysis of our entire loan portfolio on a
quarterly basis. The analysis considers both qualitative and quantitative
criteria including, among others, the account conduct, future prospects,
repayment history and financial performance. This comprehensive analysis
includes an account by account analysis of our entire loan portfolio, and an
allowance is made for any probable loss on each account. In estimating the
allowance, we consider the net realizable value on a present value basis by
discounting the future cash flows over the expected period of recovery.
Further, we also consider our past history of credit losses and value of
underlying collateral. For further discussions of our allowances for credit
losses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Result of operations Provisions for Credit Losses".
Under our US GAAP analysis of the provisions for non-performing loans, we
are required to take into account the time delay in our ability to foreclose
upon and sell collateral. Under US GAAP, the net present value of a
non-performing loan includes the net present value of the underlying
collateral, if any. As a result, even though we are generally
over-collateralized, allowances are required under US GAAP that would not be
required under Reserve Bank of India regulations because US GAAP takes into
account the time value of money.
71
Risk Management
As a financial intermediary, we are exposed to various risks that are
related to our lending and trading businesses, deposit taking activities and
our operating environment. Our aim in risk management is to ensure that we
understand, measure and monitor the various risks that arise and that our
organization adheres strictly to the policies and procedures which are
established to address these risks.
We are exposed to three broad categories of risk: credit risk, market risk
and operational and legal risk.
In October 1999, our risk management function was reorganized and
integrated into a single Risk Management Department separate from our strategic
business units. The Risk Management Department works in close association with
the business units to implement the various risk management strategies. Our
Risk Management Department is completely independent of all business
operations. This department identifies, assesses, monitors and manages all our
principal risks in accordance with well-defined policies and procedures. The
Risk Management Department consists of 20 experienced bankers and analysts and
is led by a Senior Executive Vice President reporting directly to our Managing
Director and Chief Executive Officer and the Audit and Risk Committee of our
board of directors.
The organizational structure of our Risk Management Department is shown in
the following chart.
Managing Director and Chief Audit and Risk Committee of the
Executive Officer board of directors
Senior Executive Vice President and
Head, Risk Management Department
Credit Risk Group Market Risk Group Operational Risk
Group
The Audit Department undertakes periodic inspection of branches to ensure
adherence to policies, systems and procedures. The head of the Audit Department
reports to the head of the Risk Management Department.
Credit Risk
Credit risk primarily arises in our lending operations from the failure of
any party, principally our borrowers, to abide by the terms and conditions of
any financial contract with us, principally the failure to make required
payments on loans due to us.
Our standardized credit approval process includes a well-established
procedure of credit evaluation and approval. We measure, monitor and manage
credit risk for each borrower. We have a comprehensive system for tracking the
rating profile of our loan portfolio and are now working on a comprehensive
portfolio risk evaluation mechanism.
72
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal,
we assess a variety of risks relating to the borrower and the relevant
industry. If the borrower is undergoing a major expansion project that requires
them to obtain project finance from a financial institution in addition to
working capital loans from us, we also assess the risks relating to the
project.
We evaluate borrower risk by considering:
o the financial position of the borrower by analyzing the quality of
its financial statements, its past financial performance, its
financial flexibility in terms of ability to raise capital and its
cash flow adequacy;
o the borrower's relative market position and operating efficiency; and
o the quality of management by analyzing their track record, payment
record and financial conservatism.
We evaluate industry risk by considering:
o certain industry characteristics, such as the importance of the
industry to the economy, its growth outlook, cyclicality and
government policies relating to the industry;
o the competitiveness of the industry; and
o certain industry financials, including return on capital employed,
operating margins and earnings stability.
After conducting an analysis of a specific borrower's risk, we assign a
credit rating to the borrower. We have a scale of ten ratings ranging from AAA
to B and an additional default rating of D. Before November 1999, we had a
scale of six ratings ranging from AAA to D. We are in the process of re-rating
all our existing exposures according to the new credit rating model. We expect
to complete this process by the end of the first quarter of fiscal 2001. Credit
rating is a critical input for the credit approval process. We use studies on
the historical default patterns of loans in order to predict defaults. We
determine the desired credit risk spread over our cost of funds by considering
the borrower's credit rating and the default pattern corresponding to the
credit rating. Our credit approval process generally requires a benchmark
minimum credit rating of A-.
We study industry sectors and published reports from online databases,
including the Center for Monitoring the Indian Economy and Internet Securities,
(Euromoney Group company) and review our large exposures by industry and by
corporate client. We identify, through these internal studies, the growing
industry sectors to which we should increase our exposure and the stagnating
sectors to which we should decrease our exposure. These ongoing studies and
reviews also enable us to regularly adjust a borrower's credit rating in
response to changes in that borrower's risk and the risk associated with that
borrower's industry.
Working capital loans are generally approved for a period of 18 months. At
the end of 12 months, we review the loan arrangement and the credit rating of
the borrower and take a decision on continuation of the arrangement and the
changes in the loan covenants as may be necessary. We intend to review the
credit rating of borrowers with higher credit risks more frequently.
Credit Approval Procedures for Corporate Loans
Our corporate banking approval process is dictated by our credit policy.
This policy sets out our maximum credit exposures to individual companies,
groups of companies and industries.
We have established a strong framework for the appraisal and execution of
working capital and term loan finance transactions. Pursuant to our
organization restructuring that was implemented on April 1, 1999, our credit
appraisal and approval processes have been centralized. We evaluate commercial,
financial, marketing and management factors relating to the borrower and the
sponsor's financial strength
73
and experience. We make use of databases of approximately 3,000 Indian
companies that contain historical financial and operating information on these
companies. We also extensively use industry analysis reports and interact with
external rating agencies to track business cycles in specific sectors and
industries, the impact of emerging fiscal, regulatory and other environmental
factors and the financial performance of Indian companies. Once this review is
completed, an appraisal note is prepared for credit approval purposes. A
structured appraisal format is used to ensure a uniform standard across the
organization. Quantitative tools like inter-firm comparisons, sensitivity
analysis, analysis of demand-supply gap patterns are used to analyze the
performance of the borrower. As part of the appraisal process, we generate a
risk matrix, which identifies each of the risks, mitigating factors and
residual risks associated with the proposal.
Credit Approval Authority for Corporate Loans
We have established five distinct levels of credit approval authorities
for our corporate banking activities: the head of Corporate Banking, the
Managing Director and Chief Executive Officer (the Credit Committee of
Executives that acts in the absence of the Managing Director and Chief
Executive Officer), the Investment Committee, the Committee of Directors and
our board of directors.
The following table sets forth the composition of the committees and
approval authority of the committees and the authorized officers.
Authorized executives and committees Members Approval authority
- --------------------------------------------- ---------------------------- ------------------------------
Board of Directors All the members on our board All approvals (in practice,
of directors generally above the prescribed
authority of the Committee of
Directors and the Investment
Committee)
Committee of Directors Managing Director and Chief All approvals to companies up to
Executive Officer and four Rs. 400 million
other directors
Investment Committee Managing Director and Chief All approvals for subscribing to
Executive Officer, heads of debentures, preferred stock,
Information Technology, bonds and commercial paper
Corporate Banking, Retail
Banking, Risk Management,
Domestic Treasury and Foreign
Exchange Treasury and the
Chief Financial Officer
Managing Director and Chief Executive Officer All approvals up to Rs. 160
million
Credit Committee of Executives Heads of Information In the absence of the Managing
Technology, Corporate Director and Chief Executive
Banking, Retail Banking and Officer, all approvals within the
Risk Management and the Chief prescribed authority of the
Financial Officer Managing Director and Chief
Executive Officer
Head of Corporate Banking All approvals up to Rs. 100
million
74
The branch managers of corporate banking branches are not individually
authorized to approve loans. They are however authorized to approve excess
borrowing above the approved limits up to Rs. 10 million in respect of
commercial loans. These loans are reported to the corporate office for
ratification.
Disbursement Procedures for Corporate Loans
After credit approval, we disburse the loans though our corporate
branches. Our corporate office sends credit approval letters to the branches
stating the covenants governing the approval. Based on the credit approval
letter received from the corporate office, branches issue a credit arrangement
letter to the borrower outlining the terms of the facility, sponsors'
obligations, conditions precedent to disbursement and undertakings from and
covenants on the borrower. After the borrower accepts the terms, the loan
agreement and other documents are executed. The borrower account is then made
operational in the case of a working capital facility and disbursements are
made to the borrower in the case of other loan facilities. The working capital
finance account operates as a revolving asset backed overdraft facility. We
determine the amount that can be drawn by the borrower on the basis of monthly
cash flow statements or statements of current assets provided by the borrower
and the current asset cover margins stipulated.
Credit Monitoring Procedures for Corporate Loans
We have established detailed procedures for the monitoring of our credit
exposures. Our aim in credit monitoring is to:
o ensure compliance with the terms and conditions of the credit
approval;
o review performance of our borrowers against projections;
o detect early warning signals and take appropriate corrective actions;
and
o observe the performance of the borrowers.
With a view to achieve the above, we have laid out operating procedures
for our branches and the frequency of credit monitoring activities to be
undertaken. Our branches prepare various credit monitoring reports at periodic
intervals. Any irregularity in the account is reported to the appropriate
authority on a monthly basis. The performance of the borrowers is monitored
through quarterly information reports. Monthly cash flow statements are
obtained wherever considered necessary. We monitor the performance of companies
by comparing the published results against the projections. We undertake stock
inspections and stock audits on a regular basis.
Credit Risk Procedures for Credit Cards
The initial target group for credit cards are our present Power Pay
account holders and ICICI's retail bond customers where relationships are
already established and customer details are already available with us.
The improper verification of identity and applicant information and
payment delinquencies are the main source of credit risk in the credit card
business.
We use the services of external agencies for verification of applicant
information and for collection of past due amounts. Detailed credit
applications have been devised for aggregating information on a prospective
customer, such as the person's place of work and residence.
Credit checks are undertaken before the credit card applicants are
approved. These credit checks contain a list of the delinquent customers of
ICICI and a few non-banking finance companies. Copies of a prospective
customer's income tax return and paycheck are also obtained to determine the
income and tax status of the prospective customer. There are no credit bureaus
in India, but we are in the process of
75
implementing our own internal credit scoring model. We have set individual
credit limits based on the monthly salary of the credit card holder.
We use the services of external agencies to collect amounts from credit
card customers whenever considered necessary.
Credit Risk Procedures for Retail Loans
Since substantially all of our retail loans are fully collateralized with
either cash (in the case of loans against time deposits) or liquid equity
securities (in the case of loans against subscriptions for initial public
offering), we have not yet devised any credit risk procedures for these loans.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the value of a financial
instrument as a result of changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect
market risk sensitive instruments. Market risk is attributed to all market risk
sensitive financial instruments, including securities, loans, deposits,
borrowings and derivative instruments. Our exposure to market risk is a
function of our asset and liability management activities, our proprietary
trading activities, and our role as a financial intermediary. The objective of
market risk management is to avoid excessive exposure of our earnings and
equity to loss and to reduce the volatility inherent in financial instruments.
Market Risk Management Procedures
Our board of directors reviews and approves the policies for the
management of market risks and have delegated the responsibility for market
risk management to the Asset Liability Management Committee. Our Managing
Director and Chief Executive Officer chairs the Asset Liability Management
Committee. Our Chief Financial Officer, economist and executives of various
business units and the Risk Management Department are the members of the
committee. The committee generally meets on a monthly basis and reviews our
interest rate and liquidity gap position, formulates a view on interest rates,
sets deposit and benchmark lending rates and reviews the business profile and
its impact on asset liability management. Emergency meetings of the committee
are convened to respond to developments in the markets and economy. The
committee also sets market risk limits for our trading activities. The
committee reports to the Audit and Risk Committee of our board of directors on
a quarterly basis.
We have established a mid-office independent of treasury, which monitors
the risks in our treasury operations and ensures adherence to various risk
control limits on a real time basis. The mid-office at regular intervals
submits reports to the head of the Risk Management Department and the Managing
Director and Chief Executive Officer on the extent of our market risk exposure.
We have established risk control limits, including holding period limits
and stop loss limits. Additionally, in the case of foreign exchange trading, we
have set up loss limits for each half-year period (April-September and
October-March). We have also implemented a value at risk model for measuring
market risk of our foreign exchange spot positions.
Our exposure to market risk arises mainly from interest rate risk, equity
risk, exchange rate risk and liquidity risk. We discuss, in the following
paragraphs, each of these sources of risk and the methods we have adopted to
manage them.
Interest Rate Risk
Since our balance sheet consists predominantly of rupee assets and
liabilities, movements in domestic interest rates constitute the main source of
interest rate risk. Our portfolio of traded debt securities is negatively
impacted by an increase in interest rates while our loan portfolio benefits
from a rise in interest rates.
76
We measure our exposure to fluctuations in interest rates, primarily by
way of gap analysis. This provides us a static view of the maturity and
re-pricing characteristics of balance sheet positions. An interest rate gap
report is prepared by classifying all assets and liabilities into various time
buckets according to contracted maturities or anticipated re-pricing date. The
difference in the amount of assets and liabilities maturing or being re-priced
in any time bucket, would then give us an indication of the extent to which we
are exposed to the risk of potential changes in the margins on new or re-priced
assets and liabilities.
Our core business is deposit taking and lending, in both rupees and
foreign currencies, as permitted by Reserve Bank of India. As the rupee market
differs significantly from the international credit asset markets, our gap
positions in these markets are different.
In the Indian market, our liabilities are mostly at fixed rates of
interest for fixed periods. However, we have a mix of floating and fixed
interest rate assets. We have tenor-based prime-lending rates. We quote
interest rates for our loan products as a markup over the relevant
prime-lending rate, effectively making these floating rate loans. Our loan
portfolio, which is largely by way of working capital loans, is on a floating
rate.
Our foreign currency liabilities, which are primarily deposits from
non-resident Indians, are at fixed rates. A large portion of our foreign
currency loans is on a floating rate basis. Although this leads to interest
rate risk, the volumes are not significant. Foreign currency liabilities, net
of foreign currency loans, enable us to raise rupee liquidity quickly by way of
currency swaps, which helps us to address any liquidity risk.
The following table sets forth for both our loan book and our trading
portfolio, for the period indicated, our asset-liability gap position.
At March 31, 1999(1)-(6)
-------------------------------------------------------------------------------------------------
Greater
than one
Total year and Greater
within up to five than five
0-28 days 29-90 days 91-180 days 6-12 months one year years years Total
--------- ---------- ----------- ----------- ------- ---------- ---------- ---------
(in millions)
Loans, net............... Rs. - Rs.19,870 Rs. - Rs. - Rs.19,870 Rs. 5,977 Rs. 1,751 Rs.27,598
Securities............... - - 1,034 57 1,091 2,172 700 3,963
Fixed assets............. - - - - - - 1,761 1,761
Trading assets........... 606 607 97 217 1,527 10,712 3,583 15,822
Cash and cash
equivalents............ 12,657 1,266 4,565 - 18,488 - - 18,488
Other assets(6) ......... - - - - - 396 1,210 1,606
--------- --------- ---------- ----------- ----------- --------- --------- ---------
Total assets............. Rs.13,263 Rs.21,743 Rs. 5,696 Rs. 274 Rs.40,976 Rs.19,257 Rs. 9,005 Rs.69,238
========= ========= ========== =========== =========== ========= ========= =========
Stockholders' equity..... Rs. - Rs. - Rs. - Rs. - Rs. - Rs. - Rs. 2,612 Rs. 2,612
Debt(6).................. - - - - - 1,084 680 1,764
Deposits................. 13,861 11,245 13,430 11,564 50,100 10,629 - 60,729
Other liabilities(6)..... 4,133 - - - 4,133 - - 4,133
--------- --------- ---------- ----------- ----------- --------- --------- ---------
Total liabilities........ Rs.17,994 Rs.11,245 Rs.13,430 Rs.11,564 Rs.54,233 Rs.11,713 Rs. 3,292 Rs.69,238
========= ========= ========== =========== =========== ========= ========= =========
Total gap................ Rs.(4,731) Rs.10,498 Rs.(7,734) Rs.(11,290) Rs.(13,257) Rs.7,544 Rs. 5,713
========= ========= ========= ========== ========== ========= =========
- ---------
(1) Assets and liabilities are classified into the applicable categories,
based on residual maturity or re-pricing date whichever is earlier.
(2) Items that neither mature nor re-price are included in the "greater than
five years" category. This includes equity share capital and fixed assets.
(3) Non-performing loans are classified in the "greater than five years"
category.
(4) Based on past trends, 80.0% of non-interest-bearing non-maturity deposit
accounts have been classified as "greater than one year and up to five
years" category and 20.0% in the "0-28 days" category.
77
(5) Based on past trends, 90.0% of interest-bearing non-maturity deposit
accounts have been classified as "greater than one year and up to five
years" category and 10.0% in the "0-28 days" category.
(6) The categorization for these items is different from that reported in the
financial statements.
The following table sets forth, for the period indicated, the impact of changes
in interest rates on net interest revenue for fiscal 2000, assuming a parallel
shift in yield curve at year-end fiscal 1999
At March 31, 1999
---------------------------------------------------------------
Change in interest rates
(in basis points)
---------------------------------------------------------------
(25) (10) 10 25
------------ ------------ ---------- ------------
(in millions)
Rupee portfolio.............................. Rs. 9 Rs. 4 Rs. (4) Rs. (9)
Foreign currency portfolio................... (1) (1) 1 1
-------- ------- -------- --------
Total........................................ Rs. 8 Rs. 3 Rs. (3) Rs. (8)
======== ======= ======== ========
Profit/(loss) as a % of net income........... 1.6% 0.6% (0.6%) (1.6%)
======== ======= ======== ========
Given our asset and liability position at March 31,1999, if interest rates
increased by 25 basis points, we expect that net interest revenue from our loan
portfolio for fiscal 2000 would fall by Rs. 8 million (US$ 184,000). If
interest rates decreased by 25 basis points, our net interest revenue for
fiscal 2000 would rise by Rs. 8 million (US$ 184,000). The amount of Rs. 8
million was 1.6% of our net income for fiscal 1999. This sensitivity analysis
is for risk management purposes and assumes we make no other changes in our
portfolio. Actual changes in net interest revenue will vary from the model.
The following table sets forth, for the period indicated, the amount of
loans with maturities greater than one year that had fixed and variable
interest rates. Loans with maturities of greater than one year are 39.0% of our
gross loan portfolio at March 31, 1999 and 62.6% of our gross loan portfolio at
December 31, 1999.
At March 31, 1999(1)
---------------------------------------------------------
Fixed rate Variable rate
loans loans Total
---------- -------------- -----------------------
(in millions)
Loans, net................................ Rs. 6,995 Rs. 4,215 Rs. 11,210 US$ 258
- ---------
(1) All our variable rate loans have been treated as pricing in the 29 to
90 days category in the asset liability gap table regardless of their
nominal maturity hence, the figures in the table will differ from
those in the asset liability gap table.
Price Risk (Trading Portfolio). Trading activities are undertaken
primarily to optimize the income from our regulatory fixed income portfolio and
secondarily to enhance our earnings through profitable trading for our own
account. A substantial proportion of our trading portfolio (91.3%) consisted of
investments in government of India securities at March 31, 1999. We are
required by law to invest 25.0% of our demand and time liabilities in specified
securities, including government of India securities, which contributes in a
significant way to our total investment in government of India securities.
Duration limits, holding period limits and stop-loss limits are used by us to
manage risks for debt security positions in our trading book.
At March 31, 1999, the total value of our rupee fixed income trading
portfolio was Rs. 15.2 billion (US$ 349 million). As set forth in the table
below, if interest rates rose by 25 basis points, the value of this portfolio
would fall, on a tax-adjusted basis, by Rs. 66 million (US$ 2 million) and if
the interest rates fell by 25 basis points, the value of this portfolio would
rise, on a tax-adjusted basis, by Rs. 66 million (US$ 2 million). The
sensitivity of the net interest revenue to interest rate changes is largely due
to the fixed income specified securities that we are required to hold by law.
This sensitivity analysis is for risk management purposes and assumes that we
make no other changes in our portfolio. Actual changes may vary from the model.
78
The following table sets forth, for the period indicated, the impact of
changes in interest rates on a tax adjusted basis on the value of our fixed
income trading portfolio as a percentage of net income, assuming a parallel
shift in the yield curve at year-end fiscal 1999.
At March 31, 1999
-----------------------------------------------
Change in interest rates
(in basis points)
-----------------------------------------------
Portfolio Size (25) (10) 10 25
-------------- ------- ------ ----- -----
(in millions)
Government of India securities(1) ...... 14,449 65 26 (26) (65)
Others.................................. 751 1 - - (1)
-------- ---- ---- ---- -----
Total................................... 15,200 66 26 (26) (66)
======== ==== ==== ==== =====
Profit/loss as % of net income.......... 13.1% 5.2% (5.2%) (13.1%)
- ---------
(1) For the purpose of analysis, certain quasi-government corporate
securities are included as government of India securities.
Equity Risk
Our equity positions include both direct equity holdings and positions in
equity-oriented mutual funds. We only invest in equity securities in book-entry
form, which decreases our settlement and liquidity risk. However, our total
exposure to these investments is not significant. Position limits, stop-loss
limits and holding period limits are used by us to manage risks for equity
positions in the trading book. The Reserve Bank of India requires that the net
incremental investment by banks in equity securities in a fiscal year cannot
exceed 5.0% of the incremental deposits in the previous fiscal year.
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps and forwards to our
clients. We actively use cross currency swaps and forwards to hedge ourselves
against exchange risks arising out of these transactions. Our trading
activities in the foreign currency markets exposes us to exchange rate risks.
We seek to control this by setting counterparty limits, stipulating stop-loss
limits by deal and limits on the loss of the entire foreign exchange trading
floor, implementing an internal Value at Risk model for all spot positions and
engaging in exception reporting.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the
risk of unexpected increases in the cost of funding our asset portfolio at
appropriate maturities and the risk of being unable to liquidate a position in
a timely manner at a reasonable price. The goal of liquidity management is for
us to be able, even under adverse conditions, to meet all our liability
repayments on time and fund all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. We fund our operations principally by accepting
deposits from retail and corporate depositors. We also borrow in the short-term
inter-bank market. Loan maturities and sale of investments also provide
liquidity.
We use the majority of funds raised by us to extend loans or purchase
securities. Generally, deposits are of shorter average maturity than loans or
investments.
We maintain a substantial portfolio of liquid high quality securities that
may be sold on an immediate basis to meet the liquidity needs. We also have the
option to manage our liquidity by borrowing on the inter-bank market on a
short-term basis. While generally this market provides an adequate amount of
liquidity, the interest rates at which funds are available can sometimes be
volatile. We prepare regular maturity gap analyses to review our liquidity
position.
79
The Reserve Bank of India adopted a directive on asset liability
management in February 1999. Starting from April 1, 1999, we were required to
submit gap analysis on a quarterly basis to the Reserve Bank of India.
Effective April 1, 2000, our liquidity gap must not exceed 20.0% of outflows in
the 0-28 day time category.
Operational and Legal Risk
Due to our vast geographical spread and our operations being largely
transaction oriented, we are exposed to many types of operational risks.
Operational risks are risks arising from non-adherence to systems and
procedures or from frauds resulting in financial or reputation loss.
The Audit Department is part of our operational risk group. It inspects
branches and conducts revenue and management audits based on an inspection
calendar drawn up each year. The primary objective of the inspection function
is to ascertain and ensure that the business activities are carried out in
accordance with our guidelines. The Audit and Risk Committee of our board of
directors reviews the inspection function each quarter. Any procedural weakness
noticed in either systems or procedures is addressed appropriately. The Reserve
Bank of India requires us to have a process of concurrent audits at our
branches handling large volumes, to cover a minimum of 50.0% of our business
volumes. We have instituted systems to conduct concurrent audits, using reputed
chartered accountancy firms, to cover about 85.0% of our business.
We plan to introduce snap audits in the future, which will entail a quick
review of the implementation of various procedures in key areas at the
branches. These audits are intended to rectify any procedural irregularities,
especially in newly opened branches and new activities.
We are subject to inspections conducted by the Reserve Bank of India under
the Indian Banking Regulation Act. The Reserve Bank of India has adopted the
global practice of subjecting banks to examination on the basis of the CAMELS
model, a model that assigns confidential ratings to banks based on their
capital adequacy, asset quality, management, earnings, liquidity and systems
and controls. We also have independent statutory audits conducted on a
quarterly basis by auditors appointed by our shareholders.
We are now re-engineering the audit process to make it more risk-oriented.
We propose to assign each business unit to a particular level of perceived
operational risk. This would then determine a level of capital to be allocated
for unexpected losses from that unit. Aggregation of these allocations across
business units would enable us to arrive at a capital allocation for
operational risks. We have, on the basis of preliminary studies, decided to set
aside capital to the extent of 0.25% of our net worth effective April 1, 2000
for operational risks. This capital allocation is not required by Indian
regulations. We believe that we are the only bank in India to have this capital
allocation for operational risks.
There is regular monitoring of complaints at the branches to improve
customer service. We intend to centralize our complaint tracking mechanisms
soon.
We consider legal risk as a part of operational risk. The uncertainty of
the enforceability of the obligations of our customers and counterparties,
including the foreclosure on collateral, creates legal risk. Changes in law and
regulation could also adversely affect us. Legal risk is higher in new areas of
business where the law is often untested in the courts. For example, critical
legal issues in the area of Internet banking are unresolved in India as well as
other jurisdictions to which we would like to offer our products and services
using the Internet. Legislation has been proposed in India in this area, but
until this legislation is passed by the parliament, there will be uncertainty
regarding the following issues: legal recognition of electronic records,
validity of contracts entered into online and the validity of digital
signatures. Legal risk in other jurisdictions is also increased by the
international reach of Internet delivery.
We seek to minimize legal risk by using stringent legal documentation,
employing procedures designed to ensure that transactions are properly
authorized and consulting legal advisers. Our internal
80
auditors scrutinize all loan documents to ensure that these are correctly drawn
up to withstand scrutiny in court.
We are formulating a new product policy that requires the business units
to test run their new products a certain number of times before launching them
and to prepare detailed product profiles and requires each new product to be
vetted by the Operational Risk Management Committee.
We plan to form an independent Operations Department to oversee our
operations, branches and regional processing centers by the end of the first
quarter of fiscal 2001. This action will enable the heads of our strategic
business units and our Chief Financial Officer to be freed from operational
responsibilities. A new Chief Operations Officer will be named as the head of
the Operations Department. All branches and other operational units will report
to the Chief Operations Officer for operational matters.
Operational Controls and Procedures in Branches
We have operating manuals detailing the procedures for the processing of
various banking transactions and the operation of our main application
software, BANCS2000. Amendments to these manuals are implemented through
circulars sent to all offices.
When taking a deposit from a new customer, we require the new customer to
complete a relationship form, which details the terms and conditions for
providing various banking services. Photographs of customers are also obtained
for our records. Specimen signatures are scanned and stored in the system for
online verification. We enter into a relationship with our customer only after
the customer is properly introduced to the branch. When time deposits become
due for repayment, the deposit is paid to the depositor. System generated
reminders are sent to depositors before the due date for repayment. Where the
depositor does not apply for repayment on the due date, the amount is
transferred to an overdue deposits account for follow up. Balances in overdue
deposit accounts are controlled by the corporate office through monthly
statements from branches.
We have a scheme of delegation of financial powers that sets out the
monetary limit for each employee with respect to the processing of transactions
in a customer's account. Withdrawals from customer accounts are controlled by
dual authorization. Senior officers have delegated power to authorize larger
withdrawals. Our operating system validates the check number and balance before
permitting withdrawals. Cash transactions over Rs. 1 million (US$ 22,983) are
subject to special scrutiny to avoid money laundering.
We have given importance to computer security, both physical and logical.
A comprehensive computer security manual has been provided to all offices.
There is a system room in each office where the server is located. Access to
the server room is regulated. Our banking software, BANCS2000, has multiple
security features to protect the integrity of application and data. There are
user access rights and terminal-based security features.
Operational Controls and Procedures for Internet Banking
The opening of a bank account online by a new customer is a two-step
process. First, the customer fills out an online application, giving his
personal details. Based on this preliminary information, we allot the customer
a user ID and password. Second, the customer must send to us further
documentation to prove the customer's identity, including a copy of the
customer's passport, a photograph and specimen signature of the customer and a
voided personal check so that we can contact his existing bank, if required.
After the customer completes these formalities satisfactorily, we give him full
access to his account online. For a description of the security features of our
technology related to Internet banking, see "--Technology".
Operational Controls and Procedures in Regional Processing Centers
To improve customer service at our physical locations, we propose to
handle transaction processing centrally by taking away such operations from
branches. The centralization is being done both
81
at the corporate office and on a regional basis. We started this process in
September 1999 when we implemented the quasi-centralization of branch
operations in important cities where we have more than one branch. We have
centralized operations in Mumbai, New Delhi, Chennai and Bangalore. These
operations, which are called regional processing centers, process clearing
checks, inter-branch transactions, inter-city check collections, back office
activities for account opening, standing instructions and auto-renewal of
deposits. We plan to centralize operations in Pune, Calcutta, Hyderabad and
Ahmedabad and add to the list of regionally centralized activities, such as
cash pick-up and delivery services.
We have centralized transaction processing at Mumbai on a nationwide basis
for transactions like the issue of ATM cards and PIN mailers, reconciliation of
ATM transactions, monitoring of ATM functioning, issue of passwords to internet
banking customers and credit card transaction processing. Centralized
processing is being extended to the issuance of personalized check books, back
office activities of non-resident Indian accounts, opening of new bank accounts
who seek web broking services and recovery of service charges for accounts for
holding shares in book-entry form.
Operational Controls and Procedures in Treasury
Management believes that we have the highest level of automation in
dealing operations in India. We use technology to monitor risk limits and
exposures on a near real-time basis. We follow international best practices in
our treasury operations. Our front office, back office and accounting and
reconciliation functions are fully segregated in both the domestic treasury and
foreign exchange treasury departments. The respective middle offices use
various risk monitoring tools such as counterparty limits, position limits,
exposure limits and individual dealer limits. Procedures for reporting breaches
in limits are also in place.
Domestic Treasury. Our front office consists of dealers in fixed income
securities, equity securities and inter-bank money markets. The dealers analyze
the market conditions and take views on price movements. Thereafter, they
strike deals in conformity with various limits relating to counterparties,
securities and brokers. The deals are then forwarded to the back office for
settlement.
Our middle office plays the role of a risk manager, reporting to the Risk
Management Department, with an emphasis on market risk. The major functions of
the middle office are to monitor counterparty limits, evaluate the
mark-to-market impact on various positions taken by dealers and monitor market
risk exposure of the investment portfolio.
Our back office undertakes the settlement of funds and securities. The
back office exercises controls for minimizing operational risks, including deal
confirmations with counterparties; verifies authenticity of counterparty checks
and securities; ensures receipt of contract notes from brokers; monitors
receipt of interest and principal amounts on due dates; ensures transfer of
title in the case of purchases of securities; reconciles actual security
holdings with the holdings pursuant to the records; and reports any
irregularity or shortcoming observed.
Foreign Exchange Treasury. The inter-bank foreign exchange operations are
conducted through Reuters dealing systems. Brokered deals are concluded through
voice systems. Deals done through Reuters systems are captured on a real time
basis for processing. Deals carried out through voice systems are input in the
system immediately by the dealers for processing. The entire process from deal
origination to settlement and reconciliation takes place seamlessly under
straight through processing. The processing ensures adequate checks at critical
stages. Our foreign exchange dealings are carried out within the guidelines and
directives outlined by the Risk Management Department. Trade strategies are
discussed frequently and decisions are taken based on the market forecasts,
information and liquidity considerations. Dealers are assigned specific
currencies for dealing to ensure focused attention. Dealing operations are
conducted in conformity with the code of conduct prescribed by internal and
regulatory guidelines.
Our middle office is responsible for monitoring risk inherent to our
operations. The middle office monitors counterparty limits, positions taken by
dealers and adherence to various market risk limits set by the Risk Management
Department.
82
Our back office procedures were put in place to ensure speedy processing,
confirmation, accounting, confirmation matching, deal settlements and cash
balance monitoring. Our back office systems are designed to minimize settlement
risk. The matching and checking of counterparty confirmation of deals is fully
automated. Our 21 nostro accounts in 15 currencies handle almost 8,000
transactions on average per month. Reconciliation of nostro accounts is
automated and is carried out on a daily basis.
Disaster Recovery
Our disaster recovery site for treasury operations is located at downtown
Mumbai about 15 kilometers away from the existing treasury location. The site
is equipped with the standard installations to run full-fledged dealing
operations in case of any contingency.
83
Technology
With our focus on the application of technology to our business operations,
particularly with respect to the Internet and electronic commerce solutions, we
believe we are well positioned to continue to gain market share in our target
market. We believe technology is the primary source of competitive advantage in
the Indian banking sector. Our focus on technology emphasizes:
o Electronic and online channels to:
- Reach new target customers;
- Enhance existing customer relationships;
- Offer easy access to our products and services; and
- Reduce distribution costs.
o Application of information systems to:
- Effectively market to our target customers;
- Monitor and control risks; and
- Identify, assess and capitalize on market opportunities.
Technology Organization
Our technology initiatives are undertaken in conjunction with ICICI
Infotech Services Limited, the technology arm of the ICICI group and an ISO 9001
certified company. ICICI Infotech is divided into business groups, which include
retail banking technology, corporate banking technology, infrastructure
(comprising network management and technology operations), software development
and web technology. At December 31, 1999 a team of 33 professionals as full time
staff seconded to us from ICICI Infotech to supervise our technology operations
in retail and corporate banking.
Electronic and Online Channels
All of our 84 branches and extension counters are completely automated to
ensure prompt and efficient delivery of products and services. We use the branch
banking software, BANCS2000, developed by Infosys Technologies Limited, which is
flexible and scalable and integrates well with our electronic delivery channels.
Our 121 ATMs are from NCR and Diebold, the world's leading vendors. These
ATMs work with our main banking system, BANCS2000, and are proposed to be
integrated with the recently launched credit card system.
Our telephone banking call centers use an Interactive Voice Response System
(IVRS). The call centers are based on the latest technology, providing an
integrated customer database that allows the call agents to get a complete
overview of the customer's relationship with other ICICI group companies and us.
The database enables customer segmentation and assists the call agent in
identifying cross-selling opportunities. We are implementing a technology
architecture which enables a customer to access any product from any channel.
We believe that the Internet in India will help accelerate our customer
acquisition rate through our Internet banking service. We expect the Internet to
emerge as a key service delivery channel in the future.
We continually seek to complement our delivery channels and product
offerings with strategic alliances. We have recently signed a memorandum of
understanding with a leading Indian portal and Internet service provider for
online distribution of certain retail banking products and services.
We are in the process of finalizing agreements with several
telecommunications companies. When finalized, these agreements will allow our
customers to conduct banking operations through their mobile phones. This
service will initially be based on short messaging system technology to offer
account balances
84
and stock market quotes. Gradually, this application is scheduled to adopt
wireless application protocol technology to provide greater functionality to
users.
Application of Information Systems
Treasury and Trade Finance Operations
We believe we have one of the most technologically sophisticated treasury
operations in India. We use technology to monitor risk limits and exposures on a
real time basis. We have invested significantly to acquire advanced systems from
IBM, Reuters and TIBCO and connectivity to the SWIFT network.
Banking Application Software
We have installed an advanced banking system which addresses our corporate
banking as well as retail banking requirements. It is robust, flexible and
scalable and allows us to effectively and efficiently serve our growing customer
base.
High-Speed Electronic Communications Infrastructure
We have installed a nation-wide data communications network linking all our
offices. The network design is based on a mix of dedicated leased lines and
satellite links to provide for redundancy and reach which is imperative in a
vast country like India. The communications network is monitored 24 hours a day
using advanced network management software. We also use a sophisticated data
center in Mumbai for data storage and retrieval.
Security Features of Our Technology
We depend heavily on our technological base to provide our customers with
high-quality service. Security is critical due to the diversity of product
delivery platforms and the inherently sensitive nature of banking transactions.
We use well laid out processes including access control, complex passwords and
dual authentication. For our Internet banking service, we use 128 bit
encryption, secure socket layer technology, digital certificates, multiple
firewalls and isolation of web servers.
We also employ the services of technical security advisory organizations
for planned penetration of our systems, particularly our Internet banking
service. The penetration tests have found our systems to be highly resilient.
Awards for Technology Usage
We have received various awards for our innovative use of technology.
Bank Technology News International, in their November 1997 issue, listed us as
among the 43 True Internet Banks outside the United States. The Financial Times,
London and UUNET, UK have consistently rated our website as a "highly commended"
for the last three years. In 1998, we also received the Computer Society of
India - Tata Consultancy Services National Award for best information technology
usage.
Competition
We face strong competition in all our principal areas of business from
Indian public sector banks, private sector banks, foreign banks and mutual
funds. We believe that our principal competitive advantage over our competitors
arises from our use of technology, innovative products and services and our
highly motivated and experienced staff. In addition, our parent company, ICICI,
has long-standing customer relationships which we continue to exploit to
cross-sell our products and services. Because of these factors, we believe that
we have a strong competitive position in the Indian financial services market.
85
Corporate Banking
Our principal competition in corporate lending comes from public sector
banks, which have built extensive branch networks that have enabled them to
raise low cost deposits and, as a result, price their loans very competitively.
Supported by their large retail deposit bases, public sector banks have over
80.0% of the market share for working capital financing. Their wide geographical
reach facilitates the delivery of banking products to their corporate customers
located in most parts of the country. We have been able, however, to build a
quality loan portfolio without compromising our minimum lending rates, because
of our efficient service and prompt turnaround times that are significantly
faster than public sector banks. We seek to compete with the large branch
networks of the public sector banks through our multi-channel distribution
approach.
Foreign banks have traditionally served Indian corporates with cross-border
trade finance, fee-based services and other short-term financing products. We
effectively compete with foreign banks in cross-border trade finance as a result
of our strong correspondent banking relationships with over 105 international
banks our SWIFT-enabled corporate branches and customized trade financing
solutions. We have established a strong fee-based cash management service and
compete with foreign banks due to our technological edge and competitive pricing
strategies.
Other new private sector banks also compete in the corporate banking market
on the basis of efficiency, service delivery and technology. However, the ICICI
group's strong corporate relationships and our ability to use technology to
provide innovative, value-added products and services provide us with a
competitive edge.
Retail Banking
In the retail banking market, we face strong competition from commercial
banks and mutual funds. Indian commercial banks attract the majority of retail
bank deposits, historically the preferred retail savings product in India. We
have exploited the ICICI group's corporate relationships to gain individual
customer accounts through payroll management products such as Power Pay and will
continue to pursue a multi-channel distribution strategy utilizing physical
branches, ATMs, telephone banking call centers and the Internet to reach our
customers.
With access to the latest technology and the benefit of strategies
developed in mature and highly competitive overseas markets, several foreign
banks have recently started to target middle and upper middle class retail
customers, particularly salary earners. These banks have installed ATM networks
and introduced utility bill payment schemes, mortgages and personal loans.
We also face competition from foreign banks and some new private sector
banks in the areas of retail deposits and credit cards. Citibank recently
launched a savings bank product. Other new private sector banks have been
launching international debit cards and other innovative deposit schemes. There
could be an increase in the consolidation of private sector banks that seek to
exploit synergies of branch networks and technologies and realize economies of
scale.
Mutual funds have recently emerged as another source of competition to us.
In its last budget, the government of India waived the tax on dividends received
from mutual funds. This change has made mutual fund offerings a viable
alternative to bank deposits.
The following table gives a comparison pursuant to Indian GAAP of the
relative levels of deposits and loans of leading foreign banks and new private
sector banks in India.
At March 31,
--------------------------------------------
1998 1999 1998 1999
------ ------ ------ ------
Deposits Loans(1)
-------------------- ----------------
(in billions)
Total commercial banks.....................Rs. 6,662.6 Rs.7,999.5 Rs.3,896.6 Rs.4,622.8
Total foreign banks........................ 428.3 474.5 334.4 386.6
86
Of which leading banks are:
Citibank NA....................... Rs. 75.5 Rs. 94.4 Rs. 51.8 Rs. 59.4
ANZ Grindlays banks............... 77.6 86.9 51.6 57.7
HSBC.............................. 54.9 63.9 33.0 40.9
Standard Chartered Bank........... 48.1 53.5 34.5 44.4
Bank of America................... 38.6 35.0 40.6 43.5
Deutsche Bank..................... 20.2 21.3 19.9 23.9
ABN Amro Bank..................... 14.6 18.8 16.0 25.9
Total new private sector banks............. Rs. 217.4 Rs. 308.1 Rs. 141.8 Rs.211.1
Of which leading banks are:
ICICI Bank........................ Rs. 26.3 Rs. 60.7 Rs. 14.5 Rs. 34.4
IndusInd Bank..................... 42.7 50.2 28.6 32.3
Global Trust Bank................. 32.9 41.0 21.4 30.2
Times Bank(2)..................... 22.1 30.1 13.6 16.8
HDFC Bank(2)...................... 21.9 29.2 13.9 24.4
Centurion Bank.................... 12.5 21.4 9.2 18.3
- ------------
Source: Reserve Bank of India publications.
(1) Loans include advances and investments in non statutory liquidity ratio
securities.
(2) HDFC Bank and Times Bank agreed to merge in December 1999 subject to the
approval of their respective shareholders. The merger is expected to be
effective on March 31, 2000.
Employees
At December 31, 1999, we had 1,190 employees, an increase from 891
employees at March 31, 1999, 603 employees at March 31, 1998 and 445 employees
on March 31, 1997. Of the 891 employees at March 31, 1999, 532 are
professionals, holding degrees in management, accountancy, engineering, law,
computer science, economics and banking.
We consider our relations with our employees to be good. Our human resource
practices are open and transparent. Our employees do not belong to any union.
We use incentives in structuring compensation packages and have established
a performance-based bonus scheme under which permanent employees can
significantly increase their pay (up to 100.0% of their base salary). We have a
transparent system of performance measurement, consisting of review by an
employee's superiors as well as a self review and, in some cases, review by any
employee's peers. To encourage commitment to results and productivity, our board
has recently approved an employee stock option scheme, subject to the approval
of our shareholders at an extraordinary general meeting to be held on February
21, 2000. For further details on this scheme, see "Management--Employee Stock
Option Scheme".
In addition to basic compensation, employees are eligible to receive loans
from us at subsidized rates and to participate in our provident fund and other
employee welfare plans. The provident fund, to which both we and our employees
contribute a defined amount, is a savings scheme, required by government
regulation, under which we at present are required to pay to employees a minimum
12.0% annual return. If such return is not generated internally by the fund, we
are liable for the difference. Our provident fund has generated sufficient funds
internally to meet the 12.0% annual return requirement. We have also set up a
superannuation fund to which we contribute defined amounts. In addition, we
contribute specified amounts to a gratuity fund set up pursuant to Indian
statutory requirements.
We focus on training our employees on a continuous basis. We were named
"learning organization" and were awarded the Asian Banking Award for the year
1998. We have training centers at Delhi and Mumbai, where we conduct regular
training programs designed to impart the necessary skills to our employees
including orientation sessions for new employees. Training programs are also
conducted for developing functional as well as managerial skills. We regularly
offer courses conducted by both national and international faculty, drawn from
industry, academia and our own organization.
87
For the career progression and promotion of employees, we use the
assessment center approach to identify the potential of employees to assume new
responsibilities. Career progression is assessed on the basis of job
performance, future potential and abilities to handle assignments in the higher
grade.
We share no employees with our parent company ICICI. For the nine months
ended December 31, 1999, we had seconded 16 employees to ICICI, and ICICI had
seconded 33 employees to us. Besides ICICI Infotech had seconded 35 employees to
us. When we second an employee to ICICI, we pay the salary of that employee, but
this expense is reimbursed to us by ICICI. When ICICI seconds an employee to us,
ICICI pays the salary of that employee, but this expense is reimbursed to ICICI
by us. We paid Rs. 2 million in fiscal 1997, Rs. 1 million in fiscal 1998 and
Rs. 1 million in fiscal 1999 to ICICI for the secondment of ICICI employees to
us.
In accordance with our corporate policy, all our employees, other than
those who are executive directors, retire at the age of 58 years.
Properties
Our registered office is located at Land Mark, Race Course Circle,
Vadodara-390 007, Gujarat, India. Our corporate headquarters are located at
ICICI Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
We had a principal office network consisting of 71 branches, 13 extension
counters and 32 off-site ATMs at December 31, 1999. These facilities are located
throughout India. Sixteen of these facilities are located on properties owned by
us, while the remaining facilities are located on leased properties. The net
book value of all our owned properties at December 31, 1999 was Rs. 1,234
million (US$ 28 million), which includes two residential facilities for our
employees and residential flats under construction.
Legal and Regulatory Proceedings
We are involved in a number of legal proceedings in the ordinary course of
our business. However, excluding the legal proceedings discussed below, we are
not a party to any proceedings and no proceedings are known by us to be
contemplated by governmental authorities or third parties, which, if adversely
determined, may have a material adverse effect on our financial condition or
results of operations.
We have been assessed an aggregate of Rs. 479 million (US$ 11 million) in
income tax, interest tax and sales tax demands by the government of India's tax
authorities for past years. We have appealed the tax demands for Rs. 273 million
(Rs. 6 million), which represents the disputed amount. We believe that we have a
good chance of success in these appeals for the following reasons:
o The Indian appellate authorities have ruled in our favor in respect of
the deductibility of software expenses. The Indian tax authorities,
however, have appealed against this ruling that is pending adjudication
before a higher appellate authority.
o Another significant issue that relates to the treatment of interest on
securities applies to the entire banking sector. The treatment of such
interest by us is in accordance with standard accounting practices and
the Reserve Bank of India guidelines.
o Of the aggregate assessed tax of Rs. 479 million (US$ 11 million), Rs.
271 million (US$ 6 million) represents income tax recoverable from
lessees of assets under various lease agreements. In accordance with the
expert opinion obtained by us, the tax treatment adopted by us is in
conformity with industry practice and in our view, the demand by the
Indian tax authorities cannot be substantiated. Accordingly, we have not
provided for or disclosed this tax demand as a contingent liability.
88
SELECTED FINANCIAL AND OPERATING DATA
The selected financial and other data at year-end fiscal 1998 and 1999 and
for fiscal 1997, 1998 and 1999 and at and for the nine months ended December 31,
1998 and 1999 have been prepared in accordance with US GAAP. The selected
financial data presented below under the captions "Selected income statement
data" , "Per common share date" and "Selected balance sheet data" for and at the
end of each of the years ended March 31, 1997, 1998 and 1999 are derived from
our financial statements. These financial statements have been audited by KPMG,
independent accountants. The selected financial and other data at year-end
fiscal 1997 have been derived from our financial statements that are not
included in this prospectus. The selected financial and other data at December
31, 1998 and 1999 and for the nine months ended December 31, 1998 and 1999 have
been derived from our unaudited interim financial statements prepared in
accordance with US GAAP. Capital adequacy ratios have been calculated both from
the financial statements prepared in accordance with Indian GAAP and the
financial statements prepared in accordance with US GAAP. Five years of selected
Indian GAAP financial information is given in "Selected Financial Information
under Indian GAAP".
You should read the following data with the more detailed information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements, included in this
prospectus. Historical results do not necessarily predict the results in the
future. The results for the nine months ended December 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal 2000.
Year ended March 31, Nine months ended December 31,
------------------------------------------ ------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
------ ------ ------ --------- ------ ------ ---------
(in millions, except per common share data)
Selected income statement data:
Interest revenue.................... Rs. 1,843 Rs. 2,579 Rs. 5,390 US$ 124 Rs. 3,758 Rs. 5,837 US$ 134
Interest expense.................... (1,170) (1,854) (4,244) (98) (2,962) (4,783) (110)
------- ------- ------- ------ ------- --------- -------
Net interest revenue................ 673 725 1,146 26 796 1,054 24
Provisions for credit losses........ (187) (360) (540) (12) (398) (218) (5)
------- ------- ------- ------ ------- --------- -------
Net interest revenue after
provisions for credit losses..... 486 365 606 14 398 836 19
Non-interest revenue, net........... 317 591 866 20 551 1,343 31
Net revenue......................... 803 956 1,472 34 949 2,179 50
Non-interest expense................ (406) (554) (799) (18) (517) (850) (19)
------- ------- ------- ------ ------- --------- -------
Income before taxes................. 397 402 673 16 432 1,329 31
Income tax expense.................. (155) (104) (170) (4) (112) (303) (7)
------- ------- ------- ------ ------- --------- -------
Net income.......................... Rs. 242 Rs. 298 Rs. 503 US$ 12 Rs. 320 Rs. 1,026 US$ 24
======= ======= ======= ====== ======= ========= =======
Per common share data:
Net income--basic.................... Rs. 1.61 Rs. 1.84 Rs.3.05 US$ 0.07 Rs. 1.94 Rs. 6.22 US$ 0.14
Net income--diluted.................. 1.61 1.84 3.05 0.07 1.94 6.22 0.14
Dividends............................ 1.00 1.00 1.20 0.03 - - -
Book value........................... 10.67 14.98 17.15 0.39 16.02 22.24 0.51
Common shares outstanding at end of
period (in millions of common
shares)........................... 150 165 165 165 165
Weighted average common shares
outstanding basic (in millions
of common shares)................. 150 162 165 165 165
Weighted average common shares
outstanding diluted (in millions
of common shares)................ 150 162 165 165 165
- ------------
(1) Rupee amounts for fiscal 1999 and for the nine months ended December 31,
1999 have been translated into US dollars using the noon buying rate in
effect on December 31, 1999 of Rs. 43.51 = US$ 1.00.
89
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of our average total assets for the
respective period.
Nine months
Year ended March 31, ended December 31,
------------------------- ------------------
1997 1998 1999 1998(1) 1999(1)
------ ------ ------ -------- ---------
Selected income statement data:
Interest revenue........................................ 11.55% 9.67% 10.25% 10.29% 9.49%
Interest expense........................................ (7.33) (6.95) (8.07) (8.11) (7.78)
---- ---- ---- ---- ----
Net interest revenue.................................... 4.22 2.72 2.18 2.18 1.71
Provisions for credit losses............................ (1.17) (1.35) (1.03) (1.09) (0.35)
---- ---- ---- ---- ----
Net interest revenue after provisions for credit losses. 3.05 1.37 1.15 1.09 1.36
Non-interest revenue, net............................... 1.98 2.22 1.65 1.51 2.18
---- ---- ---- ---- ----
Net revenue............................................. 5.03 3.59 2.80 2.60 3.54
Non-interest expense.................................... (2.54) (2.08) (1.52) (1.42) (1.38)
---- ---- ---- ---- ----
Income before taxes..................................... 2.49 1.51 1.28 1.18 2.16
Income tax expense...................................... (0.97) (0.39) (0.32) (0.30) (0.49)
---- ---- ---- ---- ----
Net income.............................................. 1.52% 1.12% 0.96% 0.88% 1.67%
==== ==== ==== ==== ====
- ------------
(1) Annualized.
At March 31, At December 31,
---------------------------------------------- -------------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
------ ------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Selected balance sheet
data:
Total assets........... Rs. 19,766 Rs. 35,278 Rs. 74,825 US$ 1,720 Rs. 59,346 Rs. 102,205 US$ 2,349
Loans, net(2).......... 8,374 12,765 27,597 634 20,880 37,749 868
Securities............. 3,816 1,476 3,963 91 2,912 4,402 101
Non-performing loans,
net................. - 179 733 17 594 882 20
Total liabilities...... 18,016 32,807 71,995 1,655 56,703 98,536 2,264
Long-term debt......... 89 129 1,764 41 1,110 1,734 40
Deposits............... 13,476 26,290 60,729 1,396 46,424 85,002 1,953
Stockholders' equity... 1,750 2,471 2,830 65 2,643 3,669 85
Period average(3):
Total assets........... 15,958 26,661 52,605 1,209 48,715 82,044 1,886
Interest-earning assets 11,730 19,467 42,521 977 38,599 62,349 1,433
Loans, net(2).......... 7,224 9,498 18,546 426 16,623 28,469 654
Total liabilities...... 14,270 24,351 49,937 1,148 46,142 78,779 1,811
Interest-bearing
liabilities......... 9,484 17,185 41,212 947 37,837 63,202 1,453
Long-term debt......... 76 109 1,127 26 958 1,763 41
Deposits............... 7,753 15,140 35,916 825 33,533 56,608 1,301
Stockholders' equity... 1,688 2,310 2,668 61 2,573 3,265 75
90
At or for the
At or for the year ended nine months ended
March 31, December 31,
------------------------ -----------------
1997 1998 1999 1998 1999
------ ------ ------ ------ ------
(in millions, except percentages)
Profitability(4):
Net income as a percentage of:
Average total assets.................................... 1.52% 1.12% 0.96% 0.88% 1.67%
Average stockholders' equity............................ 14.34 12.90 18.85 16.58 41.90
Dividend payout ratio(5)................................... 61.98 59.89 43.30 - -
Spread(6).................................................. 3.38 2.46 2.38 2.54 2.39
Net interest margin(7)..................................... 5.74 3.72 2.70 2.75 2.25
Cost-to-income ratio(8).................................... 41.01 42.10 39.71 38.38 35.47
Cost-to-average assets ratio(9)............................ 2.54 2.08 1.52 1.42 1.38
Capital:
Total capital adequacy ratio (10).......................... 13.04 13.48 11.06 11.60 9.41
Tier 1 capital adequacy ratio (10)......................... 12.71 13.38 7.32 9.18 6.60
Tier 2 capital adequacy ratio (10)......................... 0.33 0.10 3.74 2.42 2.81
Average stockholders' equity as a percentage of average
total assets............................................. 10.58 8.66 5.07 5.28 3.98
Asset quality:
Gross non-performing loans as a percentage of gross loans.. 2.18 4.58 5.66 6.53 5.06
Net non-performing loans as a percentage of net loans...... - 1.40 2.66 2.84 2.34
Net non-performing loans as a percentage of total assets... - 0.51 0.98 1.00 0.86
Allowance for credit losses as a percentage of gross non-
performing loans........................................ 100.00 70.36 54.56 58.08 55.11
Allowance for credit losses as a percentage of gross total
loans................................................... 2.18 3.22 3.09 3.79 2.79
- ------------
(1) Rupee amounts for fiscal 1999 and for the nine months ended December 31,
1999 have been translated into US dollars using the noon buying rate in
effect on December 31, 1999 of Rs. 43.51 = US$ 1.00.
(2) Net of allowance for credit losses in respect of non-performing loans.
(3) Average balances are the daily average of outstanding.
(4) Profitability data for the nine months ended December 31, 1998 and 1999 is
annualized.
(5) Represents the ratio of total dividends payable on common stock, including
the dividend distribution tax, as a percentage of net income.
(6) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(7) Represents the ratio of net interest revenue to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(8) Represents the ratio of non-interest expense to the sum of net interest
revenue and non-interest revenue.
(9) Represents the ratio of non-interest expense to average total assets.
(10) Our capital adequacy is computed in accordance with the Reserve Bank of
India guidelines. The computation is based on our financial statements
prepared in accordance with Indian GAAP. Our total capital adequacy ratio
computed under the applicable Reserve Bank of India guidelines and based on
our financial statements prepared in accordance with US GAAP was 9.08% at
December 31, 1999. Using the same basis of computation, our Tier 1 capital
adequacy ratio was 6.69% and our Tier 2 capital adequacy ratio was 2.39% at
December 31, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Financial Condition--Capital".
91
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our audited financial
statements and unaudited interim financial statements included in this
prospectus. The following discussion is based on our audited financial
statements and unaudited interim financial statements, which have been prepared
in accordance with US GAAP. The results for the nine months ended December 31,
1999 are not necessarily indicative of the results to be expected for the full
fiscal 2000. Our fiscal year ends on March 31 of each year so all references to
a particular fiscal year are to the year ended March 31 of that year.
Introduction
Our loan portfolio, financial condition and results of operations have
been, and in the future, are expected to be influenced by economic conditions,
particularly industrial growth, in India and certain global developments,
particularly in commodity prices relating to the business activities of our
corporate customers. For ease of understanding the discussion of our results of
operations that follows, you should consider the introductory discussion of
these macroeconomic factors.
Indian Economy
Despite the slowdown in the global economy between 1997 and 1999 stemming
from the economic crisis in Asia, Russia and elsewhere, the GDP growth rate for
the Indian economy was 7.8% in fiscal 1997, 5.0% in fiscal 1998 and 6.8% in
fiscal 1999. Growth in industrial production in India, however, slowed to 4.0%
in fiscal 1999 from 6.6% in fiscal 1998 and 5.6% in fiscal 1997, with overall
GDP growth driven by other sectors such as agriculture and services. Average
inflation, as measured by the wholesale price index, remained below 7.0% in each
of fiscal 1997, 1998 and 1999. After the Asian crisis in 1997-1998, unlike
certain south-east Asian currencies, the rupee maintained its value due to
effective exchange rate management by the Reserve Bank of India and the fact
that convertibility of the rupee is still controlled.
The Indian economy registered a GDP growth rate of 5.9% in the six months
ended September 30, 1999 compared to 4.0% in the six months ended September 30,
1998. The higher GDP growth rate was due to an improvement in growth in all the
three sectors: agriculture, industry and services. Growth in industrial
production was also higher at 6.4% in the period April-November 1999 compared to
3.6% in the period April-November 1998. This industrial growth was a result of
higher demand for consumer, capital and intermediate goods, an increase in
exports and a firming of international commodity prices. This recovery was
evident particularly in the textiles, metals and machinery segments. Average
inflation, as measured by the wholesale price index, for the period
April-November 1999 was 3.0% compared to 7.7% during the corresponding period of
the previous year. Lower inflation was essentially due to the easing of prices
of primary articles and manufactured products, which more than offset the rise
in the price of fuel.
Fiscal 1999, in particular, was a difficult year for the Indian financial
sector. There was an overall decline in asset quality principally due to an
increase in non-performing loans to certain borrowers in the manufacturing
sectors, particularly in the textiles, man-made fibers and iron and steel
industries.
The rapid reduction in trade barriers and integration with global markets,
and the downtrend in global commodity markets, caused difficulty in the Indian
economy for those commercial enterprises with cost inefficiencies, poor
technology and fragmented capacities. Over the last few years, a sharp reduction
in international steel prices to historic lows has had an adverse impact, for
example, on the companies in the iron and steel industry. In addition, a
significant reduction in import tariffs over the last three years led to price
competition from certain countries, substantially reducing domestic steel
prices. The textiles industry was also affected by a reduction in exports as a
result of the devaluation of certain south-east Asian currencies in 1998, making
Indian exports less competitive, and a decrease in demand in Asia.
The decline in prices of raw materials and commodities has also made it
difficult for some Indian companies to operate profitably. While the Indian
economy has continued to grow, although at a slower
92
rate than in past periods, certain companies have had to restructure their
operations to deal with financial stress they have encountered. In certain
cases, the stress has resulted in borrowers incurring cash losses due to their
operating at levels below their overall capacities. This had an adverse impact
on the financial strength of some of our borrowers, which has resulted in an
overall increase in non-performing loans in our loan portfolio. The impact was
more on the middle market companies (companies with annual sales of less than
Rs. 1.0 billion (US$ 23 million)) due to their generally weaker financial
strength and lesser ability to withstand stress. In certain cases, while
continuing to generate revenue and net profits, some of our borrowers have had
to make significant changes in their operations, selling unproductive assets,
merging with other market participants, reducing costs and refocusing their
business objectives. This has resulted in the need to restructure and
renegotiate credit and related facilities with banks and financial institutions
including, in some cases, us.
Banking Sector
According to the Reserve Bank of India's data, total deposits of all
commercial banks have increased by 16.5% in fiscal 1997, 19.8% in fiscal 1998
and 17.9% in fiscal 1999. In fiscal 1998, the high growth in deposits was
primarily due to the shift in the depositor preference towards bank deposits and
away from the capital market instruments due to depressed capital market
conditions. In fiscal 1999, the government-controlled State Bank of India, the
largest commercial bank in India, issued bonds, totaling Rs. 179.5 billion (US$
4.1 billion), to non-resident Indians living abroad. These bonds are included in
computing the total deposits of all commercial banks in fiscal 1999. Excluding
these proceeds, growth in deposits would have been 15.0% in fiscal 1999. In
fiscal 1999, households appeared to prefer holding cash and non-bank deposits,
which slowed down the growth in deposits. In the nine months ended December 31,
1999, bank deposits increased 10.4% compared to 13.4% in the nine months ended
December 31, 1998. The higher growth rate in the nine months ended December 31,
1998 was also due to the State Bank of India's bond issuance program. Excluding
these proceeds, growth in deposits in the nine months ended December 31, 1999
would have been 10.6% compared to 10.4% in the nine months ended December 31,
1998.
According to the Reserve Bank of India's data, bank credit increased at a
slower rate than total bank deposits in recent years, growing 9.6% in fiscal
1997, 16.4% in fiscal 1998 and 13.8% in fiscal 1999. These growth rates
reflected the trend in growth in industrial production during these years. Banks
in India also invest in commercial paper, medium and long-term bonds and, to a
limited extent, in equity securities. Including these investments, the total
growth in bank credit was 12.3% in fiscal 1997, 18.1% in fiscal 1998 and 16.4%
in fiscal 1999. As a result of improved growth in GDP and industrial production
in fiscal 2000, growth in bank credit was 11.3% in the nine months ended
December 31, 1999 compared to 7.1% in the nine months ended December 31, 1998.
The comparable figures for growth in total bank credit, including investments,
was 10.5% in the nine months ended December 31, 1999 and 9.1% in the nine months
ended December 31, 1998.
There has been a downward movement in interest rates during the last three
fiscal years principally due to the Reserve Bank of India's policy of assuring
adequate liquidity to the banking system and generally lowering the bank rate to
ensure that corporate borrowers have access to funding at competitive rates. The
Reserve Bank of India's primary motive has been to realign interest rates with
the market to facilitate a smooth transition from a government-controlled regime
in the early 1990s, when interest rates were heavily regulated, to a more
market-oriented interest rate regime. Banks have generally followed the
direction of interest rates set by the market and adjusted both their deposit
rates and lending rates downward. The following table sets forth the decline in
average deposit rates and average lending rates of five major public sector
banks for the last three years.
Average deposit rate Average prime
for over one year term lending rate
Fiscal year (range) (range)
- ------------------------------------ ---------------------- -------------
1997................................ 11.0-12.0% 14.5-15.0%
1998................................ 10.5-11.0 14.0
1999................................ 9.0-11.0 12.0-13.0
2000 (to December 31, 1999)......... 8.0-10.5 12.0-12.5
93
- ------------
Source: Reserve Bank of India: Handbook of Statistics on Indian Economy, 1999
and Weekly Statistical Supplements.
Our average deposit rate for a deposit with a maturity of greater than one
year decreased to 10.5%-11.0% in the nine months ended December 31, 1999 from
12.0%-14.5% in fiscal 1997 and our average prime lending rate range decreased to
13.5% in the nine months ended December 31, 1999 from 17.0%-18.5% in fiscal
1997.
Results of Operations
In spite of the slowdown in the economy between 1997 and 1999 and stress on
certain core sectors of industry such as iron and steel and textiles, we were
able to add to our assets and liabilities at a rapid pace since we were a recent
entrant in the commercial banking sector and we were able to acquire new
customers from public sector banks. We cannot guarantee that we will be able to
continue to achieve the same growth rates as those achieved in the last three
fiscal years.
We analyze our financial performance in terms of deposits, loans, trading
assets and securities. We analyze our average cost of deposits, yield on loans
and returns from trading portfolio and securities portfolio on a regular basis.
Along with these measures, we also focus on the gross non-performing loans,
allowance for credit losses, non-interest revenue and non-interest expense to
study our profitability. We discuss below these measures of financial
performance.
Summary Nine Months ended December 31, 1999 compared to Nine Months ended
December 31, 1998
Net income increased 220.6% in the nine months ended December 31, 1999 to
Rs. 1.0 billion (US$ 24 million) from Rs. 320 million (US$ 7 million) in the
nine months ended December 31, 1998. The annualized return on average assets was
1.67% in the nine months ended December 31, 1999 compared to 0.88% in the nine
months ended December 31, 1998. The annualized return on average stockholders'
equity was 41.90% in the nine months ended December 31, 1999 compared to 16.58%
in the nine months ended December 31, 1998.
Net interest revenue increased 32.4% in the nine months ended December 31,
1999 compared to the nine months ended December 31, 1998 reflecting mainly the
following factors:
o an increase of 61.5% in the average volume of interest-earning assets,
offset by
o a decrease of 50 basis points in the net interest margin to 2.25% in the
nine months ended December 31, 1999 from 2.75% in the nine months ended
December 31, 1998 and a decrease of 15 basis points in our spread to
2.39% in the nine months ended December 31, 1999 from 2.54% in the nine
months ended December 31, 1998.
The net interest margin decreased primarily due to our shift towards loans
to highly rated clients resulting in lower credit spreads, an increase in gross
non-performing loans, a 120 basis point decline in yield on cash, cash
equivalents and trading account assets and a decline in average interest-earning
assets as a proportion of average interest-bearing liabilities to 98.7% in the
nine months ended December 31, 1999 from 102.0% in the nine months ended
December 31, 1998.
Gross non-performing loans increased more slowly at 21.8% in the nine
months ended December 31, 1999 to Rs. 2.0 billion (US$ 45 million) at December
31, 1999 from Rs. 1.6 billion (US$ 37 million) at year-end fiscal 1999. The
increase in non-performing loans was primarily due to our loans made to middle
market companies in earlier years becoming non-performing during this period.
The gross non-performing loan as a percentage of gross loans declined to 5.06%
at December 31, 1999 from 5.66% at year-end fiscal 1999. As a percentage of net
loans, net non-performing loans declined to 2.34% at December 31, 1999 from
2.66% at year-end fiscal 1999. Provisions for credit losses in the nine months
ended December 31,
94
1999 decreased 45.2% to Rs. 218 million (US$ 5 million) from Rs. 398 million
(US$ 9 million) in the nine months ended December 31, 1998 primarily due to the
slower growth in gross non-performing loans in the nine months ended December
31, 1999.
Non-interest revenue increased 143.7% in the nine months ended December 31,
1999 to Rs. 1.3 billion (US$ 31 million) from Rs. 551 million (US$ 13 million)
in the nine months ended December 31, 1998, primarily due to an increase in
trading account revenue and fees, commissions and brokerage.
Non-interest expense increased 64.6% in the nine months ended December 31,
1999 to Rs. 850 million (US$ 20 million) from Rs. 517 million (US$ 12 million)
in the nine months ended December 31, 1998. Non-interest expense as a percentage
of average total assets decreased to 1.38% in the nine months ended December 31,
1999 from 1.42% in the nine months ended December 31, 1998.
Our total assets increased 36.6% to Rs. 102.2 billion (US$ 2 billion) at
December 31, 1999 from Rs. 74.8 billion (US$ 1.7 billion) at March 31, 1999. Net
loans increased 36.8% in the nine months ended December 31, 1999 to Rs. 37.7
billion (US$ 868 million) from Rs. 27.6 billion (US$ 634 million) at March 31,
1999 due to our focus on corporate lending as working capital loans increased
48.5% and term loans increased 22.2%.
Our total deposits increased 40.0% in the nine month period ended December
31,1999 to Rs. 85.0 billion (US$ 2.0 billion) from Rs. 60.7 billion (US$ 1.4
billion) at March 31, 1999. Our focus on retail deposit taking was reflected in
the 67.9% growth in our retail deposits in the nine months ended December 31,
1999 compared to 30.7% growth in our corporate deposits in the same period.
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with Indian GAAP was 9.41% at December 31, 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.60% and our Tier 2 capital
adequacy ratio was 2.81% at December 31, 1999. Our total capital adequacy ratio
computed under the applicable Reserve Bank of India guidelines and based on our
financial statements prepared in accordance with US GAAP was 9.08% at December
31, 1999. Using the same basis of computation, our Tier 1 capital adequacy ratio
was 6.69% and our Tier 2 capital adequacy ratio was 2.39% at December 31, 1999.
Summary Fiscal 1999 compared to Fiscal 1998
Net income increased 68.8% in fiscal 1999 to Rs. 503 million (US$ 12
million) from Rs. 298 million (US$ 7 million) in fiscal 1998. The return on
average assets was 0.96% in fiscal 1999 compared to 1.12% in fiscal 1998 and the
return on average stockholders' equity was 18.85% in fiscal 1999 compared to
12.90% in fiscal 1998.
Net interest revenue increased 58.1% in fiscal 1999 compared to fiscal 1998
reflecting mainly the following factors:
o an increase of 118.4% in the average volume of interest earning assets,
offset by
o a decrease of 102 basis points in the net interest margin to 2.70% in
fiscal 1999 from 3.72% in fiscal 1998 and a decrease of 8 basis points
in our spread to 2.38% in fiscal 1999 from 2.46% in fiscal 1998.
The net interest margin decreased primarily due to our shift towards loans
to highly rated clients resulting in lower credit spreads, an increase in gross
non-performing loans and the decline in average interest-earning assets as a
proportion of average interest-bearing liabilities to 103.2% in fiscal 1999 from
113.3% in fiscal 1998.
Gross non-performing loans increased 167.1% in fiscal 1999 to Rs. 1.6
billion (US$ 37 million) at year-end fiscal 1999 from Rs. 604 million (US$ 14
million) at year-end fiscal 1998 due to an increase in
95
non-performing loans to the middle market companies which formed a major portion
of our loan portfolio in our initial years. The non-performing loans in the
light manufacturing, iron and steel and textile sectors increased by Rs. 769
million. The light manufacturing industry category includes manufacturers of
electronic equipment, electrical cables, fasteners, windmills and light
manufacturing items. As a percentage of net loans, net non-performing loans
increased to 2.66% at year-end fiscal 1999 from 1.40% at year-end fiscal 1998.
Provisions for credit losses in fiscal 1999 increased 50.0% to Rs. 540 million
(US$ 12 million) from Rs. 360 million (US$ 8 million) in fiscal 1998 as a result
of the increase in gross non-performing loans.
Non-interest revenue increased 46.5% in fiscal 1999 to Rs. 866 million (US$
20 million) from Rs. 591 million (US$ 14 million) in fiscal 1998, primarily due
to a 54.2% increase in income from fees, commissions and brokerage and a 99.4%
increase in income from foreign exchange transactions offset, in part, by
decline in trading account revenue and income from securities transactions.
Non-interest expense increased 44.2% in fiscal 1999 to Rs. 799 million (US$
18 million) from Rs. 554 million (US$ 13 million) in fiscal 1998 primarily due
to the increase in employee expense, premises and equipment expense and
administrative and other expense. Non-interest expense as a percentage of
average total assets decreased to 1.52% in fiscal 1999 from 2.08% in fiscal
1998.
Our total assets increased 112.1% to Rs. 74.8 billion (US$ 1.7 billion) at
year-end fiscal 1999 from Rs. 35.3 billion (US$ 811 million) at year-end fiscal
1998 primarily due to the increase in loans, trading assets and cash and cash
equivalents. Total liabilities increased 119.5% to Rs. 72.0 billion (US$ 1.7
billion) at year-end fiscal 1999 from Rs. 32.8 billion (US$ 754 million) at
year-end fiscal 1998 primarily due to the increase in time deposits.
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with Indian GAAP was 11.06% at year-end fiscal 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 7.32% and our Tier 2 capital
adequacy ratio was 3.74% at year-end fiscal 1999. Our total capital adequacy
ratio computed under the applicable Reserve Bank of India guidelines and based
on our financial statements prepared in accordance with US GAAP was 10.44% at
year-end fiscal 1999. Using the same basis of computation, our Tier 1 capital
adequacy ratio was 6.92% and our Tier 2 capital adequacy ratio was 3.52% at
year-end fiscal 1999.
Summary Fiscal 1998 compared to Fiscal 1997
Net income increased 23.1% in fiscal 1998 to Rs. 298 million (US$ 7
million) from Rs. 242 million (US$ 6 million) in fiscal 1997. The return on
average assets was 1.12% in fiscal 1998 compared to 1.52% in fiscal 1997 and the
return on average stockholders' equity was 12.90% in fiscal 1998 compared to
14.34% in fiscal 1997.
Net interest revenue increased 7.7% in fiscal 1998 compared to fiscal 1997
reflecting mainly the following factors:
o an increase of 66.0% in the average volume of interest-earning assets,
offset by
o a decrease of 202 basis points in the net interest margin to 3.72% in
fiscal 1998 from 5.74% in fiscal 1997 and a decrease of 92 basis points
in our spread to 2.46% in fiscal 1998 from 3.38% in fiscal 1997.
The net interest margin decreased primarily due to the over 2.0% decline in
our average lending rates in fiscal 1998 and a decline in average
interest-earning assets as a proportion of average interest-bearing liabilities
to 113.3% in fiscal 1998 from 123.7% in fiscal 1997.
Gross non-performing loans increased 223.0% in fiscal 1998 to Rs. 604
million (US$ 14 million) at year-end fiscal 1998 from Rs. 187 million (US$ 4
million) at year-end fiscal 1997. All the companies
96
that became non-performing in fiscal 1998 were middle market companies,
primarily in textiles and iron and steel industries that were adversely impacted
principally by the slowdown in the Indian economy. As a percentage of net loans,
net non-performing loans increased to 1.40% at year-end fiscal 1998 from none at
year-end fiscal 1997. Provisions for credit losses in fiscal 1998 increased
92.5% to Rs. 360 million (US$ 8 million) from Rs. 187 million (US$ 4 million) in
fiscal 1997 as a result of the increase in gross non-performing loans.
Non-interest revenue increased 86.4% in fiscal 1998 to Rs. 591 million (US$
14 million) from Rs. 317 million (US$ 7 million) in fiscal 1997, primarily due
to the increase in income from fees, commissions and brokerage, trading account
revenue and income from foreign exchange transactions offset, in part, by
decline in income from securities transactions.
Non-interest expense increased 36.5% in fiscal 1998 to Rs. 554 million (US$
13 million) from Rs. 406 million (US$ 9 million) in fiscal 1997 primarily due to
the increase in employee expense and premises and equipment expense.
Non-interest expense as a percentage of average total assets decreased to 2.08%
in fiscal 1998 from 2.54% in fiscal 1997.
Our total assets increased 78.5% to Rs. 35.3 billion (US$ 811 million) at
year-end fiscal 1998 from Rs. 19.8 billion (US$ 454 million) at year-end fiscal
1997 primarily due to the increase in trading assets, cash and cash equivalents
and loans. Total liabilities increased 82.1% to Rs.32.8 billion (US$ 754
million) at year-end fiscal 1998 from Rs. 18.0 billion (US$ 414 million) at
year-end fiscal 1997 primarily due to the increase in time deposits.
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with Indian GAAP was 13.48% at year-end fiscal 1998. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 13.38% and our Tier 2 capital
adequacy ratio was 0.10% at year-end fiscal 1998.
Average Balance Sheet
The average balance is the daily average of balances outstanding. The
amortized portion of loan origination fees (net of loan origination costs) is
included in interest revenue on loans, representing an adjustment to the yield.
The average yield on average interest-earning assets is the ratio of interest
revenue to average interest-earning assets. The average cost on average
interest-bearing liabilities is the ratio of interest expense to average
interest-bearing liabilities. The average balances of loans include
non-performing loans and are net of allowance for credit losses. We have not
recalculated tax-exempt income on a tax-equivalent basis because we believe that
the effect of doing so would not be significant.
The following tables set forth, for the periods indicated, the average
balances of our assets and liabilities outstanding, which are major components
of interest revenue, interest expense and net interest margin.
Nine months ended December 31,
---------------------------------------------------------------------------
1998 1999
----------------------------------- ------------------------------------
Interest Average Interest Average
Average revenue/ yield/ Average revenue/ yield/
balance expense cost(1) balance Expense cost(1)
--------- ---------- --------- --------- ---------- ---------
(in millions, except percentages)
Assets:
Interest-earning assets:
Cash, cash equivalents and
trading assets(2)........... Rs. 19,524 Rs. 1,640 11.20% Rs. 28,548 Rs. 2,142 10.00%
Securities(3).................. 2,452 209 11.36 5,332 525 13.13
Loans net...................... 16,623 1,853 14.86 28,469 3,080 14.43
Other interest income(4)....... 56 90
----------- ---------- ---------- ---------
Total interest-earning assets.. 38,599 3,758 12.98 62,349 5,837 12.48
97
Non-interest-earning assets:
Cash and cash equivalents(5)... 3,537 5,473
Acceptances.................... 3,988 6,978
Property and equipment......... 1,397 1,606
Other assets................... 1,194 5,638
Total non-earning assets....... 10,116 19,695
----------- ---------- ---------- ---------
Total assets................... Rs. 48,715 Rs. 3,758 Rs. 82,044 Rs. 5,837
=========== ========== ========== =========
Nine months ended December 31(1),
----------------------------------------------------------------------------
1998 1999
------------------------------------ ------------------------------------
Interest Average Interest Average
Average revenue/ yield/ Average revenue/ yield/
balance expense cost(1) balance Expense cost(1)
--------- ---------- --------- --------- ---------- ---------
(in millions, except percentages)
Liabilities:
Interest-bearing liabilities:
Savings account deposits......... Rs. 1,447 Rs. 36 3.32% Rs. 3,176 Rs. 81 3.40%
Time deposits.................... 32,086 2,573 10.69 53,432 4,091 10.21
Long-term debt................... 958 102 14.20 1,763 184 13.92
Trading account and
other liabilities.............. 3,346 251 10.00 4,831 427 11.78
----------- -------- ---------- --------
Total interest-bearing
liabilities.................... 37,837 2,962 10.44 63,202 4,783 10.09
----------- -------- ---------- --------
Non-interest-bearing liabilities:
Non-interest-bearing deposits.... 3,444 5,626
Other liabilities................ 4,861 9,951
Total non-interest-bearing
liabilities.................... 8,305 15,577
----------- ----------
Total liabilities................ 46,142 2,962 78,779 4,783
----------- -------- ---------- --------
Stockholders' equity............. 2,573 3,265
Total liabilities and
stockholders' equity........... Rs. 48,715 Rs. 82,044
=========== ==========
Year ended March 31,
-------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ----------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Revenue/ yield/ Average Revenue/ Yield/ Average revenue/ yield/
Balance Expense cost balance Expense Cost balance expense cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(in millions, except percentages)
Assets:
Interest-earning assets:
Cash, cash equivalents and Rs. 1,159 Rs. 81 6.99% Rs. 8,637 Rs. 913 10.57% Rs. 21,143 Rs. 2,297 10.86%
trading assets(2)..............
Securities(3).................. 3,347 421 12.58 1,332 148 11.11 2,832 305 10.77
Loans, net..................... 7,224 1,341 18.56 9,498 1,499 15.78 18,546 2,707 14.60
Other interest income(4)....... - - - - 19 - - 81 -
--------- -------- --------- --------- ---------- ---------
Total interest-earning assets.. 11,730 1,843 15.71 19,467 2,579 13.25 42,521 5,390 12.68
--------- -------- --------- --------- ---------- ---------
Non-interest-earning assets:
Cash and cash equivalents(5)... 1,287 2,776 3,625
Acceptances.................... 2,507 2,575 4,388
Property and equipment......... 212 910 1,704
Other assets................... 222 933 367
Total non-earning assets....... 4,228 7,194 10,084
--------- --------- --------- ----------
Total assets................... Rs.15,958 Rs.1,843 Rs.26,661 Rs. 2,579 Rs. 52,605 Rs. 5,390
========= ======== ========= ========= ========== =========
98
Year ended March 31,
--------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ------------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average Revenue/ yield/ Average Revenue/ yield/ Average revenue/ yield/
Balance Expense cost balance expense cost balance expense cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(in millions, except percentages)
Liabilities:
Interest-bearing liabilities:
Savings account deposits.... Rs. 304 Rs. 10 3.29% Rs. 815 Rs. 28 3.44% Rs. 1,569 Rs. 54 3.44%
Time deposits............... 7,449 962 12.91 14,325 1,590 11.10 34,347 3,653 10.64
Long-term debt.............. 76 13 17.11 109 16 14.68 1,127 155 13.75
Trading account and
other liabilities......... 1,655 185 11.18 1,936 220 11.36 4,169 382 9.16
--------- --------- ---------- ---------- ---------- ---------
Total interest-bearing
Liabilities............... 9,484 1,170 12.34 17,185 1,854 10.79 41,212 4,244 10.30
--------- --------- ---------- ---------- ---------- ---------
Non-interest-bearing
liabilities:
Non-interest-bearing
Deposits.................. 2,170 3,399 3,539
Other liabilities........... 2,616 3,767 5,186
--------- ---------- ----------
Total non-interest-
bearing liabilities....... 4,786 7,166 8,725
--------- ---------- ----------
Total liabilities........... Rs.14,270 Rs. 1,170 Rs. 24,351 Rs. 1,854 Rs. 49,937 Rs. 4,244
========= ========= ========== ========= ========== =========
Stockholders' equity........ Rs. 1,688 Rs. 2,310 Rs. 2,668
--------- ---------- ----------
Total liabilities and
stockholders' equity...... Rs.15,958 Rs. 26,661 Rs. 52,605
========= ========== ==========
- -----------
(1) Average yield and average cost for the nine months ended December 31, 1998
and 1999 are annualized.
(2) Includes government of India securities, inter-bank deposits and lending,
commercial paper, certificate of deposits and equity securities.
(3) Includes corporate debt securities, government of India securities held as
available for sale and mutual fund units.
(4) Includes interest income earned on balances maintained with the Reserve
Bank of India pursuant to the cash reserve ratio requirement, which is
currently 9.0% of our demand and time liabilities, excluding certain
specified liabilities. See "Supervision and Regulation--Legal Reserve
Requirements--Cash Reserve Ratio". Up to fiscal 1997, no interest was
payable by the Reserve Bank of India on these balances. Since fiscal 1998,
the Reserve Bank of India pays interest of 4.0% per annum on balances in
excess of 3.0% of our demand and time liabilities.
(5) Includes balances maintained with the Reserve Bank of India pursuant to the
cash reserve ratio requirement.
Analysis of Changes in Interest Revenue and Interest Expense Volume and
Rate Analysis
The following table sets forth, for the periods indicated, the changes in
the components of our net interest revenue. The changes in net interest revenue
between periods have been reflected as attributed either to volume or rate
changes. For the purpose of this table, changes which are due to both volume and
rate have been allocated solely to volume.
Nine months ended December
31, 1999 vs. Nine months ended
Fiscal 1998 vs. Fiscal 1997 Fiscal 1999 vs. Fiscal 1998 December 31, 1998
------------------------------- -------------------------------- --------------------------------
Increase (decrease) Increase (Decrease) Increase (decrease)
due to due to due to
--------------------- --------------------- ---------------------
Change in Change in Change in Change in Change in Change in
Net average average Net average average Net average average
Change volume rate change volume rate Change volume rate
-------- --------- --------- -------- --------- --------- -------- --------- ---------
(in millions)
Interest revenue:
Cash, cash equivalents and Rs. 832 Rs. 790 Rs. 42 Rs. 1,384 Rs. 1,359 Rs. 25 Rs. 502 Rs. 735 Rs. (233)
trading assets..........
Securities................. (273) (224) (49) 157 162 (5) 316 273 43
Loans, net................. 158 359 (201) 1,208 1,321 (113) 1,227 1,300 (73)
Other interest income...... 19 19 - 62 62 - 34 34 -
-------- -------- ------- --------- --------- -------- -------- --------- --------
Total interest revenue..... Rs. 736 Rs. 944 Rs.(208) Rs. 2,811 Rs. 2,904 Rs. (93) Rs.2,079 Rs. 2,342 Rs. (263)
======== ======== ======= ========= ========= ======== ======== ========= ========
99
Interest expense:
Savings account deposits... Rs. 18 Rs. 18 Rs. - Rs. 26 Rs. 26 Rs. - Rs. 45 Rs. 44 Rs. 1
Time deposits.............. 628 763 (135) 2,063 2,129 (66) 1,518 1,673 (155)
Long-term debt............. 3 5 (2) 139 140 (1) 82 85 (3)
Trading account and other
Liabilities.............. 35 32 3 162 205 (43) 176 116 60
-------- -------- ------- --------- --------- -------- -------- --------- --------
Total interest expense..... Rs. 684 Rs. 818 Rs.(134) Rs. 2,390 Rs. 2,500 Rs. (110) Rs.1,821 Rs. 1,918 Rs. (97)
======== ======== ======= ========= ========= ======== ======== ========= ========
Net interest revenue Rs. 52 Rs. 126 Rs. (74) Rs. 421 Rs. 404 Rs. 17 Rs. 258 Rs. 424 Rs. (166)
======== ======== ======= ========= ========= ======== ======== ========= ========
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and net interest margins on our interest-earning assets.
Nine months ended
Year ended March 31, December 31(1),
------------------------------- ------------------
1997 1998 1999 1998 1999
------ ------ ------ ------ ------
(in millions, except percentages)
Interest revenue......................................... Rs. 1,843 Rs. 2,579 Rs. 5,390 Rs. 3,758 Rs. 5,837
Average interest-earning assets.......................... 11,730 19,467 42,521 38,599 62,349
Interest expense......................................... 1,170 1,854 4,244 2,962 4,783
Average interest-bearing liabilities..................... 9,484 17,185 41,212 37,837 63,202
Average total assets..................................... 15,958 26,661 52,605 48,715 82,044
Average interest-earning assets as a percentage
of Average total assets............................... 73.5% 73.0% 80.8% 79.2% 76.0%
Average interest-bearing liabilities as a
percentage of Average total assets.................... 59.4 64.5 78.3 77.7 77.0
Average interest-earning assets as a percentage
of Average interest-bearing liabilities............... 123.7 113.3 103.2 102.0 98.7
Yield.................................................... 15.71 13.25 12.68 12.98 12.48
Cost of funds............................................ 12.34 10.79 10.30 10.44 10.09
Spread(2)................................................ 3.38 2.46 2.38 2.54 2.39
Net interest margin(3)................................... 5.74 3.72 2.70 2.75 2.25
- ------------
(1) Yield, cost of funds, spread and net interest margin are annualized for the
nine months ended December 31, 1998 and 1999.
(2) Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(3) Net interest margin is the ratio of net interest revenue to average
interest-earning assets. The difference in net interest margin and spread
arises due to the difference in amount of average interest-earning assets
and average interest-bearing liabilities. If average interest-earning
assets exceed average interest-bearing liabilities, net interest margin is
greater than the spread and if average interest-bearing liabilities exceed
average interest-earning assets, net interest margin is less than the
spread.
Interest Revenue
Nine months ended December 31, 1999 compared to Nine months ended
December 31, 1998
The following table sets forth, for the periods indicated, the principal
components of our interest revenue.
100
Nine months ended December 31,
----------------------------------------------------
1999/1998 %
1998 1999 1999 change
------ ------ ------ -----------
(in millions, except percentages)
Cash, cash equivalents and trading
account assets..................... Rs. 1,640 Rs. 2,142 US$ 49 30.6%
Securities........................... 209 525 12 151.2
Loans................................ 1,853 3,080 71 66.2
Others............................... 56 90 2 60.7
---------- ---------- --------
Total interest revenue............... Rs. 3,758 Rs. 5,837 US$ 134 55.3%
========== ========== ========
Interest revenue increased 55.3% in the nine months ended December 31, 1999
compared to the nine months ended December 31, 1998 reflecting mainly the
following factors:
o an increase of Rs. 23.8 billion (US$ 546 million) or 61.5% in the
average volume of interest-earning assets, offset by
o a decline of 50 basis points in the gross yield on interest-earning
assets to 12.48% in the nine months ended December 31, 1999 from 12.98%
in the nine months ended December 31, 1998.
The increase in interest-earning assets was primarily driven by the growth
in loan and cash, cash equivalents and trading assets. The average volume of
cash, cash equivalents and trading account assets increased 46.2% in the nine
months ended December 31, 1999 to Rs. 9.0 billion (US$ 207 million) compared to
the nine months ended December 31, 1998 primarily due to increased reserve
requirements resulting from a 68.3% increase in average deposits in the nine
months ended December 31, 1999. Our trading portfolio primarily consists of
government of India securities which are held to meet our statutory liquidity
reserve requirements. The yield on cash, cash equivalents and trading account
assets decreased 120 basis points in the nine months ended December 31, 1999
primarily because we did not have the opportunities to swap rupee funds into US
dollars at attractive forward rates as we did in the nine months ended December
31, 1998.
The average volume of loans increased by Rs. 11.8 billion (US$ 272 million)
or 71.3% to Rs. 28.5 billion (US$ 654 million) in the nine months ended December
31, 1999 compared to the nine months ended December 31, 1998. Our loan growth
was due to an increase in our working capital loans primarily to more highly
rated larger corporate clients introduced to us by our parent, ICICI through our
joint marketing in the major client group. The decline in yield on
interest-earning assets was primarily due to the decline in yield on loans. The
yield on loans decreased 43 basis points to 14.43% in the nine months ended
December 31, 1999 from 14.86% in the nine months ended December 31, 1998
primarily due to the increased volume of business with higher rated clients
which, consistent with market conditions, typically earns lower yields. Our
yield was also lower due to an increase in our non-performing loans as we do not
accrue interest on non-performing loans and a general decline in interest rates
in the nine months ended December 31, 1999.
The average volume of securities increased 117.5% to Rs. 5.3 billion (US$
123 million) in the nine months ended December 31, 1999 from Rs. 2.5 billion in
the nine months ended December 31, 1998. The yield on the securities increased
to 13.13% in the nine months ended December 31, 1999 from 11.36% in the nine
months ended December 31, 1998 primarily due to the higher level of dividend
income earned from investments in mutual fund units. Our investment in mutual
fund units increased to Rs. 1.2 billion (US$ 27 million) at December 31, 1999
from Rs. 266 million (US$ 6 million) at year-end fiscal 1999. Dividend income
increased to Rs. 240 million (US$ 6 million) in the nine months ended December
31, 1999 from Rs. 44 million (US$ 1 million) in the nine months ended December
31, 1998.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our interest revenue.
101
Year ended March 31,
-----------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ ----------- ------ ------ -----------
(in millions, except percentages)
Cash, cash equivalents and trading
Account assets..................... Rs. 81 Rs. 913 1,027.2% Rs. 2,297 US$ 53 151.6%
Securities 421 148 (64.8) 305 7 106.1
Loans................................ 1341 1499 11.8 2,707 62 80.6
Others............................... 19 81 2 326.3
--------- --------- --------- -------
Total interest revenue............... Rs. 1,843 Rs. 2,579 39.9 Rs. 5,390 US$ 124 109.0
========= ========= ========= =======
Interest revenue increased 109.0% in fiscal 1999 compared to fiscal 1998
reflecting mainly the following factors:
o an increase of Rs. 23.1 billion (US$ 530 million) or 118.4% in the
average volume of interest-earning assets, offset by
o a decline of 57 basis points in the gross yield on interest-earning
assets from 13.25% in fiscal 1998 to 12.68% in fiscal 1999.
The increase in interest-earning assets was primarily driven by the growth
in cash, cash equivalents and trading assets and loans. The average volume of
cash, cash equivalents and trading account assets increased 144.8% in fiscal
1999 to Rs. 21.1 billion (US$ 486 million) compared to fiscal 1998 primarily due
to increased reserve requirements resulting from a 112.8% increase in average
deposits in fiscal 1999. We also from time to time swapped rupee funds into US
dollars at attractive forward rates and placed them in foreign currency
denominated deposits with banks outside India.
The decline in yield on interest-earning assets was primarily due to the
decline in yield on loans. The average volume of loans increased by Rs. 9.0
billion (US$ 208 million) or 95.3% to Rs. 18.5 billion (US$ 426 million) in
fiscal 1999 compared to fiscal 1998. Our loan growth was due to an increase in
our working capital loans primarily to additional clients referred to us by our
parent, ICICI. The yield on loans decreased 118 basis points to 14.60% in fiscal
1999 from 15.78% in fiscal 1998 primarily due to lower market rates generally
prevalent in fiscal 1999 compared to fiscal 1998 and the increased volume of
business with higher rated clients which, consistent with market conditions,
typically earns lower yields. Our yield was also lower due to an increase in our
non-performing loans as we do not accrue interest on non-performing loans.
The average volume of securities increased 112.6% to Rs. 2.8 billion (US$
65 billion) in fiscal 1999 from Rs. 1.3 billion (US$ 31 million) in fiscal 1998.
The yield on the securities declined to 10.77% in fiscal 1999 from 11.11% in
fiscal 1998 primarily due to the lower coupon rate on additional securities
purchased during the year in line with the downward movement in market interest
rates.
Fiscal 1998 compared to Fiscal 1997
Interest revenue increased 39.9% in fiscal 1998 compared to fiscal 1997
reflecting mainly the following factors:
o an increase of Rs. 7.7 billion (US$ 178 million) or 66.0% in the average
volume of interest-earning assets; and
o a decline of 246 basis points in the gross yield on interest-earning
assets to 13.25% in fiscal 1998 from 15.71% in fiscal 1997.
The increase in interest-earning assets was primarily due to the growth in
cash, cash equivalents and trading account assets. The average volume of cash,
cash equivalents and trading account assets increased 645.2% in fiscal 1998 to
Rs. 8.6 billion (US$ 198 million) compared to fiscal 1997 primarily due
102
to increased reserve requirements resulting from a 86.8% increase in average
deposits and our shift towards trading operations to maximize our earning from
our portfolio of government of India securities. Further, we swapped rupee funds
into foreign currency at attractive forward rates and placed them in foreign
currency denominated deposits with banks outside India. The yield on cash, cash
equivalents and trading account assets increased significantly to 10.57% in
fiscal 1998 from 6.99% in fiscal 1997 as a result of increase in our trading
portfolio and higher yields earned on rupee funds held as foreign currency
deposits.
The yield on interest-earning assets decreased 246 basis points principally
due to a decline in yield on loans offset, in part, by an increase in yield on
cash, cash equivalents and trading account assets. The average volume of loans
increased by Rs. 2.3 billion (US$ 52 million) or 31.5% to Rs. 9.5 billion (US$
218 million) in fiscal 1998 compared to fiscal 1997 primarily due to the
increased level of corporate customers acquired as a result of our focus on
commercial lending. The yield on loans decreased 278 basis points to 15.78% in
fiscal 1998 from 18.56% in fiscal 1997 as our average lending rates were over
2.0% lower in fiscal 1998 compared to fiscal 1997 loans as did the general
market decline in interest rates. In addition, an increase in our non-performing
loans had an adverse effect on the yield on loans as we do not accrue interest
on non-performing
The average volume of securities decreased 60.2% to Rs. 1.3 billion (US$ 31
million) in fiscal 1998 from Rs. 3.3 billion in fiscal 1997 primarily due to the
sale of securities held as "available for sale" in fiscal 1997 as the market
offered more opportunities for obtaining capital gains. We replaced them with
bonds carrying market-related yields, which were lower in fiscal 1998 compared
to fiscal 1997 due to the lower interest rates prevalent in fiscal 1998 compared
to fiscal 1997.
Interest Expense
Nine Months ended December 31, 1999 compared to Nine Months ended
December 31, 1998
The following table sets forth, for the periods indicated, the principal
components of our interest expense.
Nine months ended December 31,
----------------------------------------------
1999/1998 %
1998 1999 1999 change
------ ------ ------ -----------
(in millions, except percentages)
Savings account deposits............. Rs. 36 Rs. 81 US$ 2 125.0%
Time deposits........................ 2,573 4,091 94 59.0
Long-term debt....................... 102 184 4 80.4
Trading account liabilities and
others............................. 251 427 10 70.1
--------- --------- ---------
Total interest expense............... Rs. 2,962 Rs. 4,783 US$ 110 61.5
========= ========= =========
Interest expense increased 61.5% in the nine months ended December 31, 1999
compared to the nine months ended December 31, 1998 reflecting mainly the
following factors:
o an increase of Rs. 25.4 billion (US$ 583 million) or 67.0% in the
average volume of interest-bearing liabilities, offset by
o a decline of 35 basis points in the cost of interest-bearing liabilities
to 10.09% in the nine months ended December 31, 1999 from 10.44% in the
nine months ended December 31, 1998.
The average volume of interest-bearing liabilities increased primarily due
to an increase in time deposits which were 84.5% of average interest-bearing
liabilities in the nine months ended December 31, 1999. The average volume of
time deposits increased by Rs. 21.3 billion (US$ 491 million) or 66.5% to Rs.
53.4 billion (US$ 1.2 billion) in the nine months ended December 31, 1999 from
Rs. 32.1 billion (US$ 737 million) in the nine months ended December 31, 1998.
We focused on deposit taking from retail customers
103
by offering products targeted at new segments of customers including "Power
Pay", a direct deposit product to streamline the salary payment systems of our
corporate customers. The share of new "Power Pay" accounts in all new savings
accounts in the nine months ended December 31, 1999 was 62.0%. Our focus on
retail deposit taking was reflected in the 67.9% growth in our retail deposits
in the nine months ended December 31, 1999 compared to 30.7% growth in our
corporate deposits in the same period.
The cost of interest-bearing liabilities declined primarily due to the
decrease in the cost of time deposits offset, in part, by the increase in cost
of trading account and other liabilities. Our retail deposits typically carry
lower interest rates compared to our corporate deposits. As a result of the
increase in proportion of retail deposits in the total deposits, the average
cost of time deposits decreased 48 basis points to 10.21% in the nine months
ended December 31, 1999 from 10.69% in the nine months ended December 31, 1998.
The average volume of trading account liabilities, consisting of borrowings
from the inter-bank money market and short-term borrowings from institutions,
increased 44.4% in the nine months ended December 31, 1999 to Rs. 4.8 billion
(US$ 111 million) from Rs. 3.3 billion (US$ 77 million) in the nine months ended
December 31, 1998 to meet short-term or over-night funding requirements. The
cost of trading account liabilities increased to 11.78% in the nine months ended
December 31, 1999 from 10.00% in the nine months ended December 31, 1998.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our interest expense.
Year ended March 31,
----------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Savings account deposits............. Rs. 10 Rs. 28 180.0% Rs. 54 US$ 1 92.9%
Time deposits....................... 962 1,590 65.3 3,653 84 129.7
Long-term debt....................... 13 16 23.1 155 4 868.8
Trading account liabilities and 18.9 73.6
Others............................ 185 220 382 9
--------- --------- --------- ------
Total interest expense............... Rs. 1,170 Rs. 1,854 58.5 Rs. 4,244 US$ 98 128.9
========= ========= ========= ======
Interest expense increased 128.9% in fiscal 1999 compared to fiscal 1998
reflecting mainly the following factors:
o an increase of Rs. 24.0 billion (US$ 552 million) or 139.8% in the
average volume of interest-bearing liabilities, offset by
o a decline of 49 basis points in the cost of interest-bearing liabilities
to 10.30% in fiscal 1999 from 10.79% in fiscal 1998.
The average volume of interest-bearing liabilities increased primarily due
to an increase in time deposits which accounted for 83.3% of average
interest-bearing liabilities in fiscal 1999. The average volume of time deposits
increased by Rs. 20.0 billion (US$ 460 million) or 139.8% to Rs. 34.3 billion
(US$ 789 million) in fiscal 1999 from Rs. 14.3 billion (US$ 329 million) in
fiscal 1998. We continued our focus on deposit taking by offering products
targeting different segment of customers with features tailored to their
specific requirements to build existing customer relationships and acquire new
customers.
The cost of interest-bearing liabilities declined primarily due to the
decrease in the cost of time deposits and trading account and other liabilities.
The market interest rates were generally lower in fiscal 1999 compared to fiscal
1998. We reduced the interest payable on short-term deposits to 5%-10% in fiscal
1999 from 6%-16% in fiscal 1998. We also reduced the interest rate payable on
deposits of over one year
104
maturity to 11.0%-11.5% in fiscal 1999 from 8.5%-13% in fiscal 1998. As a
result, the cost of time deposits decreased 46 basis points to 10.64% in fiscal
1999 from 11.10% in fiscal 1998. The reduction in the cost of time deposits was
lower than the reduction in the interest rates offered on time deposits because
our time deposits re-price only at maturity and existing deposits continue to
earn interest at the original contracted rate until their maturity. As a result,
revised interest rates on deposits are applicable only to new deposits raised.
The average volume of trading account liabilities, consisting of borrowings
from the inter-bank call money market and short-term borrowings from
institutions, increased 115.3% in fiscal 1999 to Rs. 4.2 billion (US$ 96
million) from Rs. 1.9 billion (US$ 44 million) in fiscal 1998 to meet short-term
or over-night funding requirements. The cost of trading account liabilities
decreased to 9.16% in fiscal 1999 from 11.36% in fiscal 1998.
Fiscal 1998 compared to Fiscal 1997
Interest expense increased 58.5% in fiscal 1998 compared to fiscal 1997
reflecting mainly the following factors:
o an increase of Rs. 7.7 billion (US$ 178 million) or 81.2% in the average
volume of interest-bearing liabilities, offset by
o a decline of 155 basis points in the cost of interest-bearing
liabilities to 10.79% in fiscal 1998 from 12.34% in fiscal 1997.
The average volume of interest-bearing liabilities increased primarily due
to an increase in time deposits, which accounted for 83.4% of average
interest-bearing liabilities in fiscal 1998. The average volume of time deposits
increased by Rs. 6.9 billion (US$ 158 million) or 92.3% to Rs. 14.3 billion (US$
329 million) in fiscal 1998 from Rs. 7.4 billion (US$ 171 million) in fiscal
1997 due to increase in our corporate and retail deposits.
The cost of interest-bearing liabilities declined primarily due to the
decrease in the cost of time deposits and trading account and other liabilities.
The cost of time deposits decreased 181 basis points to 11.10% in fiscal 1998
from 12.91% in fiscal 1997 primarily due to a decrease in market interest rates
as the Reserve Bank of India lowered the cash reserve ratio to release more
funds into the system to create more liquidity and lowered the bank rate to
create a decline in interest rates.
The average volume of trading account liabilities increased 17.0% in fiscal
1998 to Rs. 1.9 billion (US$ 44 million) from Rs. 1.7 billion (US$ 38 million)
in fiscal 1997 to meet short-term or over-night funding requirements. The cost
of trading account liabilities increased 18 basis points in fiscal 1998 compared
to fiscal 1997.
Net Interest Revenue
Nine Months ended December 31, 1999 compared to Nine Months ended
December 31, 1998
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue.
Nine months ended December 31,
-----------------------------------------------------
1999/1998 %
1998 1999 1999 change
------ ------ ------ -----------
(in millions, except percentages)
Interest revenue......................... Rs. 3,758 Rs. 5,837 US$ 134 55.3%
Interest expense......................... (2,962) (4,783) (110) 61.5
--------- ---------- --------- ----
Net interest revenue.................... Rs. 796 Rs. 1,054 US$ 24 32.4%
========= ========== ========= ====
105
Net interest revenue increased 32.4% in the nine months ended December 31,
1999 compared to the nine months ended December 31, 1998 reflecting mainly the
following factors as described in more detail above:
o an increase of 61.5% in the average volume of interest-earning assets,
offset by
o a decrease of 50 basis points in the net interest margin to 2.25% in the
nine months ended December 31, 1999 from 2.75% in the nine months ended
December 31, 1998 and a decrease of 15 basis points in our spread to
2.39% in the nine months ended December 31, 1999 from 2.54% in the nine
months ended December 31, 1998.
The net interest margin decreased primarily due to our shift towards loans
to highly rated clients resulting in lower credit spreads, an increase in gross
non-performing loans, a 120 basis point decline in yield on cash, cash
equivalents and trading account assets and a decline in average interest-earning
assets as a proportion of average interest-bearing liabilities to 98.7% in the
nine months ended December 31, 1999 from 102.0% in the nine months ended
December 31, 1998.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue.
Year ended March 31,
-------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Interest revenue.................. Rs.1,843 Rs.2,579 39.9% Rs.5,390 US$124 109.0%
Interest expense.................. (1,170) (1,854) 58.5 (4,244) (98) 128.9
-------- -------- ---- -------- ------ -----
Net interest revenue.............. Rs. 673 Rs. 725 7.7% Rs.1,146 US$ 26 58.1%
======== ======== ==== ======== ====== =====
Net interest revenue increased 58.1% in fiscal 1999 compared to fiscal 1998
reflecting mainly the following factors as described in more detail above:
o an increase of 118.4% in the average volume of interest earning assets,
offset by
o a decrease of 102 basis points in the net interest margin to 2.70% in
fiscal 1999 from 3.72% in fiscal 1998 and a decrease of 8 basis points
in our spread to 2.38% in fiscal 1999 from 2.46% in fiscal 1998.
The net interest margin decreased primarily due to our shift towards loans
to highly rated clients resulting in lower credit spreads, an increase in gross
non-performing loans and the decline in average interest-earning assets as a
proportion of average interest-bearing liabilities to 103.2% in fiscal 1999 from
113.3% in fiscal 1998.
Fiscal 1998 compared to Fiscal 1997
Net interest revenue increased 7.7% in fiscal 1998 compared to fiscal 1997
reflecting mainly the following factors as described in more detail above:
o an increase of 66.0% in the average volume of interest-earning assets,
offset by
o a decrease of 202 basis points in the net interest margin to 3.72% in
fiscal 1998 from 5.74% in fiscal 1997 and a decrease of 92 basis points
in our spread to 2.46% in fiscal 1998 from 3.38% in fiscal 1997.
106
The net interest margin decreased primarily due to the over 2.0% decline in
our average lending rates in fiscal 1998 and a decline in average
interest-earning assets as a proportion of average interest-bearing liabilities
to 113.3% in fiscal 1998 from 123.7% in fiscal 1997.
Provisions for Credit Losses
The following table sets forth, for the periods indicated, certain
information regarding our non-performing loans.
At March 31, At December 31,
----------------------------------------------------------------- -----------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change 1999 1999
------ ------ --------- ------ ------ --------- ------ ------
(in millions, except percentages)
Gross non-performing loans...... Rs. 187 Rs. 604 223.0% Rs. 1,613 US$ 37 167.1% Rs. 1,965 US$45
Allowance for credit losses..... 187 425 127.3 880 20 107.1 1,083 25
Net non-performing loans........ - 179 733 17 309.5 882 20
Gross non-performing loans as
a percentage of gross loans.. 2.18% 4.58% 5.66% 5.06%
Net non-performing loans as a
percentage of net loans...... - 1.40 2.66 2.34
Allowances for credit losses as
a percentage of gross non-
performing loans.............. 100.00 70.36 54.56 55.11
Allowances for credit losses as
a percentage of gross total
loans......................... 2.18 3.22 3.09 2.79%
The following table sets forth, for the periods indicated, certain
information regarding our provisions for credit losses.
At March 31, At December 31,
------------------------------------------ ------------------------------
1997 1998 1999 1999 1998 1999 1999
------ ------ ------ ------ ------ ------ ------
(in millions, except percentages)
Provisions for credit loss.......... Rs. 187 Rs. 360 Rs. 540 US$12 Rs. 398 Rs. 218 US$ 5
Provisions for credit losses as a
percentage of net loans......... 2.23% 2.82% 1.96% 1.91% 0.58%
Provisions for credit losses as a
percentage of total assets....... 0.95 1.02 0.72 0.67 0.21
For information on changes in the allowance for credit losses, see
"Business--Non-Performing Loans--Allowance for Credit Losses".
We conduct a comprehensive analysis of our entire loan portfolio on a
periodic basis (currently done on a quarterly basis). The analysis considers
both qualitative and quantitative criteria including, among others, the account
conduct, future prospects, repayment history and financial performance. This
comprehensive analysis includes an account by account analysis of our entire
corporate loan portfolio, and an allowance is made for any probable loss on each
account. Our loan portfolio is composed largely of short-term working capital
loans where we have a security interest and first lien on all the current assets
of the borrower. We typically lend between 60.0% and 80.0% of the appraised
value of collateral to ensure that our loans are sufficiently
over-collateralized. However, the recoveries from non-performing loans are
subject to delays that may take several years, due to the long legal collection
process in India. As a result, we make an allowance for the loans based on the
time value of money or the present value of expected realizations of collateral,
which takes into account the delay we will experience before recovering our
principal. The time to recovery, expected future cash flows and realizable value
for collateral value are periodically reviewed in estimating the allowance.
107
Loans are identified as non-performing and placed on a non-accrual basis
when it is determined that either interest or principal is past due beyond 180
days or that payment of interest or principal is doubtful of collection. Any
interest accrued (and not received) on impaired loans is reversed and charged
against current earnings. Interest is thereafter included in earnings only to
the extent actually received in cash. Our allowance for credit losses is
calculated by comparing the net present value of the expected cash flows
discounted at the effective interest rate of the loan and the carrying value of
the loan.
We believe that our process for ascertaining our allowance captures the
expected losses on our entire loan portfolio and that our current allowance for
credit losses is sufficient to cover all currently known or knowable credit
losses in our existing portfolio. There can, however, be no guarantee that
non-performing loans will not increase and that the current allowance for credit
losses will be sufficient.
Changes in our provisions reflect trends in the key sectors in which we
operate. The manufacturing sector was adversely impacted during fiscal 1998 and
1999 primarily due to a slowdown in the Indian economy, a downturn in global
commodity prices, particularly in the steel and textiles sub-sectors, and a
rapid reduction in import duties which adversely impacted the performance of
corporations in these sectors. The impact was, in particular, more on the middle
market corporate segment due to their lower resilience to external factors. In
the first few years of our operations, due to our small balance sheet size,
small to medium-sized middle market companies were our target customers. As a
result, some of our loans to small and middle market companies across industries
became non-performing.
Growth in gross non-performing loans slowed significantly to 21.8% in the
nine months ended December 31, 1999 to Rs. 2.0 billion (US$ 45 million) at
December 31, 1999 from Rs. 1.6 billion (US$ 37 million) at year-end fiscal 1999.
As in fiscal 1998 and fiscal 1999, the increase in non-performing loans was
primarily due to our loans made to middle market companies in earlier years
becoming non-performing during this period. The middle market companies
accounted for approximately 85.0% of the increase in gross non-performing loans
in the nine months ended December 31, 1999. A significant portion of loans that
became non-performing in the nine months ended December 31, 1999 were made in
fiscal 1996 and 1997 when our focus was on middle market companies. The
non-performing loans in the light manufacturing sector increased by Rs. 181
million in the nine months ended December 31, 1999. The gross
108
non-performing loan as a percentage of gross loans declined to 5.06% at December
31, 1999 from 5.66% at year-end fiscal 1999. As a percentage of net loans, net
non-performing loans declined to 2.34% at December 31, 1999 from 2.66% at
year-end fiscal 1999. Provisions for credit losses in the nine months ended
December 31, 1999 decreased 45.2% to Rs. 218 million (US$ 5 million) from Rs.
398 million (US$ 9 million) in the nine months ended December 31, 1998 primarily
due to the lower addition to non-performing loans in the nine months ended
December 31, 1999. The gross non-performing loans increased by Rs. 352 million
(US$ 8 million) in the nine months ended December 31, 1999 compared to an
increase of Rs. 813 million (US$ 19 million) in gross non-performing loans in
the nine months ended December 31, 1998. The coverage ratio for gross
non-performing loans increased to 55.11% at December 31, 1999 from 54.56% at
year-end fiscal 1999.
Gross non-performing loans increased 167.1% in fiscal 1999 to Rs. 1.6
billion (US$ 37 million) at year-end fiscal 1999 from Rs. 604 million (US$ 14
million) at year-end fiscal 1998 due to an increase in non-performing loans to
the middle market companies by Rs. 542 million (US$ 12 million). The
non-performing loans in the light manufacturing, iron and steel and textile
sectors increased by Rs. 769 million (US$ 18 million). This led to an increase
in gross non-performing loan as a percentage of gross loans to 5.66% at year-end
fiscal 1999 from 4.58% at year-end fiscal 1998. As a percentage of net loans,
net non-performing loans increased to 2.66% at year-end fiscal 1999 from 1.40%
at year-end fiscal 1998. Provisions for credit losses in fiscal 1999 increased
50.0% to Rs. 540 million (US$ 12 million) from Rs. 360 million (US$ 8 million)
in fiscal 1998 in line with the increase in gross non-performing loans.
Gross non-performing loans increased 223.0% in fiscal 1998 to Rs. 604
million (US$ 14 million) at year-end fiscal 1998 from Rs. 187 million (US$ 4
million) at year-end fiscal 1997. All the companies that became non-performing
in fiscal 1998 were middle market companies, primarily in textiles and iron and
steel industries, that were adversely impacted principally by the slowdown in
the Indian economy. This led to an increase in gross non-performing loan as a
percentage of gross loans to 4.58% at year-end fiscal 1998 from 2.18% at
year-end fiscal 1997. As a percentage of net loans, net non-performing loans
increased to 1.40% at year-end fiscal 1998 from none at year-end fiscal 1997.
Provisions for credit losses in fiscal 1998 increased 92.5% to Rs. 360 million
(US$ 8 million) from Rs. 187 million (US$ 4 million) in fiscal 1997 in line with
the increase in gross non-performing loans.
Management believes that several loans which became non-performing in
fiscal 1998, 1999 and the nine months ended December 31, 1999 are essentially to
inherently viable companies. Many of these borrowers are still making interest
payments. Management expects credit losses in these loans to be lower due to the
viability of these companies. These loans were classified as non-performing as a
result of continued stress on cash flows of these borrowers, primarily due to
the slowdown in the Indian economy, stress on account of the global downtrend in
the commodity prices coupled with the rapid reduction in domestic trade barriers
over the past few years. In some cases the companies classified as
non-performing loans are operating companies generating positive, albeit
reduced, cash flows as these companies are operating at levels below their
overall capacities due to stress. In some cases, in management's view the future
cash flows, discounted at the contracted rate of the loan, adequately cover our
current outstanding principal and require no allowance for credit losses. Gross
non-performing loans that require no allowance for credit losses increased to
Rs. 466 million (US$ 10 million) at year-end fiscal 1999 from Rs. 26 million
(US$ 600,000) at year-end fiscal 1998. As a result, the coverage ratio for gross
performing loans decreased to 54.56% at year-end fiscal 1999 from 70.36% at
year-end fiscal 1998 and 100.00% at year-end fiscal 1997. This was also
reflected in the provisions for credit losses as a percentage of total assets
declining to 0.72% in fiscal 1999 from 1.02% in fiscal 1998. We have also
reached negotiated settlements with some of our borrowers where we expect to
recover the majority of the gross principal outstanding. For a more detailed
discussion of our non-performing loan portfolio, see "Business--Non-performing
Loans".
We calculate our allowance for credit losses on a loan-for-loan basis. In
the medium-term, as we increase our exposure to credit cards and other retail
loans, we expect to change the way we calculate our allowance to incorporate the
statistical methods for loan impairment that are used by banks in developed
countries in their retail portfolios, including credit scoring and other methods
designed to evaluate consumer credit risk.
109
Non-Interest Revenue
Nine months ended December 31, 1999 compared to Nine months ended
December 31, 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
Nine months ended December 31,
----------------------------------------------------
1999/1998
1998 1999 1999 % change
------ ------ ------ ---------
(in millions, except percentages)
Fees, commissions and brokerage(1) Rs. 261 Rs. 408 US$ 9 56.3%
Trading account revenue(2).......... 11 698 16 6,245.5
Securities transactions(3).......... 22 70 2 218.2
Foreign exchange transactions(4).... 257 167 4 (35.2)
Other revenue....................... - - -
-------- --------- -------
Total non-interest revenue, net..... Rs. 551 Rs. 1,343 US$ 31 143.7%
======== ========= =======
- ------------
(1) Primarily from fee-based income on services such as the issue of letters of
credit, the issue of guarantees, cash management services and remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for sale
securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 143.7% in the nine months ended December 31,
1999 to Rs. 1.3 billion (US$ 31 million) from Rs. 551 million (US$ 13 million)
in the nine months ended December 31, 1998, primarily due to an increase in
trading account revenue and fees, commissions and brokerage.
Fees, commissions and brokerage increased 56.3% in the nine months ended
December 31, 1999 primarily due to the increase in income from cash management
services and commissions on letters of credit and guarantees. The following
table sets forth, for the periods indicated, the principal components of our
fees, commissions and brokerage.
Nine months ended December 31,
-------------------------------------------------
1999/1998
1998 1999 1999 % change
------ ------ ------ ---------
(in millions, except percentages)
Remittances......................... Rs. 28 Rs. 36 US$ - 28.6%
Cash management services............ 35 74 2 111.4
Commissions:
Bills............................ 47 71 2 51.1
Guarantees....................... 60 79 2 31.7
Letters of credit................ 55 88 2 60.0
Others........................... 36 60 1 66.7
-------- ------- -------
Total commissions................... 198 298 7 50.5
-------- ------- -------
Total fees, commissions and
Brokerage......................... Rs. 261 Rs. 408 US$ 9 56.3%
======== ======= =======
Our client coverage through the Growth Clients Group and the Major Clients
Group helped us to increase the number of our customers for cash management
services to 231 at December 31, 1999 from 130 at December 31, 1998. The volume
of transactions also increased significantly to Rs. 44.1 billion (US$ 1.0
billion) in the nine months ended December 31,1999 from Rs. 22.8 billion (US$
525 million) in the nine months ended December 31,1998. As a result, income from
cash management services increased 111.4% to Rs. 74 million (US$ 2 million) in
the nine months ended December 31, 1999 compared to the nine months ended
December 31, 1998. Our guarantees increased 45.2% to Rs. 6.7 billion (US$ 154
million) at December 31, 1999 from Rs. 4.6 billion (US$ 106 million) at year-end
fiscal 1999. The acceptances
110
increased 40.0% to Rs. 7.8 billion (US$ 180 million) at December 31, 1999 from
Rs. 5.6 billion (US$ 128 million) at year-end fiscal 1999. As a result, in the
nine months ended December 31, 1999, commissions on guarantees increased 31.4%
and commissions on letters of credit increased 57.9%.
Trading account revenue increased to Rs. 698 million (US$ 16 million) in
the nine months ended December 31, 1999 from Rs. 11 million (US$ 252,000) in the
nine months ended December 31, 1998 primarily due to the significantly higher
level of trading opportunities. We took advantage of the decline in the yield on
debt securities and sold higher yielding debt securities from our portfolio. We
also benefited from a buoyant equity capital market. As a result, in the nine
months ended December 31, 1999 the gain on sale of trading securities was Rs.
364 million (US$ 8 million) and the revaluation gain on trading securities was
Rs. 334 million (US$ 8 million).
Our income from foreign exchange transactions declined 35.2% to Rs. 167
million (US$ 4 million) in the nine months ended December 31, 1999 compared to
the nine months ended December 31, 1998 primarily due to the decline in spread
on corporate transactions on account of competition and the restricted trading
opportunities in this period since the exchange rates were steady.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the
principal components of our non-interest revenue.
Year ended March 31,
----------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Fees, commissions and brokerage(1) Rs. 149 Rs. 240 61.1% Rs. 370 US$ 9 54.2%
Trading account revenue(2).......... - 147 - 134 3 (8.8)
Securities transactions(3).......... 80 32 (60.0) 21 - (34.4)
Foreign exchange transactions(4).... 86 171 98.8 341 8 99.4
Other revenue....................... 2 1 - - - -
-------- -------- -------- -----
Total non-interest revenue.......... Rs. 317 Rs. 591 86.4% Rs. 866 US$20 46.5%
======== ======== ======== =====
- ------------
1) Primarily from fee-based income on services like the issue of letters of
credit, the issue of guarantees, cash management services and remittances.
2) Primarily reflects income from trading in government of India securities.
3) Primarily reflects capital gains realized on the sale of available for sale
securities.
4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 46.5% in fiscal 1999 to Rs. 866 million (US$
20 million) from Rs. 591 million (US$ 14 million) in fiscal 1998, primarily due
to a 54.2% increase in income from fees, commissions and brokerage and a 99.4%
increase in income from foreign exchange transactions offset, in part, by
decline in trading account revenue and income from securities transactions.
The increase in fees, commissions and brokerage income in fiscal 1999 was
primarily due to the increase in fees from cash management services and
commissions from guarantees and letters of credit businesses. The following
table sets forth, for the periods indicated, the principal components of our
fees, commissions and brokerage.
Year ended March 31,
-------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Remittances......................... Rs. 15 Rs. 24 60.0% Rs. 38 US$1 58.3%
Cash management services(1)......... 2 35 - 53 1 51.4
Commissions:
111
Bills............................. 29 45 55.2 68 2 51.1
Guarantees....................... 34 51 50.0 75 2 47.1
Letters of credit................ 46 45 (2.2) 73 2 62.2
Others........................... 23 40 73.9 63 1 57.5
-------- --------- -------- ----
Total commissions................... 132 181 37.1 279 7 54.1
-------- --------- -------- ----
Total fees, commissions and
brokerage......................... Rs. 149 Rs. 240 61.1% Rs. 370 US$9 54.2%
======== ========= ======== ====
- ------------
(1) Cash management services enables faster collection of checks for our
corporate clients. The services were started during fiscal 1997.
Our client coverage through the Growth Clients Group and the Major Clients
Group helped us in increasing our number of customers for cash management
services to 155 at year-end fiscal 1999 from 105 at year-end fiscal 1998. The
volume of transactions also increased significantly to Rs. 38.9 billion (US$ 895
million) in fiscal 1999 from Rs. 10.0 billion (US$ 231 million) in fiscal 1998.
As a result, income from cash management services increased 51.4% to Rs. 53
million (US$ 1 million) in fiscal 1999 compared to fiscal 1998.
Our client coverage strategy helped us in increasing our guarantees issued
by 75.0% to Rs. 4.6 billion (US$ 106 million) at year-end fiscal 1999 from Rs.
2.6 billion (US$ 61 million) at year-end fiscal 1998. The acceptances increased
94.9% to Rs. 5.6 billion at year-end fiscal 1999 from Rs. 2.9 billion at
year-end fiscal 1998. As a result, commissions on guarantees increased 47.1% in
fiscal 1999 and commissions on letters of credit increased 62.2% in fiscal 1999.
Trading account revenue, primarily consisting of income from trading in
government of India securities, decreased 8.8% to Rs. 134 million (US$ 3
million) in fiscal 1999 from Rs. 147 million (US$ 3 million) in fiscal 1998.
Income from securities transactions, primarily consisting of capital gains
realized on the sale of corporate debt securities, decreased 34.4% to Rs. 21
million (US$ 483,000) in fiscal 1999 from Rs. 32 million (US$ 735,000) in fiscal
1998. The decrease in trading account revenue and income from securities
transactions was due to the restricted trading opportunities in the domestic
market in fiscal 1999. Subdued sentiment in the debt market also led to a
decrease in capital gains realized in fiscal 1999.
Income from foreign exchange transactions principally reflects our
purchases and sales of foreign currency, primarily US dollars, on behalf of our
corporate clients and trading on our own account. Our income from foreign
exchange transactions increased 99.4% to Rs. 341 million (US$ 8 million) in
fiscal 1999 from Rs. 171 million (US$ 4 million) in fiscal 1998 due to favorable
market conditions in foreign exchange markets and increase in volume of
transactions to Rs. 956.1 billion (US$ 22.0 billion) in fiscal 1999 from Rs.
461.3 billion (US$ 10.6 billion) in fiscal 1998.
Fiscal 1998 compared to Fiscal 1997
Non-interest revenue increased 85.8% in fiscal 1998 to Rs. 591 million (US$
14 million) from Rs. 317 million (US$ 7 million) in fiscal 1997, primarily due
to the increase in income from fees, commissions and brokerage, trading account
revenue and income from foreign exchange transactions offset, in part, by the
decline in income from securities transactions.
The increase in fees, commissions and brokerage income in fiscal 1998 was
primarily due to the increase in income from cash management services which
commenced in fiscal 1997, and increased commissions from guarantees and income
on remittances. The income from cash management services increased to Rs. 35
million (US$ 804,000) in fiscal 1998 compared to fiscal 1997. Our client
coverage strategy helped us to increase guarantees issued by 42.6% to Rs. 2.6
billion (US$ 61 million) at year-end fiscal 1998 from Rs. 1.8 billion (US$ 43
million) at year-end fiscal 1997. As a result, commissions on guarantees
increased 50.0% in fiscal 1998.
Trading account revenue was Rs. 147 million (US$ 3 million) in fiscal 1998.
We did not have a trading account portfolio in fiscal 1997. The Reserve Bank of
India's monetary policy in fiscal 1998
112
reduced cash reserve requirements for banks thereby reducing the market interest
rates. This helped to improve trading opportunities. Our income from trading
activities was high in fiscal 1998 as we capitalized on these available market
opportunities in an environment where interest rates moved sharply during short
periods. Income from securities transactions decreased 60.0% to Rs. 32 million
(US$ 735,000) in fiscal 1998 from Rs. 80 million (US$ 2 million) in fiscal 1997.
The decline in income from securities transactions was primarily due to the
61.3% decrease in our securities portfolio to Rs. 1.5 billion (US$ 34 million)
at year-end fiscal 1998 from Rs. 3.8 billion (US$ 88 million) at year-end fiscal
1997 as a result of shift in our focus to trading operations.
Our income from foreign exchange transactions increased 98.8% to Rs. 171
million (US$ 4 million) in fiscal 1998 from Rs. 86 million (US$ 2 million) in
fiscal 1997 primarily due to the increase in the volume of transactions to Rs.
461.3 billion (US$ 10.6 billion) in fiscal 1998 from Rs. 214.4 billion (US$ 4.9
billion) in fiscal 1997.
Non-Interest Expense
Nine months ended December 31, 1999 compared to Nine months ended
December 31, 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
Nine months ended December 31,
1999/1998
1998 1999 1999 % change
------ ------ ------ --------
(in millions, except percentages)
Employee expense:
Salaries............................ Rs. 100 Rs. 158 US$ 4 58.0%
Employee benefits................... 30 48 1 60.0
------- ------- ------
Total employee expense................. 130 206 5 58.5
Premises and equipment expense:
Premises............................. 37 49 1 32.4
------- ------- ------
Computer and office equipment........ 149 173 4 16.1
------- ------- ------
Total premises and equipment expense... 186 222 5 19.4
------- ------- ------
Administration and other expenses......
Rentals, taxes and electricity...... 70 123 3 75.7
Advertisement and publicity......... 24 28 1 16.7
Communications expense.............. 31 38 1 22.6
Other............................... 76 233 5 206.6
------- ------- ------
Total administration and other expense 201 422 9 110.4
------- ------- ------
Total non-interest expense............. Rs. 517 Rs. 850 US$ 19 64.4%
======= ======= ======
Non-interest expense increased 64.4% in the nine months ended December 31,
1999 to Rs. 850 million (US$ 20 million) from Rs. 517 million (US$ 12 million)
in the nine months ended December 31, 1998. Non-interest expense as a percentage
of average total assets decreased to 1.38% in the nine months ended December 31,
1999 from 1.42% in the nine months ended December 31, 1998.
Employee expense increased 58.5% in the nine months ended December 31, 1999
due to a 46.4% increase in the number of employees to 1,190 at December 31, 1999
from 813 at December 31, 1998 as we expanded our branch network to 84 branches
and extension counters from 49 branches and extension counters at December 31,
1998.
Premises and equipment expense increased 19.4% in the nine months ended
December 31, 1999 compared to the nine months ended December 31, 1998, primarily
due to a 33.1% increase in premises expenses as a result of the addition of 20
new branches and extension counters in the nine months ended December 31, 1999.
Computer and office equipment expense increased 23.9% in the nine months ended
113
December 31, 1999 primarily due to the depreciation on technology equipment
including servers, personal computers, ATMs, VSATs and BANCS2000.
Administration and other expenses increased 110.4% in the nine months ended
December 31, 1999 compared to the nine months ended December 31, 1998 primarily
due to additional rental payments resulting from the expansion of our branch
network. We networked all our ATMs to Switch which necessitated the issue of new
ATM cards to all our existing customers resulting in increased expenses. As we
focused on increasing our retail deposits, we also engaged the services of
direct selling agents in the nine months ended December 31, 1999 resulting in
higher expenses.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
Year ended March 31,
-----------------------------------------------------------------------
1998/1997 1999/1998 %
1997 1998 % change 1999 1999 change
------ ------ ---------- ------ ------ -----------
(in millions, except percentages)
Employee expense:
Salaries......................... Rs. 55 Rs. 116 110.9% Rs. 172 US$ 4 48.3%
Employee benefits................ 12 21 75.0 32 1 52.4
------- -------- ------- ------
Total employee expense.............. 67 137 104.5 204 5 48.9
Premises and equipment expense:
Premises.......................... 17 21 23.5 49 1 133.3
Computer and office equipment..... 99 141 42.4 183 4 29.8
------- -------- ------- ------
Total premises and equipment
expense........................... 116 162 39.7 232 5 43.2
------- -------- ------- ------
Administration and other expenses...
Rentals, taxes and electricity... 49 77 57.1 114 2 48.1
Advertisement and publicity...... 8 21 162.5 34 1 61.9
Communications expense........... 13 22 69.2 43 1 95.5
Other............................ 153 135 (11.8) 172 4 27.4
------- -------- ------- ------
Total administration and other
expense........................... 223 255 14.3 363 8 42.4
------- -------- ------- ------
Total non-interest expense.......... Rs. 406 Rs. 554 36.5% Rs. 799 US$ 18 44.2%
======= ======== ======= ======
Non-interest expense increased 44.2% in fiscal 1999 to Rs. 799 million (US$
18 million) from Rs. 554 million (US$ 13 million) in fiscal 1998. Non-interest
expense as a percentage of average total assets decreased to 1.52% in fiscal
1999 from 2.08% in fiscal 1998.
Total employee expense increased 48.9% in fiscal 1999 due to a 47.8%
increase in the number of employees to 891 at year-end fiscal 1999 from 603 at
year-end fiscal 1998 as we expanded our branch network in fiscal 1999 to 64
branches and extension counters from 37 branches and extension counters at
year-end fiscal 1998.
Premises and equipment expense increased 43.2% in fiscal 1999 compared to
fiscal 1998, primarily due to a 133.3% increase in premises expenses as a result
of the addition of 27 new branches and extension counters and the renovation in
some of our branches in key locations. Computer and office equipment increased
29.8% in fiscal 1999 primarily due to the depreciation on technology equipment
including servers, personal computers, ATMs, VSATs and BANCS2000.
Administration and other expenses increased 42.4% in fiscal 1999 compared
to fiscal 1998 primarily due to additional rental payments resulting from the
expansion of our branch network, an increase in communication expenses, such as
telecommunications and postage expenses, resulting from a rapid
114
growth in the number of our customers and an increase in advertising expenses
associated with building the ICICI Bank brand name and marketing our products.
Fiscal 1998 compared to Fiscal 1997
Non-interest expense increased 36.5% in fiscal 1998 to Rs. 554 million (US$
13 million) from Rs. 406 million (US$ 9 million) in fiscal 1997. Non-interest
expense as a percentage of average total assets decreased to 2.08% in fiscal
1998 from 2.54% in fiscal 1997.
Employee expenses increased 104.5% in fiscal 1998 principally due to a
35.5% increase in the number of employees to 603 at year-end fiscal 1998 from
445 at year-end fiscal 1997 as we rapidly expanded our branch network in fiscal
1998 and an increase of approximately 14.0% in employee salaries.
Premises and equipment expense increased 39.7% in fiscal 1998 compared to
fiscal 1997, due to a 23.5% increase in premises expenses as a result of
addition of 13 new branches and extension counters in fiscal 1998 and a 42.4%
increase in the computer and office equipment expense in fiscal 1998 primarily
due to depreciation on technology equipment including servers, personal
computers, ATMs, VSATs and BANCS2000.
Administration and other expenses increased 14.3% in fiscal 1998 compared
to fiscal 1997 primarily due to additional rental payments resulting from the
expansion of our branch network offset, in part, by a reduction in rent on
office premises as we purchased three branch premises from ICICI. The
communications expenses also increased due to the rapid growth in the number of
our customer accounts.
Income Tax Expense
Income tax expense increased 170.5% in the nine months ended December 31,
1999 to Rs. 303 million (US$ 7 million) from Rs. 112 million (US$ 3 million) in
the nine months ended December 31, 1998 primarily due to the higher level of
income in the nine months ended December 31, 1999. Our effective tax rate was
22.8% in the nine months ended December 31, 1999 compared to 25.9% in the nine
months ended December 31, 1998. Our effective tax rate was lower than the
marginal tax rate of 38.5% and 35.0% applicable to companies generally in India
in fiscal 2000 and fiscal 1999 primarily due to the tax-exempt income from
certain investments of our treasury department including bonds of certain public
sector corporations and mutual funds units. The government of India, in order to
facilitate access to competitive funding for certain public sector companies,
allows these companies to issue bonds, the interest on which is tax-exempt to
the bondholder. The government of India also passed a regulation providing that
any dividends received on mutual fund units are tax exempt to the holder of the
mutual fund units.
Income tax expense increased 63.5% in fiscal 1999 to Rs. 170 million (US$ 4
million) from Rs. 104 million (US$ 2 million) in fiscal 1998 primarily due to
the higher level of income in fiscal 1999. Our effective tax rate was 25.3% in
fiscal 1999 compared to 25.9% in fiscal 1998.
Income tax expense decreased 32.9% to Rs. 104 million (US$ 2 million) in
fiscal 1998 from Rs. 155 million (US$ 4 million) in fiscal 1997. Our effective
tax rate reduced to 25.9% in fiscal 1998 from 39.0% in fiscal 1997 primarily due
to a reduction in the marginal tax rate to 35.0% in fiscal 1998 from 43.0% in
fiscal 1997 and an increase in tax-exempt income from certain investments of our
treasury department.
Financial Condition
Assets
The following tables sets forth, for the periods indicated, the principal
components of our assets.
115
At December 31, At March 31, At December 31,
--------------- --------------- -------------------------------
1998 1999 1999 1999
--------------- --------------- ------------ ------------
(in millions)
Cash and cash equivalents........... Rs. 15,298 Rs. 18,488 Rs. 18,590 US$ 427
Trading account assets (1).......... 11,599 15,822 28,606 657
Securities(2)....................... 2,912 3,963 4,402 101
Loans, net.......................... 20,880 27,597 37,749 868
Acceptances(3)...................... 5,045 5,587 7,822 180
Property and equipment.............. 1,605 1,761 1,902 44
Other assets (4).................... 2,007 1,607 3,134 72
----------- ----------- ----------- ---------
Total assets........................ Rs. 59,346 Rs. 74,825 Rs. 102,205 US$ 2,349
=========== =========== =========== =========
At March 31,
--------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Cash and cash equivalents........... Rs. 4,099 Rs. 8,728 112.9% Rs 18,488 US$ 425 111.8%
Trading account assets (1).......... 3 7,387 - 15,822 364 114.2
Securities(2)....................... 3,816 1,476 (61.3) 3,963 91 168.5
Loans, net.......................... 8,374 12,765 52.4 27,597 634 116.2
Acceptances(3)...................... 2,510 2,866 14.2 5,587 128 94.9
Property and equipment.............. 573 1,363 137.9 1,761 41 29.2
Other assets (4).................... 391 693 77.2 1,607 37 131.9
--------- --------- --------- --------
Total assets........................ Rs.19,766 Rs.35,278 78.5% Rs.74,825 US$1,720 112.1%
========= ========= ========= ========
- ------------
(1) Primarily includes government of India securities.
(2) Includes corporate debt securities, government of India securities and
mutual fund units.
(3) Includes only letters of credit that are non-funded facilities.
(4) Includes deferred tax asset, interest accrued, staff loans, deposits in
leased premises and pre-paid expenses.
Our total assets increased 36.6% to Rs. 102.2 billion (US$ 2.3 billion) at
December 31, 1999 from Rs. 74.8 billion (US$ 1.7 billion) at March 31, 1999. Net
loans increased 36.8% in the nine months ended December 31, 1999 to Rs. 37.7
billion (US$ 868 million) from Rs. 27.6 billion (US$ 634 million) at March 31,
1999. The growth was in corporate lending as working capital loans increased
48.5% and term loans increased 22.2%. Our loan growth was driven by additional
clients referred to us by our parent, ICICI, as we increased our focus on doing
business with the large more highly rated clients that are serviced by the ICICI
group's Major Clients Group. Loans denominated in foreign currency were less
than 5.0% of our total loans at December 31, 1999. The growth in cash and cash
equivalents and in trading account assets was principally due to increased
reserve requirements resulting from a 71.4% increase in deposits in the nine
month ended December 31, 1999. Securities increased 11.1% in the nine months
ended December 31, 1999 primarily due to increased investments in corporate debt
securities and mutual fund units. Our client coverage strategy helped us in
increasing our acceptances by 40.0% to Rs. 7.8 billion (US$ 180 million) at
December 31, 1999 from Rs. 5.6 billion (US$ 128 million) at March 31, 1999.
Our total assets increased 112.1% to Rs. 74.8 billion (US$ 1.7 billion) at
year-end fiscal 1999 from Rs. 35.3 billion (US$ 811 million) at year-end fiscal
1998. The high growth in cash and cash equivalents was principally due to
increased reserve requirements resulting from a 131.0% increase in deposits in
fiscal 1999 and an increase in rupee funds swapped into US dollars at attractive
forward rates and placed in foreign currency denominated deposits with banks
outside India. Trading account assets increased 114.2% in fiscal 1999
principally due to increased investments in government of India securities to
meet the reserve requirements resulting from a 131.0% increase in deposits in
fiscal 1999. Securities increased 168.5% in fiscal 1999 primarily due to
increased investments in corporate debt securities. Net loans increased 116.2%
in fiscal 1999 to Rs. 27.6 billion (US$ 634 million) from Rs. 12.8 billion (US$
293 million) at year-end fiscal 1998 reflecting significant growth in corporate
lending as working capital loans increased 89.2% and term loans increased
194.8%. Our loan growth was largely due to additional clients referred to us by
our parent, ICICI. Our acceptances increased 94.9% to Rs. 5.6 billion (US$ 128
million) at year-end fiscal 1999 from Rs. 2.9 billion (US$ 66 million) at
year-end fiscal 1998.
116
Our total assets increased 78.5% to Rs. 35.3 billion (US$ 811 million) at
year-end fiscal 1998 from Rs. 19.8 billion (US$ 454 million) at year-end fiscal
1997. The high growth in cash and cash equivalents was principally due to the
increased amount of cash required to be maintained in a current account with the
Reserve Bank of India due to its reserve requirements resulting from a 95.1%
increase in deposits in fiscal 1998. The growth was also due to an increase in
rupee funds swapped into US dollars at attractive forward rates and placed in
foreign currency denominated deposits with banks outside India. Trading account
assets were Rs. 7.4 billion (US$ 170 million) at year-end fiscal 1998 as we
shifted our focus towards treasury operations due to the Reserve Bank of India's
monetary policy in fiscal 1998 which reduced the cash reserve requirements of
banks, thereby reducing the market interest rates and creating better trading
opportunities in India. These primarily comprised investments in government of
India securities which increased to meet the reserve requirements resulting from
a 95.1% increase in deposits in fiscal 1998. This shift to treasury operations
was also reflected in the 61.3% decrease in securities in fiscal 1998. Net loans
increased 52.4% in fiscal 1998 to Rs. 12.8 billion (US$ 293 million) from Rs.
8.4 billion (US$ 192 million) at year-end fiscal 1997 reflecting growth in
corporate lending as working capital loans increased 38.0% and term loans
increased 126.4%. Acceptances increased 14.2% in fiscal 1998 to Rs. 2.9 billion
(US$ 66 million) from Rs. 2.5 billion (US$ 58 million) at year-end fiscal 1997.
Liabilities and Stockholders' Equity
The following tables set forth, for the periods indicated, the principal
components of our liabilities and stockholders' equity.
At December 31, At March 31, At December 31,
--------------- ------------ ----------------------
1998 1999 1999 1999
--------------- ------------ ------ ------
(in millions)
Deposits.............................. Rs. 46,424 Rs. 60,729 Rs. 85,002 US$ 1,953
Trading account liabilities(1)........ 2,207 418 1,797 41
Acceptances........................... 5,045 5,587 7,822 180
Long-term debt........................ 1,110 1,764 1,734 40
Other liabilities (2)................. 1,917 3,497 2,181 50
---------- ---------- ----------- ---------
Total liabilities..................... 56,703 71,995 98,536 2,264
---------- ---------- ----------- ---------
Stockholders' equity.................. 2,643 2,830 3,669 85
---------- ---------- ----------- ---------
Total................................. Rs. 59,346 Rs. 74,825 Rs. 102,205 US$ 2,349
========== ========== =========== =========
At March 31,
-----------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Deposits.............................. Rs. 13,476 Rs. 26,290 95.1% Rs. 60,729 US$ 1,396 131.0%
Trading account liabilities(1)........ 841 1,793 113.2 418 10 (76.7)
Acceptances........................... 2,510 2,866 14.2 5,587 128 94.9
Long-term debt........................ 89 129 44.9 1,764 41 -
Other liabilities (2)................. 1,019 1,729 69.7 3,497 80 102.3
---------- ---------- ---------- ---------
Total liabilities..................... 18,016 32,807 82.1 71,995 1,655 119.5
---------- ---------- ---------- ---------
Stockholders' equity.................. 1,750 2,471 41.2 2,830 65 14.5
---------- ---------- ---------- ---------
Total................................. Rs. 19,766 Rs. 35,278 78.5% Rs. 74,825 US$ 1,720 112.1%
========== ========== ========== =========
- ------------
(1) Trading account liabilities are inter-bank borrowings and short-term
borrowings from other institutions.
(2) Includes refinancing received from the Reserve Bank of India against our
export credit, interest accrued but not due on deposits and bills payable.
The following tables set forth, for the periods indicated, the components
of our total deposits.
117
At December 31, At March 31, At December 31,
--------------- ------------ ----------------------
1998 1999 1999 1999
--------------- ------------ ------ ------
(in millions)
Interest-bearing deposits:
Savings deposits............... Rs. 1,913 Rs. 2,271 Rs. 4,313 US$ 100
Time deposits.................. 39,788 52,692 72,674 1,670
Total interest-bearing deposits..... 41,701 54,963 76,987 1,769
Non interest bearing deposits:
Demand deposits ............... 4,723 5,766 8,015 185
---------- ---------- ---------- ---------
Total deposits...................... Rs. 46,424 Rs. 60,729 Rs. 85,002 US$ 1,954
========== ========== ========== =========
At March 31,
---------------------------------------------------------------------------
1998/1997 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits............... Rs. 497 Rs. 1,037 108.6% Rs. 2,271 US$ 52 119.0%
Time deposits.................. 9,816 21,621 120.3 52,692 1,211 143.7
Total interest-bearing deposits..... 10,313 22,658 119.7 54,963 1,263 142.6
Non interest bearing deposits:
Demand deposits ............... 3,163 3,632 14.8 5,766 133 58.8
---------- ---------- ---------- ---------
Total deposits...................... Rs. 13,476 Rs. 26,290 95.1% Rs. 60,729 US$ 1,396 131.0%
========== ========== ========== =========
Our total deposits increased 40.0% in the nine months ended December 31,
1999 to Rs. 85.0 billion (US$ 2.0 billion) from Rs. 60.7 billion (US$ 1.4
million) at March 31, 1999. We focused on deposit taking from retail customers
by offering products targeted at different segment of customers including "Power
Pay", a direct deposit product to streamline the salary payment systems of our
corporate customers. The share of new "Power Pay" accounts in all new savings
accounts in the nine months ended December 31, 1999 was 62.0%. Our focus on
retail deposit taking was reflected in the 67.9% growth in our retail deposits
in the nine months ended December 31, 1999 compared to 30.7% growth in our
corporate deposits in the same period. Our savings account deposits increased
89.9% in the nine months ended December 31, 1999 as we continued our focus on
building a strong retail depositor base. Our time deposits increased 37.9% in
fiscal 1999 mainly from corporate deposits. Our non-interest-bearing deposits
increased 39.0% due to our specific thrust on this segment as it significantly
reduces our cost of funds. Trading account liabilities increased to Rs. 1797
million (US$ 41 million) at December 31, 1999 from Rs. 418 million (US$ 10
million) at March 31, 1999 primarily due to overnight inter-bank borrowings.
Our total deposits increased 131.0% in fiscal 1999 to Rs. 60.7 billion (US$
1.4 billion) from Rs. 26.3 billion (US$ 604 million) at year-end fiscal 1998. We
continued our focus on deposit taking by offering products targeting different
segment of customers with features tailored to their specific requirements. In
fiscal 1999, our corporate deposits increased 139.3% and our retail deposits
increased 109.1%. Our savings account deposits increased 119.0% in fiscal 1999
as we continued our focus on building a strong retail depositor base. Our time
deposits increased 143.7% in fiscal 1999 mainly from an increase in corporate
deposits. Our non-interest-bearing deposits and savings account deposits grew at
a lower rate than the time deposits, as customers appeared to prefer investing
in higher earning time deposits. Trading account liabilities decreased 76.7% to
Rs. 418 million (US$ 10 million) at year-end fiscal 1999 from Rs. 1.8 billion
(US$ 41 million) at year-end fiscal 1998 primarily due to the decrease in
short-term borrowings from institutions. Long-term debt increased to Rs. 1.8
billion (US$ 41 million) at year-end fiscal 1999 from Rs. 129 million (US$ 3
million) at year-end fiscal 1998 primarily due to our issuing unsecured
redeemable subordinated debentures of Rs. 1.7 billion (US$ 39 million) in fiscal
1999 to augment our Tier 2 capital level.
Our total deposits increased 95.1% in fiscal 1998 to Rs. 26.3 billion (US$
604 million) from Rs.13.5 billion (US$ 310 million) at year-end fiscal 1997. In
fiscal 1998, our corporate deposits increased 104.0% and our retail deposits
increased 74.9%. Our savings account deposits increased 108.6% in fiscal 1988 as
we continued our focus on building a strong retail depositor base. Trading
account liabilities increased 113.2% in fiscal 1998 to Rs. 1.8 billion (US$ 41
million) from Rs. 841 million (US$ 19 million) at year-end fiscal 1997.
Long-term debt increased to Rs. 129 million (US$ 3 million) in fiscal 1998 from
118
Rs. 89 million (US$ 2 million) in fiscal 1997 primarily due to the refinancing
of our term loans from the Small Industries Development Bank of India and the
Export Import Bank. Stockholders' equity increased 41.2% in fiscal 1998 as a
result of issuance of 15 million equity shares to our parent, ICICI, at Rs. 35
per equity share in June 1997.
Guarantees
As part of our financing activities, we provide standby letter of credit
facilities, called guarantees in India, that can be drawn down any number of
times up to the committed amount of the facility. We issue guarantees on behalf
of our borrowers in favor of corporations and government authorities inviting
bids for projects, guaranteeing the performance of our borrowers and as security
for advance payments made to our borrowers by such project authorities. These
generally represent irrevocable assurances that we will make payments in the
event that the customer fails to fulfil its financial or performance obligations
but represent a non-funded exposure. The guarantees are generally for a period
not exceeding 18 months. The credit risk associated with these products, as well
as the operating risks, are similar to those in our other loan products. We have
the same appraisal process, pricing methodology and collateral requirement for
guarantees as that for any other loan product. Guarantees increased 45.2% at
December 31, 1999 to Rs. 6.7 billion (US$ 154 million) from Rs. 4.6 billion (US$
106 million) at March 31, 1999. Guarantees increased 75.0% at year-end fiscal
1999 to Rs. 4.6 billion (US$ 106 million) from Rs. 2.6 billion (US$ 61 million)
at year-end fiscal 1998, which in turn increased 42.6% from Rs. 1.8 billion (US$
43 million) at year-end fiscal 1997. Guarantees outstanding increased at a much
faster rate in fiscal 1999 primarily due to our focus on this business in fiscal
1999 as one of the areas for generating non-interest revenue.
Foreign Exchange and Derivative Contracts
We enter into foreign exchange forward contracts, swap agreements and other
derivative products, which enable customers to transfer, modify or reduce their
foreign exchange and interest rate risks. Our foreign exchange contracts arise
out of foreign exchange transactions, forward foreign exchange transactions with
corporate and non-corporate customers and inter-bank foreign exchange
transactions. We earn profit by way of an exchange margin as a mark-up over the
exchange rate offer on customer transactions. We earn profit on inter- bank
foreign exchange transactions by way of differences between the purchase rate
and the sale rate. This income is booked as income from foreign exchange
transactions.
All our outstanding derivative contracts represent currency and interest
rate swaps for our corporate customers. We have started offering these types of
transactions only recently. The income earned by us on all such transactions is
booked as trading account revenue.
The following table sets forth, for the periods indicated, the notional
amount of our derivative contracts.
Notional principal amounts Balance sheet credit exposure(1)
------------------------------------------ ------------------------------------
At March 31, At December 31, At March 31, At December 31,
--------------------- --------------- ----------------- ---------------
1998 1999 1999 1998 1999 1999
------ ------ --------------- ------ ------ ---------------
(in millions)
Interest rate products:
Swap agreements............. - - Rs. 900 - - -
---------- ---------- ---------- ------ ------- -------
Total interest rate products - - Rs. 900 - - -
========== ========== ========== ====== ======= =======
Foreign exchange products:
Forward contracts........... Rs. 23,528 Rs. 36,705 Rs. 49,591 Rs. 77 Rs. 425 Rs. 341
Swap agreements............. - 2,962 7,658 - - -
---------- ---------- ---------- ------ ------- -------
Total foreign exchange
products................. Rs. 23,528 Rs. 39,667 Rs. 57,249 Rs. 77 Rs. 425 Rs. 341
========== ========== ========== ====== ======= =======
- -----------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products at the indicated periods.
119
Capital
We are subject to the capital adequacy requirements of the Reserve Bank of
India, which are primarily based on the capital adequacy accord reached by the
Basle Committee of Banking Supervision, Bank of International Settlements in
1988. For a detailed description of the Reserve Bank of India's capital adequacy
guidelines, see "Supervision and Regulation--Capital Adequacy Requirements". We
are required to maintain a minimum ratio of total capital to risk adjusted
assets as determined by a specified formula of 8.0%, at least half of which must
be Tier 1 capital generally stockholders' equity. The Reserve Bank of India has
increased the minimum requirement of the capital adequacy ratio to 9.0% from
year-end fiscal 2000.
The following tables set forth, for the periods indicated, our risk-based
capital, risk-weighted assets and risk-based capital adequacy ratios computed in
accordance with the applicable Reserve Bank of India guidelines and based on our
financial statements prepared in accordance with Indian GAAP.
At December 31
---------------------------------------------------
US$ 1999/1998
1998 1999 1999 % change
------ ------ ------ ---------
In millions, except percentages
Tier 1 capital........................ Rs. 3,109 Rs. 3,624 US$ 83 16.6%
Tier 2 capital........................ 820 1,543 36 88.2
----------- ---------- ---------
Total capital......................... Rs. 3,928 Rs. 5,168 US$ 119 31.5
=========== ========== =========
On-balance sheet risk assets.......... 27,076 42,330 973 56.3
Off-balance sheet risk assets......... 6,780 12,610 290 86.0
----------- ---------- ---------
Total risk assets..................... Rs. 33,857 Rs. 54,940 US$ 1,263 62.3%
=========== ========== =========
Tier 1 capital adequacy ratio......... 9.18% 6.60%
Tier 2 capital adequacy ratio......... 2.42 2.81
----------- ----------
Total capital adequacy ratio.......... 11.60% 9.41%
=========== ==========
Year ended March 31,
--------------------------------------------------------------------------
1998/1997 US$ 1999/1998
1997 1998 % change 1999 1999 % change
------ ------ --------- ------ ------ ---------
(in millions, except percentages)
Tier 1 capital........................ Rs. 1,819 Rs. 2,668 46.7% Rs. 3,035 US$ 70 13.8%
Tier 2 capital........................ 47 20 (57.4) 1,549 35 -
---------- ---------- ---------- -------
Total capital......................... 1,866 2,688 44.0 4,584 105 70.6
========== ========== ========== =======
On-balance sheet risk assets.......... 10,698 15,801 47.7 33,646 773 112.9
Off-balance sheet risk assets......... 3,613 4,138 14.5 7,803 179 88.6
---------- ---------- ---------- -------
Total risk assets..................... Rs. 14,311 Rs. 19,939 39.3 Rs. 41,449 US$ 952 107.9
========== ========== ========== =======
Tier 1 capital adequacy ratio......... 12.71% 13.38% 7.32%
Tier 2 capital adequacy ratio......... 0.33 0.10 3.74
---------- ---------- ----------
Total capital adequacy ratio.......... 13.04% 13.48% 11.06%
========== ========== ==========
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with US GAAP was 9.08% at December 31, 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.69% and our Tier 2 capital
adequacy ratio was 2.39% at December 31, 1999.
Our total capital adequacy ratio computed under the applicable Reserve Bank
of India guidelines and based on our financial statements prepared in accordance
with US GAAP was 10.44% at year-end fiscal 1999. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 6.92% and our Tier 2 capital
adequacy ratio was 3.52% at year-end fiscal 1999.
120
MANAGEMENT
Directors and Executive Officers
Our board of directors, which consists of eight members, is responsible for
the management of our business. Our organizational documents provide for at
least three and no more than twelve directors. We may, subject to the provisions
of our organizational documents and the Indian Companies Act, change the minimum
or maximum number of directors by a resolution which is passed at a general
meeting by a majority of 75.0% of the present and voting shareholders.
The composition of our board of directors reflects the principal
shareholdings held by ICICI, the requirements of the Indian Banking Regulation
Act and the public ownership in India. Under the terms of our organizational
documents, ICICI is entitled to appoint one-third of the total number of
directors of our board. ICICI has nominated two directors to our board. The
Banking Regulation Act requires that not less than 51% of the board members have
special knowledge or practical experience in areas relevant to banking including
accounting, finance, agriculture, banking and small scale industry. Accordingly,
all our directors are professionals with special knowledge of accountancy,
banking, economics, administration and management. Of these, one director has
expertise in the area of agriculture and another director has experience in
small scale industries, as required by the Banking Regulation Act. In addition,
under the Banking Regulation Act, the Reserve Bank of India may require us to
convene a meeting of our shareholders for the purposes of appointing new
directors to our board of directors.
Our organizational documents also provide that we may execute trust
deeds securing our debentures under which the trustee or trustees may appoint a
director, known as a debenture director. The debenture director is not subject
to retirement by rotation and may only be removed as provided in the relevant
trust deed. There is no debenture director on our board of directors.
Our organizational documents further provide that ICICI may appoint one of
their nominated directors to act as the Executive Chairman and Managing Director
of our board for terms not exceeding five years at a time. The board of
directors has powers to appoint one of the directors to be the Executive
Chairman or Managing Director, if ICICI has not appointed one of its nominee
directors. The board of directors has appointed Mr. K. V. Kamath as a
non-executive Chairman of our board, subject to approval of the Reserve Bank of
India. Application to the Reserve Bank of India seeking approval for this
appointment has been submitted. We are awaiting this approval. Mr. H. N. Sinor
has been appointed our Managing Director and Chief Executive Officer by the
shareholders with effect from June 1, 1998 for a period of five years.
At least two-thirds of the total number of directors, excluding the
debenture director and the directors nominated by ICICI, are subject to
retirement by rotation. One-third of these directors must retire from office at
each annual meeting of shareholders. A retiring director is eligible for
re-election. None of our directors other than the Chairman or executive
directors shall hold office continuously for a period exceeding eight years.
Our board of directors at February 11, 2000 had the following members:
Name, Designation and Profession Date of appointment Other appointments
- --------------------------------- ------------------------ ---------------------------------------------------
Mr. Kundapur Vaman Kamath April 17, 1996 Chairman
Profession: Managing Director and ICICI Infotech Services Limited
Chief Executive Officer of ICICI ICICI Personal Financial Services Limited
ICICI Securities & Finance Company Limited
ICICI Venture Funds Management Company Limited
Prudential ICICI Asset Management Company Limited
121
Director
Indian Institute of Management, Ahmedabad
National Development Bank, Sri Lanka
Vice Chairman
Indian Business School
Member - Governing Board
Entrepreneurship Development of India
National Institute of Bank Management
Member- Managing Committee
The Associated Chambers of Commerce and Industry of
India (ASSOCHAM)
Member - Governing Council
Manel Srinivas Nayak Institute of Management
Member - Advisory Board
NCR Financial Solutions Group Limited, London
The Economic Times Editorial
Member - Board of Management
Manipal Academy of Higher Education
Member
Confederation of Indian Industry
Mrs. Lalita Dileep Gupte September 12, 1994 Chairperson
Profession: Joint Managing Director ICICI Capital Services Limited
and Chief Operating Officer of ICICI ICICI Home Finance Company Limited
Director
G. S. Mhaskar Private Limited
ICICI Personal Financial Services Limited
ICICI Infotech Services Limited
ICICI Securities and Finance Company Limited
ICICI Venture Funds Management Company Limited
National Stock Exchange of India Limited
Prudential ICICI Asset Management Company Limited
Dr. Satish Chandra Jha May 2, 1997 Director- Governing Board
Profession: Development Economist Delhi Stock Exchange
Director
Phillips India Limited
SREI International Finance Limited
Walchand Capital Limited
122
Mr. Raghunathan Rajamani December 2, 1994 Director
Profession: Retired Government CanBank Computer Service Limited
Official
Trustee
Sundaram Mutual Fund
Mr. Bhupendranath V. Bhargava September 12, 1994 Chairman
Profession: Chairman, India Index Services and Products Limited
Credit Rating and Information
Services of India Limited Director
BPL Cellular Holdings Limited
Cosmo Films Limited
Grasim Industries Limited
HEG Limited
J. K. Corporation Limited
Raymond Limited
Supreme Industries Limited
Trustee
Amarnath Vidya Ashram
Sri Shanmukhananda Fine Arts and Sangeetha Sabha
Mr. Uday Madhav Chitale August 21, 1997 Director
Profession: Partner, M. P Chitale & DFK Consulting Services (India) Private Limited
Company (Chartered Accountants) Seahorse Industries Limited
Chairman of Executive Committee
Shishu Vihar Mandal
Mr. Somesh R Sathe January 29, 1998 Managing Director
Profession: Managing Director, Arbes ESSP Meditek Private Limited
Tools Private Limited Sukeshan Equipments Private Limited
Mr. H.N. Sinor August 21, 1997
Profession: Managing Director and
Chief Executive Officer
Our executive officers at February 11, 2000 were as follows:
Years of Total
work remuneration in
Name Age Position experience fiscal 1999 Shareholdings(1)
- ------------------------- --- --------------------------- ---------- --------------- ----------------
Mr. H.N. Sinor 55 Managing Director and Chief 34 Rs. 1,514,078 1,100
Executive Officer
Mr. P.H. Ravikumar 48 Senior Executive Vice 27 1,057,087 1,000
President
Mr. M.N. Gopinath 51 Senior Executive Vice 30 1,046,699 1,200
President
Mr. Alladi Ashok 48 Senior Executive Vice 28 867,374 -
President
123
Years of Total
work remuneration in
Name Age Position experience fiscal 1999 Shareholdings(1)
- ------------------------- --- --------------------------- ---------- --------------- ----------------
Mr. E.S. Mohan 49 Executive Vice President 26 886,522 1,000
Mr. A.V.A. Subramaniam 57 Executive Vice President 28 621,115 1,000
Mr. G. Venkatakrishnan 49 Executive Vice President 25 469,085 -
and Chief Financial Officer
Mr. K.S. Harshan 48 Senior Vice President 23 702,648 1,000
Mr . M.S. Annigeri 46 Senior Vice President 20 663,774 1,000
Mr. R. B. Nirantar 46 Senior Vice President 21 651,378 500
Mr. Bhashyam Seshan 43 Company Secretary 22 567,749 1,200
- ------------
(1) We have not granted any stock options to our executive officers.
Mr. H. N. Sinor holds Bachelor's degrees in Commerce and Law. Mr. Sinor
started his career with the Central Bank of India in September 1965 and moved to
the Union Bank of India in 1969. He worked in various positions gaining
experience in working capital finance, branch banking, resources and corporate
planning. Mr. Sinor returned to Central Bank of India as its Executive Director
in December 1996. Mr. Sinor joined us on July 1, 1997 and our board on August
21, 1997 and was appointed our Managing Director and Chief Executive Officer
with effect from June 1, 1998.
Mr. P. H. Ravikumar has a Bachelor of Commerce degree and is a Certified
Associate of the Institute of Bankers both of London and India. Mr. Ravikumar
joined the Bank of India in September 1972. In his 22 years with the Bank of
India, he has worked at various offices in India and in Paris, in the areas of
branch management, treasury, international banking, commercial advances and
planning. Mr. Ravikumar joined us in 1994 and is the Senior Executive Vice
President heading the Corporate Banking business.
Mr. M. N. Gopinath holds a Bachelor's degree in Commerce, a Master's degree
in Business Administration and is a Certified Associate of the Indian Institute
of Bankers, Mumbai. He joined the Bank of India in 1970. In his 25 years with
Bank of India, he has worked at various offices in India and in the US. He has
gained experience in credit, international banking, training, branch management,
operations, treasury, leasing and housing finance. He was transferred by the
Bank of India to its merchant banking subsidiary, BOI Finance Limited, as
General Manager. Mr. Gopinath joined us in 1995 and is the Senior Executive Vice
President heading the Retail Banking business.
Mr. Alladi Ashok has a Bachelor of Science degree. Mr. Ashok started his
career with the State Bank of India in 1972. He worked in different branches of
State Bank of India both in India and in the US. He has handled various
responsibilities including working capital financing, credit administration,
branch management, foreign exchange and treasury. He joined us in 1996 and is
the Senior Executive Vice President heading our Risk Management Department.
Mr. E. S. Mohan holds Master's degrees in Science and in Business
Administration. He is a Certified Associate of the Institute of Bankers of both
London and India. He joined the Bank of India in 1974. He was posted at various
offices of the Bank of India in India and U.K and gained exposure in treasury
management, foreign exchange, commercial loans and branch banking. Mr. Mohan
joined us in 1994. He is an Executive Vice President and is on secondment to
Inter Commercial Bank Limited, Trinidad and Tobago as the Advisor to the
Managing Director of that bank.
Mr. A. V. A. Subramaniam has a Bachelor of Arts degree, a diploma in
Systems Management and is a Certified Associate of the Indian Institute of
Bankers. He joined the State Bank of India in 1965. He has worked in various
areas including the audit and inspection of general banking and foreign exchange
124
businesses of large branches and foreign offices. Mr. Subramaniam joined us in
1995. He is the Executive Vice President heading our Audit Department.
Mr. G. Venkatakrishnan holds a Master's degree in Science and a post
graduate diploma in bank management. He is a graduate member of Cost and Works
Accountants of India and a Certified Associate of the Indian Institute of
Bankers, Mumbai. He began his career as an officer with the State Bank of India
in 1974. He has held various positions and worked in areas including
international banking, auditing, compliance and balance sheet management. Mr.
Venkatakrishnan joined us in 1997 and is the Executive Vice President and Chief
Financial Officer.
Mr. K.S. Harshan holds a Master's degree in Economics and a post graduate
diploma in Management. He began his career with the Union Bank of India in 1976.
In his 18 years with Union Bank of India, he has worked at various offices in
India and in London, in the areas of branch management, international trade
finance, foreign exchange and operations. Mr. Harshan joined us in 1994 and is a
Senior Vice President and head of Foreign Exchange and International Banking.
Mr. M. S. Annigeri holds a Bachelor's degree in Science. He joined the
State Bank of India in 1979. He was posted at various offices of the State Bank
of India and gained exposure in branch management and treasury management. Mr.
Annigeri joined us in 1996 and is a Senior Vice President and head of Domestic
Treasury.
Mr. R. B. Nirantar has a Bachelor's degree in Commerce, a diploma in
Industrial Relations and Personnel Management and is a Certified Associate of
the Indian Institute of Bankers. He also holds a degree in General Law. He
joined the Union Bank of India in 1974. He joined us in 1994 and is Senior Vice
President and heads our Human Resources Development department.
Mr. Bhashyam Seshan has a Bachelor's degree in Commerce. He is an Associate
Member of the Institute of Company Secretaries of India. He started his career
with State Bank of Travancore in 1978 and joined us in 1994. He is our Company
Secretary.
Corporate Governance
Our corporate governance policies recognize the accountability of the board
and the importance of making the board transparent to all our constituents,
including employees, customers, investors and the regulatory authorities, and to
demonstrate that the shareholders are the ultimate beneficiaries of our economic
activities. We have taken a series of steps including setting up a series of
board sub-committees to oversee the functions of executive management. All
important board committees consist mainly of non-executive directors. These
board committees meet regularly.
Our board's role, functions, responsibility and accountability are clearly
defined. In addition to its primary role of monitoring corporate performance,
the functions of the board include:
o approving corporate philosophy and mission;
o participating in the formulation of strategic and business plans;
o reviewing and approving financial plans and budgets;
o monitoring corporate performance against strategic and business plans,
including overseeing operations;
o ensuring ethical behavior and compliance with laws and regulations;
o reviewing and approving borrowing limits; o formulating exposure limits;
and
o keeping shareholders informed regarding plans, strategies and
performance.
To enable the board of directors to discharge these responsibilities
effectively, our executive management gives detailed reports on our performance
on a quarterly basis.
125
The Audit Department conducts regular audits of our branches and concurrent
audits of our larger branches and treasury.
The board functions either as a full board or through committees. The
following committees have been formed to focus on specific issues.
Audit and Risk Committee
The Audit and Risk Committee consists of five directors, all of which are
independent directors. It provides direction to and oversees the audit and risk
management function, reviews the financial accounts, interacts with statutory
auditors and reviews matters of special interest.
Committee of Directors
The Committee of Directors consists of five directors, including the
Managing Director and Chief Executive Officer. This Committee has delegated
financial powers and approves loan proposals and expenditures within the broad
parameters of the delegated authority.
Compensation Committee
The Compensation Committee consists of four directors including the
Managing Director and Chief Executive Officer. The functions of the committee
include considering and recommending to the board the amount of compensation
payable to the executive directors, fees payable to other directors and framing
the guidelines and management of the employee stock option scheme.
Nomination Committee
The Nomination Committee consists of four directors including the Managing
Director and Chief Executive Officer. The functions of this committee include
the submission of recommendations to the board to fill vacancies on the board or
in senior management positions.
Share Transfer Committee
The Share Transfer Committee consists of four directors including the
Managing Director and Chief Executive Officer. This committee reviews and
approves transfers of our equity shares and debentures.
Compensation and Benefits to Directors and Officers
Under our organizational documents, each director, except directors
nominated by ICICI and the Managing Director and Chief Executive Officer, is
entitled to remuneration for attending each meeting of the board or of a board
committee. The amount of remuneration is set by the board from time to time in
accordance with limitations prescribed by the Indian Companies Act or the
government of India. Remuneration for attending a board meeting is Rs. 2,000
(US$ 46) and for a committee meeting Rs. 1,000 (US$ 23). We reimburse directors
for travel and related expenses in connection with board and committee meetings
and with related matters. If a director is required to perform services for us
beyond attending meetings, we may remunerate the director as determined by the
board of directors and this remuneration may be either in addition to or as
substitution for the remuneration discussed above.
At its meeting held on March 28, 1998, the board of directors decided to
revise the salary paid to the Managing Director and Chief Executive Officer,
effective June 1, 1998. This was approved at the annual meeting of the
shareholders on June 15, 1998. The board or the compensation committee may in
its exclusive discretion fix the salary payable within the range of Rs. 60,000
to Rs. 120,000 (US$ 1,379 to US$ 2,758) per month, exclusive of committed bonus
and special achievement bonus.
126
The total compensation paid by us to our directors and our executive
officers in fiscal 1999 was Rs. 9 million (US$ 207,000).
Bonus
Each year, our board of directors awards bonuses to our employees including
the Managing Director and Chief Executive Officer on the basis of performance
and seniority. The performance of each employee is judged by a management
appraisal system. The aggregate amount paid towards bonuses to all eligible
employees in fiscal 1999 was Rs. 48 million (US$ 1.1 million).
Employee Stock Option Scheme
On January 24, 2000, our board approved an employee stock option scheme to
attract, encourage and retain high performing employees. Subject to the approval
of our shareholders at the extraordinary general meeting to be held on February
21, 2000, up to 5.0% of our issued equity shares after the completion of the
offering can be allocated to employee stock options. The stock options will
entitle our eligible employees and directors, and eligible employees and
directors of our subsidiary and holding companies to apply for equity shares. We
do not have any subsidiaries so only our eligible employees and directors and
ICICI's eligible employees and directors could apply for equity shares. Eligible
employees include those that are assistant managers or higher. The board of
directors and compensation committee will determine the eligibility of each
employee and director based on an individual evaluation, including an evaluation
of work performance, technical knowledge and leadership qualities. The
compensation committee will determine the eligibility of ICICI's employees based
on their contribution to its different areas of operations.
The grant date will be the date of the meeting of our board of
directors or our compensation committee approving the grant of the options. The
vesting period will begin one year after the grant date and may extend for up to
three years from that date. The options may vest in tranches subject to the
conditions stipulated by the compensation committee. The conditions may include
satisfactory performance and continued employment, unless the employment is
discontinued because of death, disability or retirement.
The options will be issued at an exercise price equal to the closing market
price on the stock exchange with the highest trading volume on the grant date,
or at a price determined by our board of directors or our compensation committee
on the grant date.
The exercise period will begin on the date of vesting and expire at the end
of five years from the date of vesting or ten years from the grant date,
whichever is later. The share option will be exercisable by submitting an
application form or an exercise notice to us. The maximum number of option
shares granted to any employee in a year will not exceed 0.05% of the issued
shares on the grant date.
After the shareholders approve the scheme, the compensation committee of
our board of directors will decide on the final details of the scheme. We are
currently working out the final details of the scheme.
ICICI has an employee stock option scheme. Under this scheme, eligible
employees of ICICI group, including our employees, may be granted options on
shares of ICICI. To date, ICICI has granted stock options to its employees only.
Loans
Our bank has internal rules and regulations to grant loans to employees to
acquire certain assets such as property, vehicles and other consumer durables.
These loans are made at interest rates ranging from 3.5 % to 6.0 % per annum and
are repayable over fixed periods of time. The loans are generally secured by the
assets acquired by the employees. We have also given loans to our employees for
purchasing our shares in the offering made by ICICI in June 1997 at the public
offering price. At March 31, 1999, there were Rs.
127
138 million (US$ 3 million) loans outstanding to employees. Pursuant to the
Banking Regulation Act, our non-executive directors are not eligible for any
loans. At December 31, 1999, there was no outstanding loan to our directors.
Gratuity
Under Indian law, we are required to pay a gratuity to employees who after
at least five years of continuous service have resigned or retired. Our bank has
set up a gratuity fund administered by the Life Insurance Corporation of India.
In accordance with our gratuity fund's rules, actuarial valuation of gratuity
liability is made based on certain assumptions regarding rate of interest,
salary growth, mortality and staff turnover. The total corpus of the fund at
March 31, 1999 was Rs. 12 million (US$ 276,000).
Superannuation Fund
We contribute 15.0% of the total annual salary of each employee to a
superannuation fund, which is administered by the Life Insurance Corporation of
India. An employee gets 33.0% of the commuted value on retirement and a monthly
pension after that for life. In the event of a death of an employee, beneficiary
receives the accumulated balance of the commuted value of 66.0%.
Provident Fund
We are statutorily required to maintain a provident fund as a part of our
retirement benefits to our employees. Each employee contributes 12.0% of his or
her salary and we contribute an equal amount to the fund. This fund is managed
by in-house trustees. The investments of the fund are made according to rules
made by the government of India. The accounts of the fund are audited by
independent auditors. The corpus of the fund at March 31, 1999 was Rs. 52
million (US$ 1 million).
Interest of Management in Certain Transactions
Except as otherwise stated in this prospectus, no amount or benefit has
been paid or given to any of our directors or officers.
128
RELATED PARTY TRANSACTIONS
We have entered into several cost-sharing arrangements with ICICI and other
group companies, including:
Lease Agreements with ICICI
We have entered into lease agreements with ICICI, as lessor, at market
rates for the lease of certain properties for both office and residential
purposes and for the lease of ATMs. We paid Rs. 92 million (US$ 2 million), Rs.
20 million (US$ 460,000) and Rs. 7 million (US$ 160,000) in fiscal 1997, 1998
and 1999, respectively, for the use of ICICI property for official and
residential purposes. We paid Rs. 4.4 million (US$ 102,000) in the nine months
ended December 31, 1999 for the lease of ATMs. We did not lease ATMs from ICICI
before this period. These lease agreements contain terms and conditions that are
standard for agreements of these types.
Agreements with ICICI Personal Financial Services Limited
On December 15, 1999, we entered into an agreement with ICICI Personal
Financial Services for the provision by them of services related to our
telephone banking call centers. The initial term of the agreement is one year.
Under this agreement, we will pay fees to ICICI Personal Financial Services
based on the number of calls handled by the call center.
On January 3, 2000, we entered into another agreement with ICICI Personal
Finance Services seconding 12 of their employees with skills in marketing and
credit processing activities relating to our credit card business. Under this
agreement, we will reimburse to ICICI Personal Financial Services the salaries
of their employees seconded to us.
On January 17, 2000, we entered into another agreement with ICICI Personal
Financial Services for the provision by them of credit card processing services.
Under this agreement, we will reimburse ICICI Personal Finance Services for all
costs incurred by them, including salaries and other operating costs, plus a
mark-up up to 10.0%.
Agreements with ICICI Infotech Service Limited
On September 9, 1997, we entered into an agreement with ICICI Infotech for
the provision of services by them relating to the handling of share transfer
activities. This agreement expires on September 9, 2000. Under this agreement,
we pay fees to ICICI Infotech depending upon the volume of shares handled. In
fiscal 1998 and 1999, we paid Rs. 3 million (US$ 69,000) and Rs. 6 million (US$
138,000), respectively, to ICICI Infotech pursuant to this agreement.
On September 1, 1999, we entered into another agreement with ICICI Infotech
for seconding 35 of their employees for providing information technology
services. We reimburse the salaries of ICICI Infotech employees seconded to us.
In the nine months ended December 31, 1999, we paid ICICI Infotech Rs. 5 million
(US$ 115,000).
Other Transactions with ICICI
We have generated fee and commission income from ICICI, as one of our
customers, for the provision of banking services to ICICI, including cash
management services, the management of ICICI bond issues, remittances and
collection. We provided these services to ICICI at market rates. ICICI paid a
total of Rs. 6 million (US$ 138,000), Rs.15 million (US$ 345,000) and Rs. 12
million (US$ 276,000) to us in fiscal 1997, 1998 and 1999, respectively, for
these banking services.
We paid Rs. 2 million (US$ 46,000), Rs. 1 million (US$ 23,000) and Rs. 1
million (US$ 23,000) to ICICI in fiscal 1997, 1998 and 1999, respectively, for
the secondment of ICICI employees to us.
129
We have paid to ICICI interest on deposits and borrowings in call money
markets in the amount of Rs.27 million (US$ 631,000), Rs. 105 million (US$ 2.4
illion) and Rs. 125 million (US$ 2.9 million) in fiscal 1997, 1998 and 1999,
respectively.
In addition, we have paid dividends to ICICI, as our shareholder, in the
amount of Rs. 113 million, (US$ 2.6 million) Rs. 120 million (US$ 2.8 million)
and Rs. 147 million (US$ 3.4 million) for fiscal 1997, 1998 and 1999,
respectively. We have paid the same dividend per share to ICICI as we have paid
to all our other shareholders.
THE REPUBLIC OF INDIA
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the government of India and its various ministries, the Reserve Bank of India,
the Center for Monitoring Indian Economy, International Data Corporation and
the National Council for Applied Economic Research, and has not been prepared
or independently verified by us or the underwriters, or any of their respective
affiliates or advisors. This is the latest available information to our
knowledge.
Territory and Population
India is located in southern Asia and covers a land area of 1.3 million
square miles. India's neighbors are Afghanistan, Bangladesh, Bhutan, Myanmar,
Nepal, Pakistan, People's Republic of China and Sri Lanka. India is the world's
second most populous country after China. It had a population of approximately
975 million in mid-year 1998-99. India's poverty ratio improved to 36.0% in
fiscal 1994 compared to 54.9% in fiscal 1974. English is the accepted business
language in India. India is the world's largest democracy.
Government and Political System
India achieved independence on August 15, 1947 and is a sovereign
democratic republic consisting of 26 states and six union territories. India's
Constitution provides for the separation of executive, legislative and judicial
powers. The legislative power of the central government is vested in a
bicameral legislature consisting of the Lok Sabha (House of People) and the
Rajya Sabha (Council of States). The Lok Sabha consists of 545 members, two of
whom are nominated by the President. The other members of the Lok Sabha are
directly elected for a term of five years on the basis of a popular vote.
The Indian Constitution provides that the Rajya Sabha can consist of not
more than 250 members, 12 of who are nominated by the President and the rest
are elected indirectly by the elected members of the legislatures of the
States. The Rajya Sabha is not subject to dissolution, but one-third of its
members is required to retire every two years.
The President of India is the constitutional head of the executive branch
of the government, exercising power under the Constitution generally upon the
advice of the council of ministers, headed by the Prime Minister. Executive
power essentially resides with the Prime Minister and the council of ministers
who are responsible to the Lok Sabha. The Prime Minister is elected by the
members of the Lok Sabha and appointed by the President who also appoints other
ministers on the advice of the Prime Minister.
The system of government in the states generally resembles that of the
central government with the states having a legislature, a governor, a chief
minister and a council of ministers. The union territories are administered by
the President. There is an extensive system of local government in India, which
is principally controlled through local corporations or municipalities. The
system of local self-government extends to the village level.
130
The Supreme Court of India consists of a Chief Justice and a maximum of 25
other judges appointed by the President.
The 13th Lok Sabha elections were completed in October 1999. A coalition
government led by the Bharatiya Janata Party was formed with A.B. Vajpayee as
the Prime Minister of India.
Membership of International Organizations
India has the following international affiliations:
o charter member of the United Nations and its affiliated bodies;
o founding member of the International Monetary Fund ("IMF");
o founding member of the International Bank for Reconstruction and
Development ("World Bank");
o member of the Asian Development Bank;
o member of the African Development Bank; and
o member of the Commonwealth of Nations.
The Indian Economy
The Indian economy was the eleventh largest in the world in terms of GNP
measured in US dollars, based on World Bank data for 1998. In terms of
purchasing power parity, however, the Indian economy was the fifth largest in
the world in 1998. Agriculture remains India's largest economic sub-sector and
employs approximately two-thirds of its workforce. The government of India has
played a dominant role in the economy in an effort to ensure social justice and
self-reliance while achieving economic growth. Economic policy has been
formulated in a series of successive five-year plans.
Economic performance in the period from fiscal 1951 to the early 1980s was
mixed. Growth in real gross domestic product or GDP averaged about 3.6% during
this period. Though the per capita GDP in this period grew at a lower rate of
1.2% a substantial middle class has emerged over the years.
India's five-year plans in this period followed policies that promoted:
o import substitution through quantitative trade restrictions and high
tariff barriers;
o extensive public ownership of productive capital; and
o a complex set of controls and regulations governing the activities
of the private sector.
In the 1980s, fiscal imbalances began to arise and the government of
India's gross fiscal deficit reached 8.3% of GDP in fiscal 1991. This was
primarily on account of:
o increased government expenditure;
o rapid expansion of subsidies which grew from about 1.5% of GDP in
fiscal 1981 to more than 2.3% in fiscal 1991;
o rapid growth of interest expenses as a result of the expansion of
public debt;
o tax policies that discouraged compliance; and
o lower revenue contributions from the public sector.
There was also deterioration in India's balance of payments position.
Import payments increased consistently in the 1980s and more so after the
Persian Gulf conflict in fiscal 1991. India's external debt service obligations
rose significantly, reflecting a mounting external debt, which consisted
increasingly of more expensive commercial borrowings rather than concessional
official lending.
The fiscal and external payments problems reached a crisis point in 1991.
After the assassination of the former Prime Minister Rajiv Gandhi in 1991, the
Congress Party with P.V. Narasimha Rao as Prime Minister initiated a major
structural transformation in the economy.
131
Economic Reforms
Confronted with a major economic crisis, the government of Prime Minister
Rao undertook a comprehensive economic reform program that has been continued
by all the successive governments. These reforms have primarily included:
o elimination of industrial licensing requirements for the majority
of industries, with only five items of health, strategic and security
considerations still remaining under the purview of licensing;
o lowering of tariff barriers and simplification of the trade regime;
o reduction in subsidies;
o substantial liberalization of the restrictions on foreign investment,
including limitations on foreign equity participation;
o reduction in the role of the public sector;
o increased deregulation of interest rates and introduction of more
stringent standards for the financial sector;
o achievement of full convertibility of the rupee on current account;
o reduction in marginal tax rates and a simplification of tax
procedures;
o introduction of a program to make prices in petroleum sector
market-determined; and
o several initiatives for developing the infrastructure sector.
Sectoral Composition
The Indian economy can be divided into three sectors:
o the primary sector including agriculture, forestry, fishing, mining
and quarrying;
o the secondary sector including manufacturing, construction and
utilities (such as electricity and gas supply); and
o the tertiary sector including transport, communications, financial,
information technology, government and other services.
The following table sets forth, for the periods indicated the sectoral
composition of the Indian economy.
Year ended March 31,
-----------------------------------------------------------------------------
1951 1961 1971 1981 1991 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(percentage of GDP)
Primary.... 56.5% 52.1% 45.8% 39.6% 32.9% 32.2% 30.1% 30.4% 29.2% 29.2%
Secondary.. 15.0 18.8 22.3 24.4 28.0 23.6 24.8 24.4 25.3 24.7
Tertiary... 28.5 29.1 31.9 36.0 39.1 44.2 45.1 45.2 45.5 46.1
- ---------
Source: Government of India, Economic Survey 1998-99 and government of India
press note on quick estimates of national income, consumption
expenditure, saving and capital formation, 1998-99, January 2000.
Although manufacturing and services have grown to be major elements of the
Indian economy, agriculture remains the single largest sub-sector. In fiscal
1999, the primary sector was estimated to have contributed 29.2% of value added
in GDP. Weather conditions, in particular, the annual monsoons, are a critical
factor in the performance of agriculture each year. In the past decade,
improved irrigation, increased use of fertilizers and higher quality seeds have
helped reduce the wide fluctuations once seen. Agricultural exports have
exhibited an increasing trend. Agricultural exports have constituted 17-20.0%
of India's total exports in recent years.
The early development of India's manufacturing base was heavily focused on
the production of iron, steel, chemicals, paper and cement. Since the 1980s,
manufacturing industries in India have been expanded to include high
value-added production of petrochemicals, electrical equipment, transport
132
equipment, power generation and synthetic fibers. The secondary sector's
contribution to GDP amounted to 24.7% in fiscal 1999.
The services or tertiary sector has grown significantly. Its share in GDP
has increased from about 39.1% in fiscal 1991 to 46.1% in fiscal 1999. Within
the services sector, finance is one of the most important components.
Government-owned entities dominate India's financial sector.
Trends in the Economy
The following table sets forth, for the periods indicated, the key
indicators of the Indian economy.
133
Year ended March 31,
-----------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999(1)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(annual percentage change, except foreign exchange reserves)
Real GDP growth.................... 6.9% 5.4% 0.8% 5.3% 6.2% 7.8% 7.6% 7.8% 5.0% 6.8%
Real per capital income............ 4.8 3.0 (2.1) 3.1 4.2 5.8 5.5 6.3 3.2 5.0
Agricultural production............ 2.1 3.8 (2.0) 4.2 3.8 5.0 (2.7) 9.3 (5.6) 7.6
Industrial production.............. 8.6 8.2 0.6 2.3 6.0 8.4 12.8 5.6 6.6 4.0
Wholesale price index (average).... 7.5 10.3 13.7 10.1 8.4 10.9 7.7 6.4 4.8 6.9
Imports............................ 8.8 14.4 (24.5) 15.4 10.0 22.9 28.0 6.7 6.0 0.9
Exports............................ 18.9 9.0 (1.1) 3.3 20.2 18.4 20.8 5.3 4.6 (3.9)
Foreign exchange reserves (including
gold) (in US$ billions).......... 4.0 5.8 9.2 9.8 19.3 25.2 21.7 26.4 29.4 32.5
- ---------
(1) Provisional figures.
Sources: Government of India: Economic Survey, various issues and government of India press
note on quick estimates of national income, consumption expenditure, saving and
capital formation, 1998-99, January 2000 and Reserve Bank of India: Reserve Bank of
India Annual Report 1998-99
Real GDP growth in the 1980s averaged approximately 5.7%. The economy
experienced a sharp downturn in fiscal 1992, when the real growth was just
0.8%. The economy recovered considerably from fiscal 1993 onwards primarily due
to the liberalization initiatives of the early 1990s. Real GDP growth decreased
to 5.0% in fiscal 1998 primarily due to reduced growth in agriculture, caused
by a prolonged cold and wet spell in November 1997. Real GDP growth recovered
to 6.8% in fiscal 1999. The recovery has continued in fiscal 2000. See "--The
Indian Economy--Economic Scenario in Fiscal 2000" for further discussion.
Although good agricultural performance has been a critical contributor to
the rising production trend, industrial output has also picked up since fiscal
1994 and peaked in fiscal 1996 to 12.8%. However, there was a slowdown in
India's industrial growth which began in the second half of 1997 due to
domestic corporate restructuring, a decline in global commodity prices and a
slowdown in world trade. Exports grew at an average rate of 19.8% between
fiscal 1994 and fiscal 1996. However, growth in exports slowed down from fiscal
1997 through fiscal 1999 primarily due to a softening in international demand.
Industrial growth and exports have recovered significantly in fiscal 2000. See
"--The Indian Economy--Economic Scenario in Fiscal 2000" for further
discussion.
Inflation
India's inflation rate has varied significantly in the past 10 years. As a
result of increasing fiscal imbalances and sharp fluctuations in oil and other
world commodity prices, average inflation as measured by the wholesale price
index rose and reached a peak rate of 13.7% in fiscal 1992. Between fiscal 1992
and fiscal 1998, inflation generally declined except in fiscal 1995 when there
was a sudden increase in the inflation rate, due to excess liquidity and an
increase in the prices of primary goods. However, the trend was reversed in the
following year. The average inflation rate in fiscal 1999 was 6.9%. The decline
in inflation rate has continued in fiscal 2000. See "--The Indian
Economy--Economic Scenario in Fiscal 2000" for further discussion.
Foreign Trade and Balance of Payments
Foreign Trade
Efforts in recent years to expand the export orientation of the economy
have been successful. Merchandise exports have increased from 6.2% of GDP in
fiscal 1991 to 8.2% in fiscal 1999, while imports have risen from 9.4% to
11.4%. India's major trade partners are the United States, developing countries
in Asia, Germany, Japan and the United Kingdom.
134
Exports have increased in diversity, with manufactured goods
constituting a rising proportion of the total, as compared to primary
commodities. Provisional data indicates that two industry groups, handicrafts
(including gems and jewellery) and textiles, accounted for about 44.3% of total
exports and 57.8% of manufactured exports in fiscal 1999. In recent years,
capital goods imports have been dominating total imports. Petroleum and
petroleum products are the single largest import items. Although the share of
petrol and petroleum product imports had fallen from 25.6% in fiscal 1997 to
15.4% in fiscal 1999 primarily due to the decrease in oil prices it has begun to
rise again since April 1999 due to major increases in the price of crude oil in
the world market. In the past five fiscal years, India's trade deficit has
ranged between 2.7% to 3.9% of GDP. However, the strong growth in invisible
receipts, which includes receipts from tourism, other services including
software exports, and remittances, has financed a large part of the trade
deficit. Consequently, India's current account deficit has remained at
manageable levels. In the past five fiscal years, the current account deficit as
a percentage of GDP has been in the range of 1.0% to 1.6%.
The following table sets forth, for the periods indicated, trade deficit
and current account deficit as a percentage of GDP.
Year ended March 31,
------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- --------- -------- --------
(in percentages, except foreign exchange reserves)
Trade deficit as percentage of
GDP........................... 1.0% 2.2% 1.5% 2.7% 3.1% 3.9% 3.6% 3.3%
Current account deficit as
percentage of GDP............. 0.3 1.7 0.4 1.0 1.6 1.2 1.3 1.0
Foreign exchange reserves
(including gold) (in US$ 9.2 US$ 9.8 US$ 19.3 US$ 25.2 US$ 21.7 US$ 26.4 US$ 29.4 US$ 32.5
billions) ....................
- ---------
Source: Economic Survey, 1998-99, Government of India and the Reserve Bank of India Annual
Report, 1998-99.
Foreign Investment Inflows
India has experienced a surge in foreign investment inflows from fiscal
1994. Foreign investment inflows were a mere US$ 103 million in fiscal 1991.
Between fiscal 1994 and fiscal 1999, foreign investment inflows have ranged
between US$ 2.4 billion and US$ 6.1 billion. The share of foreign direct
investment as a percentage of total foreign investment inflows has been rising
consistently in the recent years. There had been a slowdown in foreign
portfolio investment inflows in the last two years, largely due to the
south-east Asian and Russian economic crisis. However, foreign portfolio
investment inflows have improved substantially in fiscal 2000. See "--The
Indian Economy--Economic Scenario in Fiscal 2000" for further discussion.
The following table sets forth, for the periods indicated, the inflows
from foreign direct investment and portfolio investment.
Year ended March 31,
-------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------- -------- -------- --------
(in US$ millions)
Direct investment.............. 97 129 315 586 1,314 2,144 2,821 3,557 2,462
Portfolio investment........... 6 4 244 3,567 3,824 2,748 3,312 1,828 (61)
--- --- --- ----- ----- ----- ----- ----- -----
Total........................ 103 133 559 4,153 5,138 4,892 6,133 5,385 2,401
=== === === ===== ===== ===== ===== ===== =====
Source: Reserve Bank of India Bulletin, August 1999
India's foreign exchange reserves reached a low of US$ 5.8 billion in
fiscal 1991. Since then, the foreign exchange reserves have grown consistently
to reach a comfortable level of US$ 35.2 billion at January 21, 2000. This
level of foreign exchange reserves provides India an import cover of over seven
months. This increase in foreign exchange reserves has been primarily due to
foreign investment inflows.
Exchange Rate
135
Since March 1993, the exchange rate of the rupee has been
market-determined, with transactions on trade account being fully convertible.
In February 1994, the Reserve Bank of India announced relaxations in payments
restrictions in the case of many invisible transactions, and the final step
towards current account convertibility was taken in August 1994 by further
liberalization of invisible payments.
According to the Reserve Bank of India reference rate, the exchange rate
of the rupee (monthly average) has moved from Rs. 31.53 per US$ 1.00 in March
1993 to Rs. 42.45 per US$ 1.00 in March 1999. On February 10, 2000, the
exchange rate was Rs. 43.64 per US$ 1.00.
The rupee was stable around Rs. 31.40 per US$ 1.00 from March 1993 to
August 1995. Between August 1995 and March 1996, the rupee depreciated sharply
against the dollar. However, this was the same period that the dollar
appreciated strongly against other currencies. In real terms, the rupee had
appreciated in comparison to other currencies and a depreciation was required
to maintain a real exchange rate parity.
Between August 19, 1997 and September 8, 1997 the rupee depreciated by
2.7%, in part due to the south-east Asian crisis. In August 1998, the rupee
became volatile in the wake of the Russian crisis. Between August 5, 1998 and
August 19, 1998, the rupee depreciated by 2.2%. However, unlike the south -east
Asian currencies, the rupee has not experienced a precipitous decline.
The following chart sets forth the month-end rupee/dollar exchange rates
expressed in rupees per US dollar.
[GRAPHIC OMITTED]
Source: Report on Currency and Finance, the Reserve Bank of India (various
issues)
External Debt
Total external debt (non-defense) grew by about US$ 6.2 billion annually
between fiscal 1986 and fiscal 1991. Growth in external debt slowed sharply
thereafter. As a proportion of GDP, external debt declined from 37.7% in fiscal
1992 to 23.7% in fiscal 1999.
Total external debt was estimated to be US$ 98.2 billion at the end of
March 1999. Short-term debt was only 4.4% of total external debt, and
concessional debt was 37.9% of total external debt.
The debt service ratio, which refers to debt service payments as a
percentage of current receipts excluding official transfers, declined from
30.2% in fiscal 1992 to 18.0% in fiscal 1999.
The following table sets forth, for the periods indicated, certain
information regarding external debt and debt service payments.
136
Year ended March 31,
---------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------ -----
(in US$ billions, except percentages)
Period-end outstanding ...
stock.................. 83.8 85.3 90.0 92.7 99.0 93.7 93.5 94.3 98.2
Debt service payments..... 9.0 8.3 7.7 8.6 11.0 12.0 11.7 11.2 10.7
Total debt as a
percentage of GDP...... 28.0% 37.7% 36.6% 33.1% 30.0% 26.3% 23.8% 23.8% 23.7%
Total debt service as a
percentage of current
receipts............... 35.3 30.2 27.5 25.6 26.2 24.3 21.2 19.1 18.0
- ---------
Source: India's External Debt--A Status Report, Ministry of Finance, June 1999.
Reserve Bank of India Annual Report, 1998-99.
Investment Trends
A major achievement of the economic liberalization since 1991 has been
the improvement in the investment climate in India. The amount of capital
raised in the primary market has risen from Rs. 109.6 billion (US$ 2.5 billion)
in fiscal 1991 to Rs. 429.0 billion (US$ 9.9 billion) in fiscal 1999.
Simultaneously, there has been an increase in foreign investment inflows. See
"--The Indian Economy--Foreign Trade and Balance of Payments" for further
discussion.
Gross domestic savings as a percentage of GDP rose from 21.8% in
fiscal 1994 to 24.7% in fiscal 1998 before falling to 22.3% in fiscal 1999.
Similarly, gross domestic investment rose from 22.4% of GDP in fiscal 1994 to
26.2% of GDP in fiscal 1998 before falling to 23.4% in fiscal 1999. The
savings-investment gap has increased from negative 0.6% in fiscal 1994 to
negative 1.1% in fiscal 1999.
The following table sets forth, for the periods indicated, certain
information relating to savings, investment and capital raised in the domestic
market.
Year ended March 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
-------- -------- -------- ---------- -------- ---------
(in percentages, except Rs. in billions)
Gross domestic savings as a
percentage of GDP........... 21.8% 24.2% 24.1% 24.4%(1) 24.7%(1) 22.3%(1)
Gross domestic investment as
a percentage of GDP......... 22.4 25.4 25.8 25.7(1) 26.2(1) 23.4%(1)
Capital raised in the domestic
market...................... Rs. 398 Rs. 480 Rs. 309 Rs. 289 Rs. 490 Rs. 429
- ---------
(1) These are estimates based on data which are subject to review by official
agencies.
Source: Economic Survey 1998-99, Government of India, government of India
press note on quick estimates of national income, consumption
expenditure, saving and capital formation, 1998-99, January 2000,
Center for Monitoring Indian Economy.
In recent years, industry has raised around one-half of the funds for
capital formation from its own savings and depreciation provisions. The balance
has been raised from equity share issues in India, borrowings from financial
institutions and the domestic market and equity share issues or borrowings in
overseas markets.
Income Distribution: The Growth of the Middle Class
One of the outcomes of the growth of the Indian economy in recent years
has been the rapid growth of the Indian middle class. In the last decade, an
increasing proportion of India's population has moved from the low-income
brackets to the middle-income group as shown in the table below.
137
The following table sets forth, for the periods indicated, the
distribution of households and the annual income at fiscal 1996 prices by
income group.
Year ended March 31,
---------------------------------------------
1990 1996(1)
--------------------- ---------------------
Annual Income at fiscal
Income Group 1996 prices Urban Rural Total Urban Rural Total
- -------------------- ----------------------- ----- ----- ----- ----- ----- -----
Low Rs. 25000 or less 37.1% 67.3% 58.8% 27.9% 57.2% 48.9%
Lower Middle Rs. 25,001 - 50,000 34.8 23.9 26.9 34.9 29.0 30.7
Middle Rs. 50,001 - 77,000 17.9 7.1 10.1 20.3 8.6 11.9
Upper Middle Rs. 77,001 - 106,000 6.5 1.2 2.7 9.6 3.1 5.0
High Greater than Rs. 106,000 3.8 0.5 1.4 7.3 2.0 3.5
- ---------
(1) Total number of households at year-end 1995-96 was estimated at 164.9
million.
Source: National Council of Applied Economic Research, India Market
Demographics Report, 1998.
Households in the low-income group have decreased by 3.2 million between
fiscal 1990 and fiscal 1996 (the latest year for which consumer statistics are
available), while they have increased by 12.1 million in the lower middle
income group, 5.3 million in the middle income group and 4.4 million in the
upper middle income group. Both rural and urban areas have exhibited similar
trends, though the movement towards the middle income groups seems more
pronounced in the urban regions.
A Large and Significant Consumer Market
The recent growth in the middle class has created the possibility of a
large and significant consumer market.
A study conducted by the National Council of Applied Economic Research
("NCAER") in India on consumer classes, based on ownership and consumption
trends rather than household incomes, revealed that the structure of the Indian
market has changed significantly over the last few years, with the top three
population groups, the "very rich", the "consuming class" and the "climbers",
growing at nearly five times the average for the population as a whole. The
study also revealed that Indian consumption patterns have changed in the last
two decades.
The NCAER estimates that if India's GDP were to grow by an average of 6.4%
a year, by fiscal 2007, up to 70.0% of the Indian population, or about 140
million households, would be in the three middle income brackets. This would
certainly make India one of the largest consumer markets in the world. Most of
this shift is likely to come from the urban areas, where the share of
households in the lower income category would drop by a dramatic 90.0%.
Corresponding to these income groups, there is likely to be a significant shift
in the consumption classes in the economy as well, with the "climbers" together
with the "consuming class" projected to form the bulk (about 80%) of the Indian
population by fiscal 2007.
We cannot be sure that growth will occur as predicted by NCAER estimates
and investors should not assume that these estimates will, in fact, predict the
future.
Telecommunications in India
The Indian telecommunications network is one of the largest networks in
the world and has been in operation since 1851. At December 31, 1999, there
were 23.8 million direct exchange lines in India, translating into a
tele-density of about 2.44 per hundred population as against a world average of
11. The telecommunications infrastructure in India historically has been
controlled by government-controlled telecommunications providers. The resulting
service has been inferior to service in developed countries. Recognizing the
business need for a reliable communications network, the government of India
decided in 1994 to deregulate the telecommunications sector and open it up to
competition.
138
The privatization process for the telecommunications sector commenced in
1994 with the announcement of National Telecom Policy and the subsequent
opening up of cellular telephony and fixed line telephony to private operators.
Licences have been awarded to private fixed line and cellular operators. At
November 30, 1999, there were about 1.5 million cellular subscribers in the
country.
The government announced the New Telecom Policy 1999 in March 1999 with a
view to further facilitate development of telecommunications in the country.
The key features of this policy include :
o multiple operators in cellular and fixed line services subject to
certain conditions;
o licensing of operators based on a revenue sharing structure with
a fixed entry fees;
o provision of telephony through cable and any other media except
internet telephony;
o opening up of national long distance from January 1, 2000;
o free interconnection between all fixed line, cellular and other
telecommunicaitions service operators at mutually determined terms
without obligations to the Department of Telecommunications, the
government service provider;
o corporatization of the Department of Telecommunications by the year
2001; and
o opening of international long distance will be reviewed by 2004.
There has been significant growth in the telecommunications network in the
past few years. The telephone lines over the past five years have been added at
a growth rate of 20% per annum. At December 31, 1999, out of 607,491 villages
in India, 349,931 villages had public telephones. The above telecommunications
network was supported by about 122,124 kilometers of optic fibre and 154,067
kilometers of microwave backbone at December 31, 1999.
Internet in India
Internet services were commercially introduced in India in August 1995,
with the Videsh Sanchar Nigam Limited or VSNL as the sole provider of Internet
connectivity. The services which were initially offered in the four metros of
New Delhi, Mumbai, Chennai and Calcutta have been expanded to cover a network
of 42 nodes throughout the country. In November 1998, the Internet Service
Providers Policy was announced which envisaged entry of unlimited private
Internet service providers with negligible license fees. At October 1997, 175
licenses were issued to service providers which include cable operators.
Although the market for electronic commerce is at an early stage of
development in India, it is expanding rapidly. International Data Corporation
report estimates that:
o the personal and network computer base in India will grow at a rate
that averages 44% annually from 1.9 million in 1998 to 8.2 million
in 2002;
o Internet users will grow at a rate that averages 76% annually from
0.5 million in 1998 to 4.5 million in 2002 and 12.3 million in 2005;
and
Internet commerce revenues in India will grow at a rate that averages
260% annually from US$ 3.5 million in 1998 to US$ 593.6 million in 2002.
We believe that the fundamentals for Internet growth exist in India in
terms of income, education, and demographics but the growth has been inhibited
by relatively high costs and poor user experience caused by inadequate
telecommunications infrastructure and slow network connection speeds. Internet
usage is expected to grow rapidly with continuing deregulation, availability of
bandwidth at cheaper rates, a bigger base of personal and network computers,
advances in network design, increased availability of alternative Internet
delivery channels, such as cable, satellite and wireless, increased
availability of Internet-based software and applications and emergence of
useful content and electronic commerce technologies. As the Internet is
becoming more developed and reliable, businesses are increasingly utilizing the
Internet for functions critical to their core business strategies such as sales
and marketing, customer service and project coordination as it enables them to
reduce operating costs, access valuable information and reach new markets.
139
The government of India is in the process of introducing legislation to
facilitate the development of a secure environment for electronic commerce. In
1999, the Information Technology Bill was referred to a committee of the
parliament. This bill seeks to establish a regulatory authority for electronic
commerce, provide legal validity to information in the form of electronic
records and permit, unless otherwise agreed, an acceptance of contract to be
expressed by electronic means of communication. It seeks to facilitate
electronic intercourse in trade and commerce by providing the legal framework
for authentication and origin of electronic record/communication through
digital signature and eliminate uncertainties over writing and signature
requirements. The passage of the bill is expected to spur growth of electronic
commerce.
Impact of Political Environment on Economic Reforms
The present government was formed by a coalition of a number of parties
led by the Bhartiya Janata Party in October 1999. Since economic reforms were
introduced in fiscal 1992, successive governments in India formed by different
political parties have continued the economic reform process despite their
varying ideologies. This focus on economic reforms points to the broad
political consensus in India on the need for economic reforms. Therefore, we
believe that the political environment is unlikely to impact economic policy
making in the economy and the process of reforms. However, we cannot guarantee
that this will continue to be the case and investors should form their own
views regarding the political situation.
Economic Scenario in Fiscal 2000
The Indian economy grew at 5.9% in the first quarter and 6.0% in the
second quarter of fiscal 2000. Inflation has remained low throughout the
current fiscal year. On a point to point basis, the inflation rate measured by
the wholesale price index was 3.3% for the week ended January 22, 2000. Total
flow of funds from scheduled commercial banks to the commercial sector
increased to Rs. 416.6 billion during the period from April 1999 to December
1999 compared to Rs. 305.3 billion during the period from April 1998 to
December 1998. During the period April 1999 to November 1999, industrial
production recorded a 6.4% growth compared to a growth of 3.6% in the
corresponding period in fiscal 1999. Exports during the period from April 1999
to December 1999 have grown by 12.9% reflecting an increased world demand for
Indian goods in the current fiscal year. Software exports for the period April
1999 to September 1999 were 58% higher than that for the period April 1998 to
September 1998. Foreign investment inflows, which were at US$ 2,401 million for
the full year in fiscal 1999, have reached US$ 2,573 million in the first seven
months of the current fiscal year. Foreign exchange reserves were at US$ 35.2
billion at January 21, 2000.
Union Budget Fiscal 2000
In the Union Budget fiscal 2000, the Ministry of Finance modified the
method of estimating the fiscal deficit of the central government. Under this
modified method, it has excluded from capital expenditure the proportion of
small savings that are given as loans to States and Union Territories. Further,
the revised GDP series released by the Central Statistical Organization has
been used for calculating various deficit ratios. With these modifications,
fiscal deficit estimates worked out to be 4.7% of GDP in fiscal 1998 and 4.5%
in fiscal 1999. In fiscal 2000, fiscal deficit is budgeted to decline further
to 4.0% of GDP.
The major steps taken and proposals made in the Union Budget were:
o The indirect tax structure was rationalized. The number of excise
duty rates was brought down from 11 to three and the number of
customs duty rates was reduced from seven to five.
o Several measures were introduced to encourage the flow of
investment to the housing sector.
o The tax rate on long-term capital gains on transfer of listed
securities was fixed at the lower of 20.0% with adjustment for
cost inflation index, or 10.0% without adjustment for cost
inflation index.
140
o Tax on dividend income from mutual funds was abolished. However,
mutual funds are required to pay a 10.0% tax on distributions,
except in the case of equity oriented mutual funds that are
exempt from this tax for a period of three years.
o Stamp duty was proposed to be removed on transfer of debt
instruments in dematerialized form.
o Investment by non-resident Indians up to 100.0% was proposed in
almost all sectors.
o Corporate restructuring was generally made tax neutral.
Rationalization of Sales Tax
All states and union territories of India have agreed in principle to
introduce a system of tax on value added from April 1, 2001. Further, to reduce
the severe competition among Indian states in attracting business by fixing
very low tax rates which was not in the general economic interest, the states
have agreed to introduce floor rates of sales tax.
Legislative Framework for Restructuring Sick Companies
The Sick Industrial Companies (Special Provisions) Act, 1985 established
the Board for Industrial and Financial Reconstruction and the Appellate
Authority for Industrial and Financial Reconstruction to secure timely
detection of sick and potentially sick companies, and for speedy determination
and enforcement of preventive and remedial measures to be taken in respect of
such companies. The Board for Industrial and Financial Reconstruction makes
necessary inquiries into the working of a company and appoints an agency to
formulate a scheme for recovery. The Board for Industrial and Financial
Reconstruction is empowered to appoint banks or financial institutions as its
agents to assist it in discharging its functions. In the event of a reference
to the Board for Industrial and Financial Reconstruction, no legal proceedings
pertaining to the properties of the company or any proceedings for the
liquidation of the company may be brought except with the consent of the Board
for Industrial and Financial Reconstruction.
REFORMS IN SOME KEY SECTORS OF THE INDIAN ECONOMY
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
government of India and its various ministries, the Reserve Bank of India and
the Center for Monitoring Indian Economy, and has not been prepared or
independently verified by us or the underwriters, or any of their respective
affiliates or advisors. This is the latest available information to our
knowledge.
Infrastructure Sector
The Expert Group on the Commercialization of Infrastructure Projects
appointed by the government of India estimated that the annual level of
investment in infrastructure (at fiscal 1996 prices) would rise from Rs. 600
billion (US$ 13.8 billion) in fiscal 1996 to approximately Rs. 1.8 trillion
(US$ 43.7 billion) by fiscal 2006. This group also estimated that
infrastructure investment could rise from 5.5% of GDP to 7.0% of GDP by fiscal
year 2001 and to 8.0% of GDP by fiscal 2006. The financial resources required
between 1996 and 2006 was estimated at Rs. 6.2 billion (US$ 142.5 million) for
the power generation sector and Rs. 1.9 billion (US$ 43.7 million) for the
telecommunications sector, both at fiscal 1996 prices.
Until 1991, the development of the infrastructure in India was entrusted
predominantly to the public sector. Given the quantum of investment required in
this sector, the government of India issued policy guidelines to encourage the
involvement of the private sector, including foreign private investment, in
infrastructure development. To give a boost to investment in the infrastructure
sector, the government took the following steps:
o It introduced tax incentives for financing and developing
infrastructure activities in the 1996-97 budget;
141
o Telecommunications, oil exploration and industrial parks were
included in infrastructure to enable them to take advantage of the
tax benefits;
o Holding companies' promoters were allowed to raise external
commercial borrowings up to US$ 50 million to finance equity in a
subsidiary or joint venture company implementing infrastructure
projects;
o Provident funds have been allowed to invest up to 10.0% of
incremental funds in private infrastructure projects;
o Private investment including foreign equity participation up to
100.0%, subject to certain conditions, has been permitted in
electricity generation, transmission and distribution,
construction and maintenance of roads, highways, vehicular
tunnels and bridges and ports; and
o The Telecom Regulatory Authority of India and the Tariff
Authority for Major Ports were set up in 1997.
Insurance
The R.N. Malhotra Committee was set up in April 1993 to recommend reforms
in the insurance industry. This committee submitted its report on January 7,
1994 and its major recommendations were as follows:
o The entry of the private sector in the insurance industry should be
allowed;
o India's two insurance corporations, the Life Insurance Corporation of
India and General Insurance Corporation of India should be privatized,
with the government retaining a 50.0% stake;
o The licensing system for surveyors should be abolished;
o The tariff regime in general insurance must continue;
o Contributions to pension schemes must be exempt from tax;
o Settlement of claims must be expedited; and
o High priority should be given to activating the regulatory apparatus.
As a first step towards implementation of the recommendations of the
Malhotra Committee on Reforms in the Insurance Sector, the budget for fiscal
1996 indicated that an independent regulatory authority would be set up for the
insurance industry, and the Insurance Regulatory Authority was set up in 1996.
In December 1999, the parliament approved the Insurance Regulatory and
Development Authority Bill, 1999. This bill has opened up the Indian insurance
sector for foreign and private investors. This bill allows foreign equity
participation in new insurance companies of up to 26.0%. The new company should
have a minimum paid up equity capital of Rs. 1.0 billion (US$ 23.0 million) to
carry out the business of life insurance or general insurance or Rs. 2.0
billion (US$ 46.0 million) to carry out exclusively the business of
reinsurance. An Insurance Regulatory and Development Authority has been set up
to regulate, promote and ensure orderly growth of the insurance industry.
The Reserve Bank of India recently has circulated draft guidelines
governing the entry of banks and financial institutions into the insurance
business. The objective of the guidelines is to allow only financially strong
banks and financial institutions to enter the insurance business. The draft
guidelines permit banks and financial institutions to enter the business of
underwriting insurance through joint ventures if they meet the stipulated
criteria relating to their net worth, capital adequacy ratio, profitability
track record and level of non-performing loans and the performance of their
existing subsidiary companies. The draft guidelines specify the maximum
percentage of the paid up capital and of the net worth of the bank or financial
institution that can be invested in the joint venture. To keep the risks
associated with each of the businesses distinct, the guidelines envisage an
"arms length" relationship between the bank or financial institution and the
insurance company. The Reserve Bank of India has released these draft
guidelines for public discussion.
142
External Sector
Trade Policy
The export-import policy for the fiscal years 1997-2000 initiated the
process of import liberalization by substantially decreasing the number of
items on the restricted list of imports and increasing the number of items that
can be imported under the special import license and the open general license.
Items under the restricted list face quantitative restrictions on import while
items under open general license can be imported freely without any
quantitative restrictions. The special import licenses are freely transferable
import licenses which are granted to export houses and trading houses for the
import of goods. In a major revision of the policy in April 1999, an additional
894 items were moved from the restricted list to the open general license. Only
667 items remain in the restricted list.
In September 1998, the government of India allowed Indian companies to
access international commodity exchanges to hedge their commodity price risks
by entering into standard exchange-traded futures and options contracts.
Companies with genuine underlying exposure will now be allowed to hedge these
risks.
External Commercial Borrowings
Since 1991, the government of India has announced various measures with
respect to external commercial borrowings. Generally, the approval of the
Ministry of Finance and the Reserve Bank of India is required for external
commercial borrowings. The government has initiated reforms in this respect to
encourage the inflow of long term funds for infrastructure. The major reforms
with respect to external commercial borrowings are as follows:
o Exporters can raise up to three times their average annual
exports of the preceding three years subject to a ceiling of US$
200 million.
o The maximum eligibility for external commercial borrowings under
the long-term external commercial borrowings scheme has been
raised to US$ 200 million for borrowings with an average maturity
of eight years and US$ 400 million for borrowings with an average
maturity of 16 years.
Rules have been relaxed to allow prepayment, subject to government
approval, of all commercial borrowings with a residual maturity of one year.
Alternatively, a one-time prepayment of up to 10.0% of the outstanding external
commercial borrowing during the life of the loan is permitted. While there are
end-use restrictions under the guidelines for external commercial borrowings,
financial institutions are permitted to provide loans for project-related
expenditure in rupees.
Foreign Exchange Management Act
In India, payments and dealings affecting foreign exchange are governed by
the Foreign Exchange Regulation Act. In December 1999, parliament passed the
new Foreign Exchange Management Act, which when effective, will replace the
Foreign Exchange Regulation Act. This new legislation indicates a major shift
in the policy of the government with regard to foreign exchange management in
India. While the Foreign Exchange Regulation Act was aimed at the conservation
of foreign exchange and its utilization for the economic development of the
country, the objective of the Foreign Exchange Management Act is to facilitate
external trade and promote the orderly development and maintenance of foreign
exchange market in India.
Capital Account Convertibility
A committee, which was set up by the Reserve Bank of India to look into
the various aspects of capital account convertibility, submitted its report on
June 3, 1997. The committee in its report had laid out a road map for
introducing various measures relating to making the rupee convertible on the
capital account. At the same time, it had also specified the pre-conditions to
be achieved. Implementation of these
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recommendations and movement towards capital account convertibility has been
gradual, particularly in the wake of the south-east Asian crisis.
OVERVIEW OF THE INDIAN FINANCIAL SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the government of India and its various ministries and the Reserve Bank of
India, and has not been prepared or independently verified by us or the
underwriters, or any of their respective affiliates or advisors. This is the
latest available information to our knowledge.
The Reserve Bank of India, the central banking and monetary authority of
India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sector participate in India's financial sector, including the
following:
o commercial banks;
o long-term lending financial institutions;
o non-bank finance companies, including housing finance companies; and
o other specialized financial institutions, and state-level financial
institutions.
Until the early 1990s, the Indian financial system was strictly
controlled. Interest rates were administered, formal and informal parameters
governed the asset allocation, and strict controls limited entry into and
expansion within the financial sector. The government of India's economic
reform program, which began in 1991, encompassed the financial sector. The
first phase of the reform process began with the implementation of the
recommendations of the Committee on the Financial System, the Narasimham
Committee I. The reform process has now entered into its second phase. See
"--Banking Sector Reform--The Committee on Banking Sector Reforms (Narasimham
Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants in the Indian
financial system, with a focus on the commercial banks and the long-term
lending institutions. This is followed by a brief summary of the banking reform
process along with the recommendations of various committees which have played
a key role in the reform process. We then present a brief discussion on the
impact of the liberalization process on long-term lending institutions and
commercial banks. Finally, reforms in the non-banking financial sector are
briefly reviewed.
Reserve Bank of India
The Reserve Bank of India, established in 1935, is the central banking and
monetary authority in India. The Reserve Bank of India manages the country's
money supply and foreign exchange and also serves as a bank for the government
of India and for the country's commercial banks. In addition to these
traditional central banking roles, the Reserve Bank of India undertakes certain
developmental and promotional roles.
The Reserve Bank of India requires financial entities regulated by it to
furnish information relating to their businesses to it on a regular basis. The
Department of Financial Supervision of the Reserve Bank of India is authorized
to make requests for information from or undertake both on-site inspection and
off-site surveillance of financial institutions. The Reserve Bank of India also
issues guidelines on exposure standards, income recognition, asset
classification, provisioning for non-performing assets and capital adequacy
standards for commercial banks, long-term lending institutions and non-bank
finance companies. For further discussion regarding Reserve Bank of India's
role as the regulatory and supervisory authority, of India's financial system
and its impact on us, see "Supervision and Regulation".
Commercial Banks
Commercial banks in India have traditionally focused only on meeting the
short-term financial needs of industry, trade and agriculture. On September 30,
1999, there were 298 scheduled commercial banks in the country, with a network
of 65,294 branches serving approximately Rs. 7.4 trillion (US$ 170
144
million) in deposit accounts. Scheduled commercial banks are banks which are
listed in the schedule to the Reserve Bank of India Act, 1934, and may further
be classified as public sector banks, private sector banks and foreign banks.
Commercial banks have a presence throughout India, with nearly 72.0% of
bank branches located in rural or semi-urban areas of the country. A large
number of these branches belong to the public sector banks.
Public Sector Banks
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its associate banks, 19
nationalized banks and 196 regional rural banks. Excluding the regional rural
banks, the remaining public sector banks have 45,761 branches, and account for
77.8% of the outstanding gross bank credit and 79.5% of the aggregate deposits
of the scheduled commercial banks. The public sector banks' large network of
branches enables them to fund themselves out of low cost deposits.
The State Bank of India is the largest public sector bank in India. At
September 30, 1999, the State Bank of India and its seven associate banks had
13,334 branches. They accounted for 24.7% of aggregate deposits and 29.0% of
outstanding gross bank credit of all scheduled commercial banks.
Regional rural banks were established from 1976 to 1987 by the central
government, state governments and sponsoring commercial banks jointly with a
view to develop the rural economy. Regional rural banks provide credit to small
farmers, artisans, small entrepreneurs and agricultural laborers. There were
196 regional rural banks at September 30, 1999 with 14,481 branches, accounting
for 3.8% of aggregate deposits and 3.0% of gross bank credit outstanding of
scheduled commercial banks.
Private Sector Banks
After the first phase of bank nationalization was completed in 1969,
public sector banks made up the largest portion of Indian banking. The focus on
public sector banks was maintained throughout the 1970s and 1980s. Furthermore,
existing private sector banks which showed signs of an eventual default were
merged with state-owned banks. In July 1993, as part of the banking reform
process and as a measure to induce competition in the banking sector, the
Reserve Bank of India permitted entry by the private sector into the banking
system. This resulted in the introduction of nine private sector banks,
including us. These banks are collectively known as the "new" private sector
banks. In addition, 25 private sector banks existing prior to July 1993 are
operating.
At September 30, 1999, private sector banks accounted for approximately
10.2% of aggregate deposits and 11.3% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 4,883 branches accounted for 7.5%
of the total branch network of scheduled commercial banks in the country.
Foreign Banks
At March 31, 1999, there were 44 foreign banks with 192 branches operating
in India. At September 30, 1999, foreign banks accounted for 6.0% of aggregate
deposits and 7.9% of outstanding gross bank credit of scheduled commercial
banks. As part of the liberalization process, the Reserve Bank of India has
permitted foreign banks to operate more freely, subject to requirements largely
similar to those imposed on domestic banks. This has led to increased foreign
banking activity.
The primary activity of most foreign banks in India has been in the
wholesale segment. However, in recent years, some of the larger foreign banks
have started to make consumer financing a larger part of their portfolios based
on the growth opportunities in this area in India. These banks are offering
products such as automobile finance, home loans, credit cards and household
consumer finance.
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Cooperative Banks
Cooperative banks cater to the financial needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks provide
long-term credit for agriculture.
Long-Term Lending Financial Institutions
The long-term lending financial institutions were established to provide
medium-term and long-term financial assistance to various industries for
setting up new projects and for the expansion and modernization of existing
facilities. These institutions provide fund-based and non-fund-based assistance
to industry in the form of loans, underwriting, direct subscription to shares,
debentures and guarantees. The primary long-term lending financial institutions
include ICICI Limited, the Industrial Development Bank of India, IFCI Limited
and the Industrial Investment Bank of India.
The long-term lending financial institutions were expected to play a
critical role in Indian industrial growth and accordingly, had access to
concessional government funding. However, in recent years, the operating
environment of the long-term lending financial institutions has changed
substantially. Although the initial role of these institutions was largely
limited to providing a channel for government funding to industry, the reform
process has required them to expand the scope of their business activities.
Their new activities include:
o fee-based activities like investment banking and advisory services;
and
o short-term lending activity including issuing corporate finance and
working capital loans.
In addition, there are three other investment institutions at the national
level, Life Insurance Corporation of India, General Insurance Corporation of
India and its subsidiaries and Unit Trust of India, which also provide
long-term financial assistance to the industrial sector.
Non-Bank Finance Companies
There are over 10,000 non-bank finance companies in India, mostly in the
private sector. All non-bank finance companies are required to register with
the Reserve Bank of India. The non-bank finance companies may be categorized
into entities which take public deposits and those which do not. The companies
which accept public deposits are subject to strict supervision and capital
adequacy requirements of the Reserve Bank of India.
The scope and activities of non-bank finance companies have grown
significantly over the years. The primary activities of the non-bank finance
companies are consumer credit, including automobile finance, home finance and
consumer durable products finance, wholesale finance products to small and
medium-sized companies such as bills discounting, and fee-based services such
as investment banking and underwriting.
Over the last few years, certain non-bank finance companies have defaulted
to investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are pending.
Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank
finance companies. As a result of the various incentives given to investing in
the housing sector by the government in recent years, the scope of this
business has grown substantially. Housing Development Finance Corporation
Limited is a premier institution providing housing finance in India. In
addition, insurance institutions like Life Insurance Corporation of India and
several commercial banks have also established housing finance subsidiaries.
National Housing Bank and Housing and Urban Development Corporation Limited are
the two government-controlled financial institutions created to improve the
availability of housing finance in India.
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Other Financial Institutions
Specialized Financial Institutions
In addition to the long-term lending financial institutions, there are
various specialized financial institutions which cater to the specific needs of
different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, the Small Industries Development Bank
of India, ICICI Venture Funds Management Company Limited, Risk Capital and
Technology Finance Corporation Limited, Tourism Finance Corporation of India
Limited, Power Finance Corporation Limited and the Infrastructure Development
Finance Corporation Limited.
State Level Financial Institutions
State financial corporations operate at the state level and form an
integral part of the institutional financing system. State financial
corporations were set up to finance and promote small and medium-sized
enterprises. The state financial institutions are expected to achieve balanced
regional socio-economic growth by generating employment opportunities and
widening the ownership base of industry. At the state level, there are also
state industrial development corporations, which provide finance primarily to
medium-sized and large-sized enterprises.
Impact of Liberalization on the Indian Financial Sector
Until 1991, the financial sector in India was heavily controlled and
commercial banks and long-term lending institutions, the two dominant financial
intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition.
The focus of commercial banks was primarily to mobilize household savings
through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, commercial banks provided a range of banking services to individuals
and business entities.
Long-term lending institutions were focused on the achievement of the
Indian government's various socio-economic objectives, including balanced
industrial growth and employment creation, especially in areas requiring
development.
However, since 1991, there have been comprehensive changes in the Indian
financial system. Various financial sector reforms, implemented since 1991,
have transformed the operating environment of the banks and long-term lending
institutions. In particular, the deregulation of interest rates, emergence of a
liberalized domestic capital market, and entry of new private sector banks,
along with the broadening of long-term lending institutions' product
portfolios, have progressively intensified the competition between banks and
long-term lending institutions.
All of these factors are leading to a gradual disappearance of the
traditional boundaries between banks and long-term lending institutions.
Long-term lending institutions now compete directly with banks in several areas
of business. At the same time, since 1992, the long-term lending institutions'
access to subsidized domestic sources of long-term funds has diminished and
they now primarily depend upon market borrowings. They do not have complete
access to retail savings and demand deposits and have certain restrictions on
the short maturity funds that they are able to raise from the market.
Banking Sector Reform
Most large banks in India were nationalized in 1969 and thereafter were
subject to a high degree of control until reform began in 1991. In addition to
controlling interest rates and entry into the banking sector, these regulations
also channeled lending into priority sectors. Banks were required to fund the
public sector through the mandatory acquisition of low interest-bearing
government securities or statutory
147
liquidity ratio bonds to fulfill statutory liquidity and cash reserve
requirements. As a result, bank profitability was low, non-performing assets
were comparatively high, capital adequacy was diminished, and operational
flexibility was severely hindered.
Committee on the Financial System (Narasimham Committee I)
The Committee on the Financial System (The Narasimham Committee-I) was set
up in August 1991 to recommend measures for reforming the financial sector.
Many of the recommendations made by the committee, which addressed
organizational issues, accounting practices and operating procedures, were
implemented by the government of India. The major recommendations that were
implemented included the following:
o With fiscal stabilization and the government increasingly
resorting to market borrowing to raise resources, the statutory
liquidity ratio or the proportion of the banks' net demand and
time liabilities that were required to be invested in government
securities was reduced from 38.5% in the pre-reform period to
25.0% in October 1997. This meant that the significance of the
statutory liquidity ratio shifted from being a major instrument
for financing the public sector in the pre-reform era to becoming
a prudential requirement;
o Similarly, the cash reserve ratio or the proportion of the bank's
net demand and time liabilities that were required to be
deposited with the Reserve Bank of India was reduced from 15.0%
in the pre-reform period to 9.5% in November 1997. At present,
the level of cash reserve ratio to be maintained by banks is at 9.0%.
o Special tribunals were created to resolve bad debt problems;
o Almost all restrictions on interest rates for deposits were
removed. Commercial banks were allowed to set their own level of
interest rates for all deposits except savings bank deposits;
o In the budgets of fiscal 1993 and fiscal 1994, substantial
capital infusion to several state-owned banks was approved in
order to bring their capital adequacy closer to internationally
accepted standards. The stronger public sector banks were given
permission to issue equity to further increase capital; and
o Banks were granted the freedom to open or close branches.
Committee on Banking Sector Reform (Narasimham Committee II)
The second Committee on Banking Sector Reform (Narasimham Committee II)
submitted its report in April 1998. The major recommendations of the committee
were as follows:
o Capital adequacy requirements should take into account market
risk in addition to credit risk. Accordingly, this committee
suggested that government securities and other approved
securities should carry risk weights;
o Risk weight on a government guaranteed advance should be the same as
for other advances;
o Foreign exchange open positions should carry a 100.0% risk weight;
o The minimum capital to risk assets ratio should be increased from
8.0% to 10.0% and a general provision of 1.0% for standard assets
should be introduced;
o There should be stricter standards for asset classification;
o For resolution of non-performing assets, this committee proposed the
establishment of an asset reconstruction company. Alternatively,
banks in difficulty could issue Tier 2 bonds guaranteed by the
government of India and these bonds could be made eligible for
statutory liquidity ratio investments;
o The shareholdings of the government of India and the Reserve Bank of
India in public sector banks should be reduced;
o Banks should introduce risk management, asset-liability management
and efficient treasury management policies;
o Decisions to merge public sector banks should originate from the
management of the relevant banks, with the government of India as
the common shareholder playing a supportive role; and
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o Mergers should not be seen as a means of bailing out weak banks.
Rather, weak banks should be strengthened by slowing down their
expansion and eliminating their high cost funds and borrowings.
The Reserve Bank of India accepted and began implementing many of these
recommendations in October 1998.
Reserve Bank of India Recommendations on Role of Banks and Financial
Institutions
In December 1997, the Reserve Bank of India created a working group
under the chairmanship of S. H. Khan to harmonize the role and operations of
long-term lending institutions and banks. In its report submitted in April
1998, the Khan Working Group recommended that banks and long-term lending
institutions progressively move towards universal banking and encouraged the
development of a regulatory framework for this purpose.
Based on the recommendations of the Khan Working Group and the Narasimham
Committee II, the Reserve Bank of India, in January 1999, issued a discussion
paper entitled "Harmonizing the Role and Operations of Development Financial
Institutions and Banks". The paper described the future of the financial
system:
o The provision of diversified services both by banks and long-term
lending institutions should continue, subject to appropriate
regulation by the Reserve Bank of India;
o Ultimately there should be only banks and restructured non-bank
finance companies;
o The special role of long-term lending institutions being noted, a
transitional path was envisioned for them to become either
full-fledged non-bank finance companies or banks. This transitory
arrangement should be worked out in consultation with the Reserve
Bank of India;
o If a long-term lending institution chooses to provide commercial
banking services directly, permission to create a 100.0% owned
banking subsidiary would be considered by the Reserve Bank of India;
o A corporate form of organization under the Companies Act was
recommended to provide the financial intermediaries with the
necessary flexibility for mergers and acquisitions and the
diversification to meet the needs of the evolving situation;
o Any conglomerate in which a bank is present should be
subject to supervision and regulation on a consolidated basis; and
Supervisory functions should be isolated and brought under a
consistent supervisory framework; and
o Ownership of financial intermediaries should be transferred from
the Reserve Bank of India to the government of India. This would help
ensure that the Reserve Bank of India focused on its supervisory and
regulatory functions.
Recent Structural Reforms
Legislative Framework for Recovery of Debts due to Banks
Following the recommendations of the Narasimham Committee - I, the
Recovery of Debts due to Banks and Financial Institutions Act, 1993 was
enacted. The purpose of this legislation is to provide for the establishment of
tribunal for speedy resolution of litigation and recovery of debts owed to
banks of financial institutions. This act creates tribunals before which the
banks for the financial institutions can file a suit for recovery of the
amounts due to them. However, if a scheme of reconstruction is pending before
the Board for Industrial and Financial Reconstruction, under the Sick
Industrial Companies (Special Provision) Act, 1985, no proceeding for recovery
can be initiated or continued before the tribunals.
As part of their effort to continue bank reform, the Reserve Bank of India
announced a series of measures in the credit policy for fiscal 1999 and fiscal
2000 aimed at deregulating and strengthening the financial system.
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Credit Policy for Fiscal 1999
In the monetary and credit policy for fiscal 1999, the following major
changes regarding banks were announced:
o The minimum maturity of term deposits was reduced from 30 days to 15
days; and
o Differential interest rates were permitted on term deposits of
different sizes, but of the same maturity. However, the lending rates
for loans below Rs. 200,000 (US$ 4,597) were not to exceed the prime
lending rate.
The major changes regarding banks and long-term lending institutions
announced in the mid-term review of the monetary and credit policy for fiscal
1999 included:
o Regulations were tightened to require provisioning for investment in
government securities and government-guaranteed loans and for general
provisioning for standard assets;
o Effective from fiscal 2000, risk weights of 2.5% for central
government securities and other approved securities and 20.0% for
advances guaranteed by state governments which remained in default
were stipulated;
o Effective from fiscal 1999, foreign exchange open positions carry a
100.0% risk weight;
o Effective from fiscal 2000, provisioning of a minimum of 0.25% will
be introduced for standard assets;
o Minimum capital to risk assets ratio for banks will be raised from
8.0% to 9.0% by fiscal 2000; and
o The period for classifying assets in the sub-standard category as
doubtful will be reduced from 24 months to 18 months by March 31,
2001.
Credit Policy for Fiscal 2000
In the monetary and credit policy for fiscal 2000, the Reserve Bank of
India reduced the cash reserve ratio to 10.0%. In addition, several structural
reform measures in the banking sector were introduced including:
o the introduction of differential prime lending rates for various
maturities;
o permission for banks to provide fixed rate loans;
o permission for long-term lending institutions to enter the repo
market for short-term liquidity management before making the
call-money market a purely inter-bank market; and
o the introduction of a cap on the subscription to Tier 2 bonds of a
financial intermediary by another financial intermediary.
The mid-term review of the monetary and credit policy for fiscal 2000
introduced the following major changes applicable to the financial sector:
o The cash reserve ratio has been reduced from 10.0% to 9.0% for banks;
o A market risk weight of 2.5% has been introduced in respect of all
bank investments in government securities (on other bank investments
also from fiscal 2001);
o The exposure limit in respect of a single borrower has been reduced
from 25.0% to 20.0% of the capital funds of banks and financial
institutions; and
o Money market mutual funds, which previously were regulated by the
Reserve Bank of India, have now been brought under the supervision
and regulation of the Securities and Exchange Board of India.
Recommendations of the Working Group on Restructuring Weak Public Sector
Banks
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The Reserve Bank of India constituted a working group on restructuring
weak public sector banks which submitted its report in October 1999. The group
has suggested a restructuring program which covers the following:
o operational restructuring involving
- changes in the method of operations;
- adoption of modern technology;
- resolution of the problem of high non-performing loans; and
- reduction in cost of operations;
o organizational restructuring aimed at improved governance and
increased management involvement and efficiency;
o financial restructuring including the investment of funds by the
government on fulfillment of certain conditions; and
o restructuring providing for legal changes and institution building
for supporting the restructuring process.
Working Group to Review Deposit Insurance in India
The working group constituted by the Reserve Bank of India to review the
role of deposit insurance in India submitted its report in October 1999. The
group has recommended changes with respect to the following in the existing
system of deposit coverage:
o institutions to be brought within the ambit of deposit insurance;
o regulatory systems to be set up;
o introduction of a risk-based premium;
o parameters for the assessment of risk;
o and parameters for the capital of a deposit insurance agency.
The Reserve Bank of India has released the report for public discussion.
Reforms of the Non-Bank Finance Companies
The standards relating to income recognition, provisioning and capital
adequacy were prescribed for non-bank finance companies in June 1994. The
registered non-bank finance companies were required to achieve a minimum
capital adequacy of 6.0% by March 31, 1995 and 8.0% by March 31, 1996 and to
obtain a minimum credit rating. To encourage the companies complying with the
regulatory framework, the Reserve Bank of India announced in July 1996 certain
liberalization measures under which the non-bank finance companies registered
with it and complying with the prudential norms and credit rating requirements
were granted freedom from the ceiling on interest rates on deposits and amount
of deposits. A new set of regulatory measures were announced by the Reserve
Bank of India in January 1998. The Reserve Bank of India has stipulated a cap
of 16.0% on interest rates on the deposits raised from the public by the
non-bank finance companies.
Efforts have also been made to integrate non-bank finance companies into
the mainstream financial sector. The first phase of this integration covered
measures relating to registrations and standards. These include requiring
non-bank finance companies to register and to have minimum net owned funds of
Rs. 2.5 million (US$ 57,458). Other measures introduced include requiring
non-bank finance companies to maintain a certain percentage of liquid assets
and to create a reserve fund. The percentage of liquid assets to be maintained
by non-bank finance companies has been revised uniformly upwards and beginning
in April 1999, 15.0% of public deposits must be maintained.
The focus of supervision has now shifted to non-bank finance companies
accepting public deposits. This is because these companies will be subject to
deposit regulations and standards. A task force on non-bank finance companies
set up by the government of India submitted its report in October 1998, and
recommended several steps to rationalize the regulation of non-bank finance
companies. Accepting
151
these recommendations, Reserve Bank of India issued new guidelines for non-bank
finance companies, which were as follows:
o A minimum net owned fund of Rs. 2.5 million (US$ 57,458) is mandatory
before existing non-bank finance companies may accept public
deposits;
o A minimum investment grade rating is compulsory for loan and
investment companies accepting public deposits, even if they have the
minimum net owned funds;
o Permission to accept public deposits was also linked to the level of
capital to risk assets ratio. Different capital to risk assets ratio
levels for non-bank finance companies with different ratings were
specified; and
o Non-bank finance companies were advised to restrict their investments
in real estate to 10.0% of their net owned funds.
Recently, in the Reserve Bank of India's Monetary and Credit Policy for
fiscal 2000, the Reserve Bank of India stipulated a minimum capital base of Rs.
20 million (US$ 459,664) for all new non-bank finance companies.
Regulations Review Authority
In March 1999, the Reserve Bank of India set up a Regulations Review
Authority to provide an opportunity to the public at large to seek
justification for and suggest deletion or modification of any regulation,
circular or return issued, or required by the Reserve Bank of India. This
authority is neither a forum for grievance redressal nor a policy-making forum.
This authority will, however, convey its views on an application to the
relevant department of the Reserve Bank of India.
Based on the recommendations of this authority, some of the existing
regulations may come under review in course of time.
SUPERVISION AND REGULATION
The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important legislations include the Reserve Bank of India
Act, the Negotiable Instruments Act and the Banker's Books Evidence Act.
Additionally, the Reserve Bank of India, from time to time, issues guidelines,
to be followed by the banks.
Reserve Bank of India Regulations
Commercial banks in India are required under the Banking Regulation Act to
obtain a license from the Reserve Bank of India to carry on banking business in
India. Before granting the license, the Reserve Bank of India must be satisfied
that certain conditions are complied with, including (i) that the bank has the
ability to pay its present and future depositors in full as their claims
accrue; (ii) that the affairs of the bank will not be or are not likely to be
conducted in a manner detrimental to the interests of present or future
depositors; (iii) that the bank has adequate capital and earnings prospects;
and (iv) that the public interest will be served if such license is granted to
the bank. The Reserve Bank of India can cancel the license if the bank fails to
meet the above conditions.
We, being licensed as a banking company, are regulated and supervised by
the Reserve Bank of India. The Reserve Bank of India requires us to furnish
statements, information and certain details relating to our business. It has
issued guidelines for commercial banks on recognition of income, assets,
maintenance of capital adequacy and provisioning for non-performing assets. The
Reserve Bank of India has set up a Board for Financial Supervision, under the
chairmanship of the Governor of the Reserve Bank of India. This Board is
assisted by the Department of Financial Supervision of the Reserve Bank of
India in supervising commercial banks and financial institutions. The
appointment of the auditors of the banks is subject to the approval of the
Reserve Bank of India. The Reserve Bank of India can direct a special audit in
the interest of the depositors or in the public interest.
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Regulations Relating to the Opening of Branches
Banks are required to obtain licenses from the Reserve Bank of India to
open new branches. Permission is granted based on factors such as the financial
condition and history of the company, its management, adequacy of capital
structure and earning prospects and the public interest. The Reserve Bank of
India may cancel the license for isolations of the conditions under which its
granted. Under the banking license granted to us by the Reserve Bank of India,
we are required to have at least 25.0% of our branches located in rural and
semi-urban areas. A rural area is defined as a center with a population of less
than 10,000. A semi-urban area is defined as a center with population of
greater than 10,000 but less than 100,000. These population figures relate to
the 1991 census conducted by the government of India.
Capital Adequacy Requirements
The Reserve Bank of India has laid down minimum capital adequacy standards
for banks based on the guidelines of the Basle Committee on Banking Regulations
and Supervisory Practices, 1988. Under these guidelines, we are required to
maintain a minimum ratio of capital to risk adjusted assets and off-balance
sheet items of 8.0%, at least half of which must be Tier 1 capital. The Reserve
Bank of India, in its credit policy announced in October 1998, has proposed to
increase the minimum capital adequacy ratio to 9.0% effective March 31, 2000.
The total capital of a banking company is classified into Tier 1 and Tier
2 capital. Tier 1 capital, the core capital, provides the most permanent and
readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves and
capital reserve in terms of Indian Income Tax Act as reduced by equity
investments in subsidiaries, intangible assets, gap in provisioning and losses
in the current period and those brought forward from the previous period.
Tier 2 capital consists of undisclosed reserves, revaluation reserves (at
a discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of weighted risk assets), hybrid debt capital instruments
(which combine certain features of both equity and debt securities) and
subordinated debt and redeemable cumulative non-convertible preferred equity
with an initial maturity of not less than five years. Any subordinated debt is
subject to progressive discounts each year for inclusion in Tier 2 capital and
total subordinated debt considered as Tier 2 capital cannot exceed 50.0% of
Tier 1 capital. A bank's investment in Tier 2 bonds issued by other banks is
subject to a ceiling of 10.0% of the bank's total capital. Tier 2 capital
cannot exceed Tier 1 capital. The Banking Regulation Act does not allow banks
established on or after January 15, 1937 to issue preferred equity.
Risk adjusted assets and off-balance sheet items considered for
determining the capital adequacy ratio are the risk weighted total of specified
funded and non-funded exposures. Degrees of credit risk expressed as percentage
weighting have been assigned to various balance sheet asset items and
conversion factors to off-balance sheet items. The value of each item is
multiplied by the relevant weight or conversion factor to produce risk-adjusted
values of assets and off-balance-sheet items. Guarantees and documentary
credits are treated as similar to funded exposure and are subject to similar
risk weight. All foreign exchange open position limits of the bank carry a
100.0% risk weight. Capital requirements have also been prescribed for open
foreign currency exposures and open positions in gold. Starting March 31, 2000,
investment in government and approved securities will also be assigned a risk
weight for fluctuation in prices. The aggregate risk weighted assets are taken
into account for determining the capital adequacy ratio.
Loan Loss Provisions and Non-performing Assets
In March 1994, the Reserve Bank of India issued formal guidelines on
recognition of income, classification of asset, provisioning against assets and
valuation of investments applicable to banks, which are revised from time to
time. These guidelines are applied for the calculation of non-performing assets
under Indian GAAP. The discussion of asset quality in this prospectus is under
US GAAP and the US GAAP standards applied are set forth in "Business--Risk
Management--Loan Portfolio."
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The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to our loans, debentures, lease assets and
bills, are set forth below.
Non-Performing Assets
A non-performing asset is an asset in respect of which any amount of
interest or principal has remained past due for more than two quarters. In
particular, loans are not classified as non-performing until the borrower has
missed two interest payments (180 days) or two principal payments (180 days).
Interest in respect of non-performing assets is not recognized or credited to
the income account unless collected.
Asset Classification
Assets are classified as described below:
o Standard Assets. Assets that do not have any problems or do not carry
more than normal risk attached to the business.
o Sub-Standard Assets. Assets that are non-performing assets for a
period not exceeding two years (18 months by March 31, 2001).
o Doubtful Assets. Assets that are non-performing assets for more than
two years and have not been written off, either wholly or partially
(18 months by March 31, 2001)
o Loss Assets. Assets that are considered uncollectible and identified
as a loss by us, the Reserve Bank of India or our external auditors.
Renegotiated or rescheduled loans must have no past due amounts for one
year after renegotiation or rescheduling for the loan to be upgraded.
Provisioning and Write-Offs
Provisions are based on guidelines specific to the classification of the
assets. The following guidelines apply to the various asset classifications:
o Standard Assets. No provision required until fiscal 1999. From fiscal
2000, a general provision of 0.25% is required.
o Sub-Standard Assets. A general provision of 10.0% is required.
o Doubtful Assets. A 100.0% write-off is required to be taken against
the unsecured portion of the doubtful asset and charged against
income. The value assigned to the collateral securing a loan is the
amount reflected on the borrower's books or the realizable value
determined by third party appraisers. In cases where there is a
secured portion of the asset, depending upon the period for which the
asset remains doubtful, a 20.0% to 50.0% provision is required to be
made against the secured asset as follows:
- Up to one year: 20.0% provision
- One to three years: 30.0% provision
- More than three years: 50.0% provision
o Loss Assets. The entire asset is required to be written off or
provided for.
While the provisions as indicated above are mandatory, a higher provision
in a loan account would be required if the auditors considered it necessary.
Regulations Relating to Making Loans
The provisions of the Banking Regulation Act govern making loans by banks
in India. The Reserve Bank of India issues directions covering the loan
activities of banks. Some of the major guidelines of Reserve Bank of India,
which are now in effect, are as follows:
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o The Reserve Bank of India has prescribed norms for bank lending
to non-bank financial companies.
o Banks are free to determine their own lending rates but each
bank must declare its Prime Lending Rate as approved by the
board of directors. Prime lending rate is the minimum rate of
interest charged by banks on advances of over Rs. 200,000.
Separate Prime Lending Rates can be fixed for short-term and
long-term credit. Each bank should also indicate the maximum
spread over the Prime Lending Rate for all credit exposures
other than consumer credit. The interest charged by banks on
advances up to Rs. 200,000 to any one entity (other than most
personal banking loans) must not exceed the Prime Lending
Rate. Interest rates in certain categories of advances are
regulated by the Reserve Bank of India.
The Reserve Bank of India, however, does not require interest rates to be
linked to the bank's Prime Lending Rate in respect of the following categories:
- loans covered by refinance scheme of financial institutions;
- interest rates on bank lending to intermediary agencies
including housing finance intermediary agencies;
- bill discounting by banks; and
- advances or overdrafts against domestic and non-resident
deposits.
o With respect to cash credit facilities (revolving asset-backed
overdraft facilities for meeting working capital needs), up to 20.0%
of the facility can be in the form of a demand loan.
o Penalty interest represents additional interest charged over and
above the base rate of interest on certain events, including default
in the repayment of loans. Penalty interest is not chargeable for
loans up to Rs. 25,000. For loans over Rs. 25,000, penalty interest
cannot exceed 2.0%.
There are guidelines on loans against equity shares in respect of amount,
margin and purpose.
Directed Lending
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend a minimum of 40.0% of their net bank credit (total domestic loans less
marketable debt instruments and certain exemptions permitted by the Reserve
Bank of India from time to time. Presently specified categories of deposits
from non-resident Indians are exempted) to certain specified sectors called
priority sectors. Priority sectors include small-scale industries, the
agricultural sector, food and agro-based industries, small business enterprises
and weaker sections of society.
The Reserve Bank of India also has set out the minimum percentage of net
bank credit that banks may direct to the priority sectors. The minimum
percentage of credit to agriculture sector is 18.0% of which at least 25%
should be directed towards indirect agriculture. The balance can be lent to the
following:
o Credit to small scale industrial units which are entities engaged in
manufacturing, processing and providing services and whose investment
in plant and machinery does not exceed Rs. 10 million;
o Credit to small businesses including small road and water transport
operators, retail traders and professional and other self employed
persons;
o Educational and other loans to the weaker sections of society; and
o Direct home loans up to Rs. 1 million disbursed in urban and
metropolitan areas and investment in bonds of National Housing Bank
and Housing and Urban Development Corporation exclusively for the
financing of housing;
Any shortfall in the amount required to be lent to the priority sectors
may be required to be deposited with developmental banks like National Bank for
Agriculture and Rural Development and Small
institutions recognized by the government of India.
155
Industries Development Bank of India. These deposits can be for a period of one
year or five years and presently carry interest at 8.0% per annum and 11.5% per
annum, respectively.
The Reserve Bank of India requires banks to lend up to 3.0% of our
incremental deposits in the previous fiscal year towards housing finance. This
can be in the form of home loans to individuals or subscription to the
debentures and bonds of National Housing Bank and housing development
Export Credit
The Reserve Bank of India also requires us to make loans to exporters at
concessional rates of interest. This enables exporters to have access to an
internationally competitive financing option. Pursuant to existing guidelines,
12.0% of our net bank credit is required to be in the form of export credit. We
provide export credit for pre-shipment and post-shipment requirements of
exporter borrowers in rupees and foreign currencies.
Regulation Relating to Bridge Loans
Banks may consider approval of bridge loan or interim finance for a
maximum period of four months against commitment made by financial institutions
or other banks only in cases, where the lending institution faces temporary
liquidity constraint. These loans are subject to conditions specified by the
Reserve Bank of India.
o The bank extending bridge loan or interim finance must obtain prior
approval of other banks and financial institutions, which have
approved the term loans; and
The approving bank must obtain a commitment from other banks and financial
institutions that the latter would directly remit the amount of term loan to it
at the time of disbursement.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks in respect of their lending to individual borrowers
and borrower groups.
The limits set by the Reserve Bank of India are as follows:
o exposure to individual borrowers must not exceed 25.0% of capital
funds of the bank (20.0% by April 1, 2000); and
o exposure to a borrower group must not exceed 50.0% of capital funds
of the bank. In the case of infrastructure projects, such as power,
telecommunications, road and port projects, an additional exposure of
10.0% of capital funds is allowed.
o exposure to individuals against shares or debentures cannot exceed
Rs. 2 million if the shares or debentures are in book-entry form and
Rs. 1 million if they are in physical form.
Exposure is the aggregate of:
o all approved fund-based limits;
o investments in shares, debentures and commercial papers of companies
and public sector undertakings; and
o 50.0% of approved non-fund-based limits, underwriting and similar
commitments.
Capital funds include paid-up capital and free reserves excluding
revaluation reserves pursuant to accounts audited and published under Indian
GAAP.
institutions recognized by the government of India.
156
Our loan exposures to individual borrowers and borrower groups are within
the above limits. Except in some cases where we have obtained the approval of
Reserve Bank of India for exceeding the above limits.
To ensure that exposures are evenly spread, the Reserve Bank of India
requires banks to fix internal limits of exposure to specific sectors. These
limits are subject to periodical review by the banks. We have fixed a ceiling
of 15.0% on our exposure to any one industry and monitor our exposures
accordingly. Where financial fundamentals and sponsors' backing are strong, our
exposures have exceeded these limits. However, these exposures are within the
individual and borrower group limits specified by the Reserve Bank of India.
Regulations Relating to Investments
There are no limits on the amount of investments by banks in
non-convertible debt instruments. However, credit exposure limits specified by
the Reserve Bank of India in respect of a bank's lending to individual
borrowers and borrower groups apply in respect of these investments. The
Reserve Bank of India requires that the net incremental investment by banks in
equity securities in a fiscal year cannot exceed 5.0% of the incremental
deposits in the previous fiscal year. Investments in debentures convertible
into equity and equity related mutual funds are included in this 5.0% limit. In
April 1999, the Reserve Bank of India, in its monetary and credit policy stated
that the investment by a bank in subordinated debt instruments, representing
Tier 2 capital, issued by other banks and financial institutions should not
exceed 10.0% of the investing bank's capital including Tier 2 capital and free
reserves. The Reserve Bank of India has permitted us to comply with this
requirement by March 31, 2000.
Restrictions on Investments in a Single Company
No bank may hold shares in any company exceeding 30.0% of the paid up
share capital of that company or 30.0% of its own paid up share capital and
reserves, whichever is less.
Limit on Transactions through Individual Brokers
The guidelines issued by the Reserve Bank of India require banks to
empanel brokers for transactions in securities. The guidelines also require
that a disproportionate part of the bank's business should not be transacted
only through one broker or a few brokers. The Reserve Bank of India specifies
that not more than 5.0% of the total transactions through empanelled brokers
can be transacted through one broker. If for any reason this limit is breached,
the Reserve Bank of India has stipulated that the board of directors of the
bank concerned should ratify such action.
Prohibition on Short Selling
The Reserve Bank of India does not permit short selling of securities by
banks.
Valuation of Investments
In terms of the Reserve Bank of India guidelines, new private sector banks
like us are required to mark-to-market their entire investment portfolio each
year. Securities, for which market quotes are not available, are valued as
follows:
o fixed income securities are valued on the basis of yield to maturity
of or linked to government of India securities except that debentures
issued by corporations are valued at cost if interest is serviced
regularly and treated as non-performing loans if not so serviced;
o equity shares are valued at book value as per the latest balance
sheet of the investee company except that the holding is valued at
Rupee. 1 if the balance sheet is not available; and
o mutual funds are valued at their latest net asset value declared by
the fund.
Short-term instruments like treasury bills and commercial bills are to be
valued at cost.
institutions recognized by the government of India.
157
A committee of the Reserve Bank of India has proposed new guidelines for
the valuation of investments from the next fiscal year. These guidelines, if
implemented by the Reserve Bank of India, would require banks to classify their
entire portfolio under three categories namely "held for trading", "available
for sale" and "permanent". The permanent component would be required not to
exceed 25.0% of the total investment in approved securities. Securities held in
the "permanent" category would have to be valued at cost and any premium paid
over face value would be amortized over the period of maturity of the
instrument. The other two components would have to be marked to market on the
basis of the bank's own yield curve subject to the satisfaction of auditors.
Any gain or loss on the revaluation of investments in the "held for trading"
category would have to be recognized in the income statement. Depreciation
should be recognized in the income statement. However, the appreciation, being
unrealized, would be appropriated to an investment fluctuation reserve through
the income account. The gain or loss on revaluation of investments in the
"available for sale" category would have to be taken to the investment
fluctuation reserve account without routing through the income account. If the
balance in the reserve account is insufficient to provide for any loss on
revaluation, provision for such loss would have to be made in the income
account. Banks would be able to shift investments from one category to another
category only with the approval of their board of directors.
Regulations Relating to Deposits
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on fixed deposits. However, no bank is permitted to
pay interest on current account deposits. Further, banks can pay interest of
4.5% per annum on savings deposits. In respect of savings and time deposits
accepted from employees, we are permitted by the Reserve Bank of India to pay
an additional interest of 1.0% over the interest payable on deposits from the
public.
Domestic time deposits can have a minimum maturity of 15 days and maximum
maturity of 10 years. Time deposits from non-resident Indians denominated in
foreign currency can have a minimum maturity of one year and maximum maturity
of three years. Rupee time deposits from non-resident Indians can have a
minimum maturity of six months and maximum maturity of three years.
Starting April 1998, the Reserve Bank of India has permitted banks the
flexibility to offer varying rates of interests on domestic deposits of the
same maturity subject to the following conditions:
o Time deposits are of Rs. 1.5 million and above; and
o Interest is paid in accordance with the schedule of interest rates
disclosed in advance by the bank and not pursuant to negotiation
between the depositor and the bank.
Insurance of Deposits
Demand and time deposits of up to Rs. 100,000 (US$ 2,300) accepted by
Indian banks have to be mandatorily insured with the Deposit Insurance and
Credit Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of
India. Banks are required to pay the insurance premium for the eligible amount
to the Deposit Insurance and Credit Guarantee Corporation on a semi-annual
basis. The cost of the insurance premium cannot be passed on to the customer.
Regulations Relating to Knowing the Customer
The Reserve Bank of India requires banks to open accounts only after
verifying the identity of customers as to their name, residence and other
details to ensure that the account is being opened by the customer in his own
name. To open an account, a prospective customer requires an introduction by:
o an existing customer who has had his own account with the bank for at
least six months duration and has satisfactorily conducted that
account; or
o a well known person in the local area where the prospective customer
is residing
institutions recognized by the government of India.
158
If the prospective customer does not have an introducer, documents of the
prospective customer, like his identity card, passport or details of bank
accounts with other banks, are required to be submitted.
Legal Reserve Requirements
Cash Reserve Ratio
A banking company like us is required to maintain a specified percentage
of its demand and time liabilities by way of a balance in a current account
with the Reserve Bank of India. This is to maintain the solvency of the banking
system. In October 1999, the Reserve Bank of India, in its midterm review of
credit and monetary policy, fixed the cash reserve ratio at 9.0%. For this
purpose, the following liabilities are not considered:
o inter-bank liabilities;
o liabilities to primary dealers;
o repatriable and non-repatriable deposits from non-resident Indians;
o foreign currency deposits from non-resident Indians; and
o refinance from Reserve Bank of India and other institutions permitted
to offer refinance to banks.
The Reserve Bank of India pays no interest on the cash reserves up to 3.0%
of the demand and time liabilities and pays 4.0% on the balance.
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not fall below 85.0% of the required cash reserve
ratio on any particular day except the last business date of the fortnight. On
the last business day of the fortnight, no restrictions apply.
Ever since the Reserve Bank of India introduced the financial sector
reforms, the goal has been to reduce the cash reserve ratio. It has been stated
by the Reserve Bank of India that the ratio would ultimately be reduced to
3.0%.
Statutory Liquidity Ratio
In addition to the cash reserve ratio, a banking company like us is
required to maintain in India a specified percentage of its total demand and
time liabilities by way of liquid assets like cash, gold or approved
securities, such as government of India securities and state government
securities. This is to maintain liquidity in the banking system. The percentage
of this liquidity ratio is fixed by the Reserve Bank of India from time to
time. Currently, the Reserve Bank of India requires banks to maintain a
liquidity ratio of 25.0% on its total demand and time liabilities. For this
purpose the following liabilities are not considered:
o any advance taken from the Reserve Bank of India or from institutions
notified in this regard; and
o interbank liabilities to the extent of interbank assets.
Regulations for Asset Liability Management
At present, Reserve Bank of India regulations for asset liability
management require banks to draw up two types of asset-liability gap statements
separately for rupee and for four major foreign currencies. These gap
statements are prepared by scheduling all assets and liabilities according to
the stated or anticipated re-pricing date, or maturity date. These statements
have to be submitted to the Reserve Bank of India on a quarterly basis. The
Reserve Bank of India has advised banks to actively monitor the difference in
the amount of assets and liabilities maturing or being re-priced in a
particular period and place internal prudential limits on the gaps in each time
period, as a risk control mechanism. Additionally, the Reserve Bank of India
has asked banks to manage their asset-liability structure such that the
negative liquidity gap in the 1-14 day and 15-28 day time periods does not
exceed 20.0% of the cash outflows in these time
institutions recognized by the government of India.
159
periods. The Reserve Bank of India intends to make this 20.0% limit on negative
liquidity gaps mandatory with effect from April 1, 2000.
Foreign Currency Dealership
Reserve Bank of India has granted us a full-fledged authorized dealers'
license to deal in foreign exchange through our designated branches. Under this
license, we have been granted permission to :
o engage in foreign exchange transactions in all currencies;
o open and maintain foreign currency accounts abroad;
o raise foreign currency and rupee denominated deposits from non
resident Indians;
o grant foreign currency loans to on-shore and off-shore corporations;
o open documentary credits;
o grant import and export loans;
o handle collection of bills, funds transfer services;
o issue guarantees; and
o enter into derivative transactions and risk management activities
that are incidental to our normal functions authorized under our
organizational documents.
Our foreign exchange operations are subject to the guidelines specified by
the Reserve Bank of India in the exchange control manual. As an authorized
dealer, we are required to enroll as a member of the Foreign Exchange Dealers
Association of India, which prescribes the ground rules relating to foreign
exchange business in India.
Authorized dealers like us are required to determine our limits on open
positions and maturity gaps in accordance with Reserve Bank of India guidelines
and these limits are approved by the Reserve Bank of India. At present, the
limit for our over-night open positions is Rs. 460 million. Further, we are
permitted to hedge foreign currency loan exposures of Indian corporations in
the form of interest rate swaps, currency swaps and forward rate agreements,
subject to certain conditions.
Statutes governing Foreign Exchange and Cross Border Business Transactions
The foreign exchange and cross border transactions undertaken by banks are
subject to the provisions of Foreign Exchange Regulation Act. All branches
should monitor all non-resident accounts to prevent money laundering. These
transactions will be regulated by the Foreign Exchange Management Act and the
Prevention of Money Laundering Act, once they are put in force.
Requirements of Banking Regulation Act
Prohibited Business
The Banking Regulation Act specifies the business activities in which a
bank may engage. Business activities other than the specified activities are
prohibited to be undertaken by a bank.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to
which not less than 20.0% of the profits of each year before dividends must be
transferred. If there is an appropriation from this account, the bank is
required to report the same to the Reserve Bank of India within 21 days,
explaining the circumstances leading to such appropriation.
Restrictions on Payment of Dividend
The Banking Regulation Act requires that a bank shall pay dividend on its
shares only after all its capitalized expenses (including preliminary expenses,
organization expenses, share selling commission,
160
brokerage, amounts of losses and any other item of expenditure not represented
by tangible assets) have been completely written off.
Prior approval of the Reserve Bank of India is required for a dividend
payment above 25.0% of par value of a company's shares or for an interest
dividend payment.
The government of India may, on recommendation of the Reserve Bank of
India, exempt a bank from requirements relating to its reserve fund and the
restrictions on dividend payment.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. Banks incorporated before January
15, 1937 can also issue preferential shares. The Banking Regulation Act
specifies that no shareholder in a banking company can exercise voting rights
on poll in excess of 10.0% of total voting rights of all the shareholders of
the banking company.
Restriction on Transfer of Shares
Reserve Bank of India approval is required to obtain its approval before
we can register the transfer of shares for an individual or group which
acquires 5.0% or more of our total paid up capital.
Regulatory Reporting and Examination Procedures
The Reserve Bank of India is empowered under the Banking Regulation Act to
inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, the banks are required to report to
the Reserve Bank of India on aspects such as:
o assets, liabilities and off-balance sheet exposures;
o the risk weighting of these exposures, the capital base and the
capital adequacy ratio;
o the unaudited operating results for each quarter;
o asset quality;
o concentration of exposures;
o connected and related lending and the profile of ownership, control
and management; and
o other prudential parameters.
The Reserve Bank of India also conducts periodical on-site inspections on
matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging
from one to three years. We have been subject to the on-site inspection by the
Reserve Bank of India at yearly intervals. The inspection report, along with
the report on actions taken by us, has to be placed before our board of
directors. On approval by our board of directors, we are required to submit the
report on actions taken by us to the Reserve Bank of India. The Reserve Bank of
India also discusses the report with our management team including our chief
executive officer.
The Reserve Bank of India also conducts on-site supervision of our
selected branches with respect to their general operations and foreign exchange
related transactions.
Penalties
The Reserve Bank of India can impose penalties on banks and its employees
in case of infringement of regulations under the Banking Regulation Act. The
penalty can be a fixed amount or be related to the amount involved in any
contravention of the regulations. The penalty may also include imprisonment.
Assets to be Maintained in India
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Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and Reserve Bank of India approved
securities, even if the bills and the securities are held outside India) or not
less than 75.0% of its demand and time liabilities in India.
Secrecy Obligations
Our obligations relating to maintaining secrecy arise out of common law
principles governing our relationship with our customers. We cannot disclose
any information to third parties except under clearly defined circumstances.
The following are the exceptions to this general rule:
o where disclosure is required to be made under any law;
o where there is an obligation to disclose to the public;
o where we need to disclose information in our interest; and
o where disclosure is made with the express or implied consent of the
customer.
We are required to comply with the above in furnishing any information to
any parties.
The Reserve Bank of India may, in the public interest, publish the
information obtained from the bank. Under the provisions of the Banker's Books
Evidence Act, a copy of any entry in a bankers' book, such as ledgers, day
books, cash books and account books certified by an officer of the bank may be
treated as prima facie evidence of the transaction in any legal proceedings.
Appointment and Remuneration of our Chairman, Managing Director and other
directors
We require prior approval of the Reserve Bank of India to appoint our
chairman and managing director and any other directors and to fix their
remuneration. The Reserve Bank of India is empowered to remove such an
appointee on the grounds of pubic interest, interest of despositors or to
ensure the proper management of the bank. Further, the Reserve Bank of India
may order meetings of the bank's board of directors to discuss any matter in
relation to the bank, appoint observers to such meetings and in general may
make such changes to the management as it may deem necessary and can also order
the convening of a general meeting of the company to elect new directors.
Securities and Exchange Board of India Regulations and Guidelines
The Securities and Exchange Board of India was established to protect the
interests of public investors in securities and to promote the development of,
and to regulate, the Indian securities market. We are subject to Securities and
Exchange Board of India regulations in respect of our activities as
underwriters and agents for collecting subscriptions to public offerings of
securities made by other companies. These regulations provide for registration
with the Securities and Exchange Board of India for each of these activities,
the functions, responsibilities and a code of conduct applicable for these
activities.
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EXCHANGE CONTROLS
Restrictions on Conversion of Rupees
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign
exchange received on trade or current account at a market-determined rate and
the remaining 40.0% at the official rate. All importers were, however, required
to buy foreign exchange at the market rate except for certain specified
priority imports. In March 1993, the exchange rate was unified and allowed to
float. In February 1994 and again in August 1994, the Reserve Bank of India
announced relaxations in payment restrictions in the case of a number of
transactions. Since August 1994, the government of India has substantially
complied with its obligations owed to the IMF, under which India is committed
to refrain from using exchange restrictions on current international
transactions as an instrument in managing the balance of payments. Effective
July 1995, the process of current account convertibility was advanced by
relaxing restrictions on foreign exchange for various purposes, such as foreign
travel and medical treatment.
Restrictions on Sale of the Equity Shares underlying the ADSs and for
Repatriation of Sale Proceeds
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the Reserve Bank of India is required for the sale of equity shares underlying
the ADSs (other than a sale on a stock exchange or in connection with an offer
made under the takeover regulations) by a non-resident of India to a resident
of India as well as for renunciation of rights to a resident of India. Further,
the depositary cannot accept deposits of outstanding equity shares and issue
ADRs evidencing ADSs representing such equity shares. Therefore, an investor in
the ADSs who surrenders ADSs and withdraws equity shares is not permitted
subsequently to deposit such equity shares and obtain ADSs. Nor would a holder
to whom such equity shares are transferred be permitted to deposit such equity
shares. Investors who seek to sell in India any equity shares (other than a
sale on a stock exchange or in connection with an offer made under the takeover
regulations) withdrawn from the depositary facility and to convert the rupee
proceeds from such sale into foreign currency and repatriate such foreign
currency from India will, subject to the foregoing, have to obtain Reserve Bank
of India approval for each such transaction.
NATURE OF THE INDIAN SECURITIES TRADING MARKET
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the Securities and Exchange Board of India, the BSE and the NSE, and has not
been prepared or independently verified by us or the underwriters, or any of
their respective affiliates or advisors. This is the latest available
information to our knowledge.
Market Price Information
Equity Shares
Our outstanding equity shares are listed and traded on the Calcutta,
Delhi, Madras and Vadodara Stock Exchanges, the BSE and the NSE. The equity
shares were first listed on the Vadodara Stock Exchange in 1997. The prices for
equity shares as quoted in the official list of each of the Indian stock
exchanges are in Indian Rupees. We have applied to list the ADSs, each
representing o equity shares, for quotation on the NASDAQ National Market. The
equity shares underlying the ADSs will be listed on each of these Indian stock
exchanges within six weeks of the offering.
The following table shows:
o the reported high and low closing prices quoted in rupees for the
equity shares on the NSE;
o the reported high and low closing prices for the equity shares,
translated into U.S. dollars, based on the noon buying rate on the
last date of each period presented; and
163
o the average trading volume for the equity shares on the NSE.
Average daily
equity
Price per Price per share trading
Equity share (1) Equity share volume(2)
------------------------- --------------------- ----------------
High Low High Low (in millions)
------------ ---------- --------- ---------- ----------------
Fiscal 1998
Third Quarter (from September
29, 1997)...................... Rs. 54.50 Rs. 35.00 US$ 1.39 US$ 0.89 Rs. 41.7
Fourth Quarter................. 52.25 36.40 1.32 0.92 10.1
Fiscal 1999
First Quarter.................. 65.00 32.00 1.53 0.75 17.4
Second Quarter................. 44.00 32.10 1.04 0.76 3.6
Third Quarter.................. 35.00 21.55 0.82 0.51 2.9
Fourth Quarter................. 33.60 20.75 0.79 0.49 6.1
Fiscal 2000
First Quarter.................. 38.60 22.70 0.89 0.52 2.6
Second Quarter................. 45.45 32.00 1.04 0.73 3.4
Third Quarter.................. 75.00 32.15 1.72 0.74 9.7
Fourth Quarter (through
February 10, 2000)............. 184.10 66.00 4.22 1.51 40.8(3)
- ---------
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
(2) Data from the NSE. The average daily trading volumes reported on the BSE
and other stock exchanges may be different.
(3) Fourth quarter through February 9, 2000.
On February 10, 2000, the closing price of equity shares on the NSE was Rs.
169.10, equivalent to US$ 3.88 per equity share (US$ o per ADS on an imputed
basis) translated at the noon buying rate of Rs. 43.58 per US$ 1.00 on February
10, 2000.
At February 9, 2000, there were approximately 131,398 holders of record of
our equity shares, of which 19 had registered addresses in the United States
and held an aggregate of approximately 6,400 equity shares.
The Indian Securities Market
India has a long history of organized securities trading. In 1875, the
first stock exchange was established in Mumbai.
Stock Exchange Regulation
India's stock exchanges are regulated primarily by the Securities and
Exchange Board of India, as well as by the government of India acting through
the Ministry of Finance, Stock Exchange Division, under the Securities
Contracts (Regulation) Act, 1956 and the Securities Contracts (Regulation)
Rules, 1957. The Securities Contracts (Regulation) Rules regulate the
recognition of stock exchanges, the qualifications for membership and the
manner in which contracts are entered into and enforced between members.
The main objective of the Securities and Exchange Board of India, which
was established by the government of India in February 1992, is to promote the
development of and regulate the Indian securities markets and protect the
interests of investors. The Securities and Exchange Board of India may make or
amend an exchange's by-laws and rules, overrule an exchange's governing body
and withdraw recognition of an exchange. In the past, the Securities and
Exchange Board of India's regulation of market practices was limited. The
Securities and Exchange Board of India Act, 1992 granted the Securities and
Exchange Board of India powers to regulate the business of Indian securities
markets, including stock exchanges and other financial intermediaries, promote
and monitor self-regulatory organizations, prohibit fraudulent and unfair trade
practices and insider trading, and regulate substantial acquisitions of shares
and takeovers of companies. The Securities and Exchange Board of India has also
issued guidelines concerning minimum disclosure requirements by public
companies, rules and regulations concerning investor protection, insider
trading, substantial acquisitions of shares
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and takeovers of companies, buybacks of securities, employee stock option
schemes, stockbrokers, merchant bankers, mutual funds, credit rating agencies
and other capital market participants.
Recently, the Securities Contracts (Regulation) Act has been amended to
include derivatives of securities and instruments of collective investment in
the definition of `"securities"'. This has been done with a view to develop and
regulate the markets for derivatives. Trading in derivatives is expected to
commence in the near future. The Securities and Exchange Board of India also
set up a committee for the review of Indian securities laws, which has proposed
a draft Securities Bill. The draft Securities Bill, if accepted, will result in
a substantial revision in the laws relating to securities in India. Recently,
the Indian Companies Act, 1956 was amended to introduce significant changes
such as allowing buyback of securities, issuance of sweat equity shares, making
accounting standards issued by the Institute of Chartered Accountants of India
mandatory and relaxing restrictions on inter-corporate investment and loans.
Public Issuance of Securities
Under the Companies Act, a public offering of securities in India must
generally be made by means of a prospectus, which must contain information
specified in the Companies Act and be filed with the Registrar of Companies
having jurisdiction over the place where a company's registered office is
situated. A company's directors and promoters may be subject to civil and
criminal liability for misstatements in a prospectus. The Companies Act also
sets forth procedures for the acceptance of subscriptions and the allotment of
securities among subscribers and establishes maximum commission rates for the
sale of securities.
The Securities and Exchange Board of India has issued detailed guidelines
concerning disclosures by public companies and investor protection. Prior to
the repeal of certain rules in mid-1992, the Controller of Capital Issues of
the government of India regulated the prices at which companies could issue
securities. The Securities and Exchange Board of India guidelines now permit
existing listed companies to price freely their issues of securities, though
the pricing of initial public offerings is subject to certain restrictions. All
new issues governed by the Securities and Exchange Board of India guidelines
are conditional upon a minimum subscription requirement of 90.0% of the
securities being issued. However, such minimum subscription clause is not
applicable to Development Financial Institutions. In July 1996, Securities and
Exchange Board of India relaxed the foregoing minimum subscription requirement
in the case of "offer for sale" of securities, but introduced regulations which
require that there be a minimum of ten shareholders for every Rs. 100,000 (US$
2,298) of the nominal value of shares offered to the public. In the case of
public issues, the requirement is for a minimum of five shareholders for every
Rs. 100,000 (US$ 2,298) of the nominal value of shares offered to the public.
Promoters of companies are required to retain a certain minimum certified
holding of equity share capital, which is subject to a lock-in for three years.
No issuance of bonus shares is permitted within 12 months of any public issue
or rights issue.
Public limited companies are required under the Companies Act to prepare,
file with the Registrar of Companies and circulate to their shareholders
audited annual accounts, which comply with the Companies Act's disclosure
requirements and regulations governing their manner of presentation. In
addition, a listed company is subject to continuing disclosure requirements
pursuant to the terms of its listing agreement with the relevant stock
exchange. The Securities and Exchange Board of India has recently notified
amendments to the listing agreement tightening the continual disclosure
standards by corporations. Accordingly, companies are now required to publish
unaudited financial statements on a quarterly basis and are required to inform
stock exchanges immediately regarding any stock-price sensitive information.
Listing
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The listing of securities on a recognized Indian stock exchange is
regulated by the Securities Contract Rules.
Under the standard terms of stock exchange listing agreements, the
governing body of each stock exchange is empowered to suspend trading of or
dealing in a listed security for breach of the company's obligations under such
agreement, subject to the company receiving prior notice of the intent of the
exchange. A listed company can also be delisted after a notice period of six
months if the number of public shareholders falls below five for every Rs.
100,000 (US$ 2,298) nominal value of shares offered to the public, the public
shareholding falls below 20.0% of the number of shares offered to the public or
the listed company fails to pay annual listing fees to the relevant stock
exchange. The Securities and Exchange Board of India has recently issued
guidelines for standardizing listing agreements and by-laws of stock exchanges
in India. The Securities and Exchange Board of India proposes to issue
additional guidelines, which set out basic listing standards for all stock
exchanges in India. In the event that a suspension of a company's securities
continues for a period in excess of three months, the company may appeal to the
Securities and Exchange Board of India to set aside the suspension. The
Securities and Exchange Board of India has the power to veto stock exchange
decisions in this regard.
Indian Stock Exchanges
There are 24 stock exchanges in India. At December 31, 1999, these stock
exchanges were served by over 9,000 brokers and over 50,000 sub-brokers
dispersed across India. Most of the stock exchanges have their governing board
for self-regulation.
It is estimated that the six major exchanges, the BSE, the stock exchanges
at Ahmedabad, Calcutta, Chennai and Delhi, and the NSE, account for more than
90.0% of the market capitalization of listed Indian companies. The BSE and the
NSE account for a majority of trading volumes of securities in India. The BSE
and NSE together hold a dominant position among the stock exchanges in terms of
number of listed companies, market capitalization and trading activity.
The Securities and Exchange Board of India had prescribed certain
guidelines for the pricing and reporting of negotiated deals. A negotiated deal
refers to a transaction executed at a price not determined through stock
exchange pricing and involving a value of not less than Rs. 2.5 million (US$
57,458) or a volume of not less than 10,000 shares. Earlier, a negotiated deal
had to be reported to the stock exchange within 15 minutes from the time the
trade was negotiated or, if such transaction occurs after trading hours, on the
next day when the market opens.
However, for greater transparency, the Securities and Exchange Board of
India has decided that negotiated deals will not be permitted in the existing
manner and they have to be executed on the screens of the exchanges just like
any other normal trade.
There are generally no restrictions on price movements of any security on
any given day. However, to restrict abnormal price volatility, the Securities
and Exchange Board of India has instructed stock exchanges to apply daily
circuit breakers which do not allow transactions at prices different by more
than 8.0% of the previous closing price for shares quoted at Rs. 20 (US$ 0.46)
or more. The Securities and Exchange Board of India has recently instructed
stock exchanges to relax the circuit breakers by a further 4.0% after half an
hour from the time prices reach the limit of 8.0%. It has allowed stock
exchanges to fix circuit breakers for shares quoted at prices up to Rs. 20 (US$
0.46). Further, margin requirements are also imposed by stock exchanges that
are required to be paid at rates fixed by the stock exchanges. The Indian stock
exchanges can also exercise the power to suspend trading during periods of
market volatility.
A settlement cycle is an account period for the securities traded on a
stock exchange. At the end of the period, obligations are settled, i.e., buyers
of securities pay for and receive securities while sellers give securities and
receive payment for them. The obligations are settled on a net basis, i.e., if
some security is both purchased and sold in the same settlement cycle then only
the net quantity of securities is delivered or received and the net amount of
funds paid or received. Typically, the length of the settlement period is five
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business days. The Securities and Exchange Board of India has specified 10
shares that were to be settled by rolling settlement from January 10, 2000.
Under rolling settlement, the length of the settlement period is one day.
In December 1993, the Securities and Exchange Board of India announced a
ban on forward trading on the Ahmedabad, Calcutta and Delhi stock exchanges and
the BSE in order to contain excessive speculation, protect the interests of
investors and regulate the stock market. All transactions thereafter were
required to be for payment and delivery.
In October 1995, the Securities and Exchange Board of India announced the
introduction of a modified forward trading system to enable buyers and sellers
to defer the settlement of their obligations to the following settlement cycle.
This system began on the BSE in January 1996 for select shares. The
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new system segregates trades into different categories, namely, carry-forward,
delivery and jobbing, with different identification numbers of the various
trades. Other features of the new system are: flat margins of 15.0%; compulsory
online trading (which means that only computerized exchanges will be allowed to
use the system); a maximum 90-day period for carry-over of transactions and
capital adequacy standards of 3.0% for individual brokers and 6.0% for
corporate brokers. The Securities and Exchange Board of India has appointed a
committee to recommend modalities for a carry forward mechanism under the
rolling settlement. Once the revised carry forward mechanism is approved,
rolling settlement would will be applicable also for shares in the carry
forward list.
In 1992, the Securities and Exchange Board of India promulgated rules and
regulations that prescribe conditions for registration of stockbrokers. A
stockbroker may not buy, sell or deal in securities except pursuant to a
certificate granted by the Securities and Exchange Board of India. The
regulations also prescribe a broker code of conduct and rules for the fair
treatment of investors by brokers, the procedures for registration, the payment
of registration fees, maintenance of appropriate books and records and the
right of inspection of the books of the stockbrokers by the Securities and
Exchange Board of India. Broker liability in cases of default extends to
suspension or cancellation of the broker's registration. The Securities and
Exchange Board of India has issued registration certificates to over 9,000
stockbrokers who are members of various stock exchanges in India. Before these
regulations, stockbrokers were required to be registered only with the stock
exchanges of which they were members. The Securities and Exchange Board of
India regulations introduced the concept of dual registration of stockbrokers
with the Securities and Exchange Board of India and the stock exchanges, and
brought the brokers under regulation for the first time.
The Securities and Exchange Board of India has enforcement powers over
secondary market participants for violation of any provisions of the Securities
and Exchange Board of India Act, 1992, or breach of the rules and regulations
of the Securities and Exchange Board of India. The Securities and Exchange
Board of India may also take enforcement actions for violations of the
Securities Contract Act or rules made thereunder and rules, regulations and
by-laws of the stock exchanges.
NSE
In April 1993, the government of India gave the final clearance for the
setting up of the NSE at Mumbai. The NSE was established by financial
institutions and banks, with the Industrial Development Bank of India as the
coordinating agency. The NSE serves as a national exchange, providing
nationwide online satellite-linked screen-based trading facilities with market
makers and electronic clearing and settlement. The principal aim of the NSE is
to enable investors to buy or sell securities from anywhere in India, serving
as a national market for securities, including government securities,
debentures, public sector bonds and units. The NSE does not categorize shares
into groups. Deliveries for trades executed "on-market" are exchanged through
the National Securities Clearing Corporation Limited. Screen-based paperless
trading and settlement is possible through the NSE from more than 291 cities in
India. At November 25, 1999, the NSE had 6,839 trading terminals across the
country.
Government securities, public sector bonds and units commenced trading on
the NSE in July 1994 and trading in equities of 200 large companies started in
November 1994. The average daily traded value of
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the capital market segment rose from approximately Rs. 70 million (US$ 1.6
million) in November 1994 to more than Rs. 31.6 billion (US$ 7.2 billion) in
November 1999. The NSE has 890 trading members on the capital market segment
and 96 trading members on the wholesale debt market segment. At October 31,
1999, 685 securities were listed and 572 securities were permitted to trade on
the capital market segment. On the wholesale debt market segment, 797
securities were listed and 517 securities were permitted to trade at October
31, 1999. The NSE launched the NSE 50 Index, now known as S&P CNX NIFTY, on
April 22, 1996 and the Mid-cap index on January 1, 1996. The securities in the
NSE 50 Index are highly liquid. In May 1998, India Index Services and Products
Limited (IISL) was launched as a joint venture between the NSE and Credit
Rating and Information Services of India Limited with the objective of
providing index-related services and products for the capital markets. IISL has
a consulting agreement with Standard & Poor's, the world's leading provider of
equity indices, for co-branding IISL's equity indices. The market
capitalization of the NSE at November 30, 1999 was approximately Rs. 7,264.2
billion (US$ 167.0 billion). With a wide network in major metropolitan cities,
screen-based trading, central monitoring system and greater transparency, the
NSE has lately recorded high volumes of trading. The volume of trading on the
NSE now generally exceeds that on the BSE.
The NSE has set up a disaster recovery site at Pune to enable it to
commence normal business operations within a very short time frame should a
disaster occur.
The clearing and settlement operations of the NSE are managed by its
wholly owned subsidiary, the National Securities Clearing Corporation. A key
factor in the growth of the NSE has been the short and tight settlement cycles
that have operated since its commencement. The National Securities Clearing
Corporation Limited operates a well-defined settlement cycle and there has been
no deviation or deferment from this cycle. The NSE provides a facility for
multiple settlement mechanisms including an account period settlement in
regular market sub-segment dealing in physical securities and rolling
settlement--normal (lot size one) and rolling settlement-- normal (marketable
lots) in book-entry sub-segment.
The account period cycle starts every Wednesday and ends on a Tuesday with
the pay in of securities on the next Monday, pay-in of funds on the next
Tuesday and pay-out of funds and securities on the next Wednesday. The
settlement in the book-entry sub-segment is conducted on the next Tuesday. The
settlement is completed within eight days of the last day of the trading cycle.
The rolling settlement is typically on a T+5 working day basis, trades taking
place on Monday will be settled on the next Monday. All settlements for
securities are through the clearing house in the case of physical settlement
and through the depositary in the case of book entry sub-segment. Funds
settlement takes place through designated clearing banks. The National
Securities Clearing Corporation Limited interfaces with the depositary on the
one hand and the clearing banks on the other to provide delivery versus payment
settlement for depositary enabled trades.
BSE
The BSE, the oldest stock exchange in India, was established in 1875. It
has evolved over the years into its present status as the premier stock
exchange of India. The BSE switched over to online trading (BOLT) since May
1995. At November 30, 1999, the BSE had 637 members, comprising 245 individual
members, 371 Indian companies, 20 foreign brokers and one composite corporate
member. Only a member of the BSE has the right to trade in the stocks listed on
the BSE.
At November 30, 1999, there were 5,858 listed companies trading on the
BSE. At November 30, 1999, the estimated market capitalization of stocks
trading on the BSE was Rs. 7.1 trillion (US$ 163.2 billion). The average daily
turnover on the BSE has also shown a significant increase from approximately
Rs. 67 million (US$ 1.5 million) in January 1987 to approximately Rs. 24.6
billion (US$ 565 million) in November 1999. At November 30, 1999, the BSE had
over 1,000 trading work-stations in 235 cities across the country. The BSE has
SEBI approval to expand its BOLT online trading network to 424 cities.
Trading Hours
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Trading on the BSE is from 10:00 a.m. to 3:30 p.m. on weekdays. The BSE is
closed on public holidays. Special trade sessions are held outside normal
trading hours simultaneously with the annual government budget announcement and
on Diwali, a religious festival.
Trading Procedure
Until 1995, brokers and members of the BSE received individual orders from
which any cross-orders were matched and taken off. The balance of the orders
was transmitted to the trading floor for execution in an open outcry system.
The BSE has now introduced its BOLT online trading system on the exchange. The
enhanced transparency in dealings due to implementation of BOLT has assisted
considerably in smoothening settlement cycles and improving efficiency in back
office work. From July 3, 1995, all listed shares were transferred to BOLT.
Classification of Shares
On the BSE, shares are classified into A, B1, B2, C and Z groups. All
groups settle funds and securities through the BSE clearing house. For the A
group of shares, forward trading is permitted. The Z group includes those
companies who have not fulfilled the listing guidelines or have not paid
listing fees. The C group covers odd lot securities in other groups and rights
renunciations. Our equity shares are in the A group. At November 30, 1999,
there were 140 A group, 1,124 B1 group, 4,515 B2 group and 541 Z group shares
and 681 debentures listed on the BSE.
Settlement
The trading period for all group shares lasts from Monday to Friday. The
trades are normally settled by the broker's net payment to the BSE clearing
house for securities on the following Thursday and the broker's delivery of
securities to the BSE clearing house on the same Thursday and, in the case of
overflow of securities, on Friday. The BSE clearing house then delivers
securities to the brokers on Friday and makes payments to the brokers on
Saturday. All shortages in delivery are compulsorily auctioned by the clearing
house. The auction system is fully computerized and has been following a
closed-bid system. For payments, the bank accounts of the brokers are
maintained with the designated clearing banks which are debited or credited on
the specified days.
Commissions
The maximum commission charged by brokers for trading equities is 2.5% of
the transaction value but, in practice, commissions are normally in the range
of 0.5% to 2.0%. The 1994 budget imposed a 5.0% service tax on brokerage
commissions.
Stock Market Indices
The following two indices are generally used in tracking the aggregate
price movements on the BSE.
o The BSE Sensitive Index (Sensex) consists of listed shares of 30
large market capitalization companies representing 15 industries from
'A' group, including ICICI. The companies were selected on the basis
of market capitalization, liquidity and the need for sectoral
representation. The BSE Sensitive Index was first compiled in 1986
(and revised in 1996) with the financial year ended March 31, 1979 as
its base year. This is the most commonly used index in India. On
October 12, 1998 the BSE Index Committee revised the composition of
the Index to include the representation of the information technology
sector and increase the representation of the oil and gas, and
pharmaceutical sectors. The revised index, the changes in the
calculation of which became effective from November 16, 1998,
represented approximately 36.5% of the BSE market capitalization at
November 30, 1999.
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o The BSE 100 Index (formerly the BSE National Index) contains listed
shares of 100 companies including the 30 in the BSE Sensitive Index,
and was based in March 1984 at a stated value of 100. The BSE 100
Index was introduced in January 1986. On January 15, 1998, the BSE
Index Committee revised the composition of the BSE 100 Index. The
index represented approximately 64.6% of the BSE market
capitalization at November 30, 1999.
Internet-Based Securities Trading and Services
The Securities and Exchange Board of India has recently allowed
Internet-based securities trading under the existing legal framework. The
regulations seek to allow the Internet to be used as an order routing system
through stock brokers registered with the Securities and Exchange Board of
India on behalf of clients for executing trades on a recognized stock exchange
in India. Stock brokers interested in providing this service are required to
apply for permission to the respective stock exchange and also have to comply
with certain minimum conditions stipulated by the Securities and Exchange Board
of India.
Takeover Code
Disclosure and mandatory bid obligations under Indian law are governed by
the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (the "Takeover Code") which prescribes certain
thresholds or trigger points that give rise to these obligations. The Takeover
Code is under constant review by the Securities and Exchange Board of India and
was recently amended.
The most important features of the Takeover Code, as amended, are as
follows:
Any acquirer (meaning a person who, directly or indirectly, acquires or
agrees to acquire shares or voting rights in a company, either by himself or
with any person acting in concert) who acquires shares or voting rights that
would entitle him to more than 5.0% of the shares or voting rights in a company
is required to disclose the aggregate of his shareholding or voting rights in
that company to the company (which in turn is required to disclose the same to
each of the stock exchanges on which the company's shares are listed) within
four working days of (a) the receipt of allotment information; or (b) the
acquisitions of shares or voting rights, as the case may be.
o A person who holds more than 15.0% of the shares or voting rights in
any company is required to make annual disclosure of his holdings to
that company (which in turn is required to disclose the same to each
of the stock exchanges on which the company's shares are listed).
o Promoters or persons in control of a company are also required to
make annual disclosure of their holdings in the same manner.
o An acquirer cannot acquire shares or voting rights which (taken
together with existing shares or voting rights, if any, held by him
or by persons acting in concert with him) would entitle such acquirer
to exercise 15.0% or more of the voting rights in a company, unless
such acquirer makes a public announcement offering to acquire a
further 20.0% of the shares of the company.
o An acquirer who, together with persons acting in concert with him,
holds between 15.0% and 75.0% of the shares cannot acquire additional
shares or voting rights that would entitle him to exercise a further
5.0% of the voting rights in any period of 12 months unless such
acquirer makes a public announcement offering to acquire a further
20.0% of the shares of the company.
o Any further acquisition of shares or voting rights by an acquirer who
holds 75.0% of the shares or voting rights in a company triggers the
same public announcement requirements.
o In addition, regardless of whether there has been any acquisition of
shares or voting rights in a company, an acquirer acting in concert
cannot directly or indirectly acquire control over a company (for
example, by way of acquiring the right to appoint a majority of the
directors or to control the management or the policy decisions of the
company) unless such acquirer
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makes a public announcement offering to acquire a minimum of 20.0% of
the shares of the company.
The Takeover Code sets out the contents of the required public
announcements as well as the minimum offer price.
The Takeover Code permits conditional offers as well as the acquisition
and subsequent delisting of all shares of a company and provides specific
guidelines for the gradual acquisition of shares or voting rights. Specific
obligations of the acquirer and the board of directors of the target company in
the offer process have also been set out. Acquirers making a public offer are
also required to deposit in an escrow account a percentage of the total
consideration which amount will be forfeited in the event that the acquirer
does not fulfill his obligations. In addition, the Takeover Code introduces the
"chain principle" by which the acquisition of a holding company will obligate
the acquirer to make a public offer to the shareholders of each subsidiary
company which is listed.
The general requirements to make such a public announcement do not,
however, apply entirely to bail-out takeovers when a promoter (i.e., a person
or persons in control of the company, persons named in any offer document as
promoters and certain specified corporate bodies and individuals) is taking
over a financially weak company but not a "sick industrial company" pursuant to
a rehabilitation scheme approved by a public financial institution or a
scheduled bank. A "financially weak company" is a company which has at the end
of the previous financial year accumulated losses, which have resulted in
erosion of more than 50.0% but less than 100.0% of the total sum of its paid up
capital and free reserves at the end of the previous financial year. A "sick
industrial company" is a company registered for more than five years which has
at the end of any financial year accumulated losses equal to or exceeding its
entire net worth.
The Takeover Code does not apply to certain specified acquisitions
including the acquisition of shares (i) by allotment in a public, rights and
preferential issue, (ii) pursuant to an underwriting agreement, (iii) by
registered stockbrokers in the ordinary course of business on behalf of
clients, (iv) in unlisted companies, (v) pursuant to a scheme of reconstruction
or amalgamation or (vi) pursuant to a scheme under Section 18 of the Sick
Industrial Companies (Special Provisions) Act, 1985. The Takeover Code does not
apply to acquisitions in the ordinary course of business by public financial
institutions such as ICICI either on their own account or as a pledgee. In
addition, the Takeover Code does not apply to the acquisition of ADSs so long
as they are not converted into equity shares.
Depositaries
In August 1996, the Indian Parliament enacted the Depositaries Act, 1996
which provides a legal framework for the establishment of depositaries to
record ownership details and effectuate transfers in book-entry form. The
Securities and Exchange Board of India passed the Securities and Exchange Board
of India (Depositaries and Participants) Regulations, 1996 which provides for
the formation of such depositaries, the registration of participants as well as
the rights and obligations of the depositaries, participants and the issuers.
Every depositary has to register with the Securities and Exchange Board of
India. Pursuant to the Depositaries Act, the National Securities Depositary
Limited was established by the Unit Trust of India, the Industrial Development
Bank of India and the NSE in 1996 to provide electronic depositary facilities
for trading in equity and debt securities. The National Securities Depositary
Limited, which commenced operations in November 1996, was the first depositary
in India. Another depositary, the Central Depositary Services India Limited,
established by the BSE has commenced operations since July 15, 1999. The
depositary system has significantly improved the operations of the Indian
securities markets.
Trading of securities in book-entry form commenced in December 1996 and
was available for securities of more than 472 companies at August 1999. In
order to encourage "dematerialization" of securities, the Securities and
Exchange Board of India has set up a working group on dematerialization of
securities comprising foreign institutional investors, custodians, stock
exchanges, mutual funds and the National Securities Depositary Limited to
review the progress of securities and trading in dematerialized form and to
recommend scrips for compulsory dematerialized trading in a phased manner.
Accordingly,
171
commencing January 1998, the Securities and Exchange Board of
India has notified scrips of various companies for compulsory dematerialized
trading by certain categories of investors such as foreign institutional
investors and other institutional investors and has also notified compulsory
dematerialized trading in specified scrips for all retail investors. The
Securities and Exchange Board of India proposes to increase the number of
scrips in which dematerialized trading is compulsory for all investors
significantly in the near future. The Securities and Exchange Board of India
has also provided that the issue and allotment of shares in public, rights or
offer for sale after a specified date to be notified by the Securities and
Exchange Board of India) shall only be in dematerialized form and an investor
shall be compulsorily required to open a depository account with a participant.
However, even in case of scrips notified for compulsory dematerialized
trading, investors, other than institutional investors, are permitted to trade
in physical shares on transactions outside the stock exchange where there are
no requirements of reporting such transactions to the stock exchange and on
transactions on the stock exchange involving lots less than 500 securities.
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RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
The government of India regulates ownership of Indian companies by
foreigners. Foreign investment in Indian securities, including the equity
shares represented by the ADSs, is generally regulated by the Foreign Exchange
Regulation Act, 1973. The Foreign Exchange Regulation Act will be replaced by
the Foreign Exchange Management Act, 1999 once it is passed by the Indian
parliament and notified by the government of India in the Official Gazette.
The Foreign Exchange Management Act, 1999 contains the same provisions as
the Foreign Exchange Regulation Act regarding the restrictions on foreign
ownership of Indian securities and the Reserve Bank of India will continue to
regulate foreign investment in Indian securities.
Under the foreign investment rules, the following restrictions are
applicable on foreign ownership:
o Under the foreign direct investment route, foreign investors may own
our equity shares only with the approval of the Foreign Investment
Promotion Board; this approval is granted on a case-by-case basis
except, as discussed immediately below:
o Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs or GDRs, subject to the receipt of all
necessary government approvals at the time the depositary receipt
program is set up. Recently, with a view to liberalize the
operational procedures, the government of India's Ministry of Finance
has granted a general approval to ADS or GDR issues, subject to
certain restrictions;
o Under the portfolio investment route, foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the Reserve Bank of India, may be permitted to own
in the aggregate up to an additional 24.0% of our equity shares that
are not represented by ADSs or GDRs; no single foreign institutional
investor may own more than 10.0% of our equity shares; and
o Under the portfolio investment route, non-resident Indians and
corporate bodies predominantly owned by non-resident Indians may own
up to 10.0% of our equity shares; no single non-resident Indian or
corporate body predominantly owned by non-resident Indian's may own
more than 5.0% of our total equity shares.
[We are required to obtain the approval of the Foreign Investment Board for
this offering which is a foreign direct investment. Under the guidelines issued
by the Indian government for consideration by the Foreign Investment Promotion
Board, of proposals for foreign direct investment in a banking company,
non-resident Indians, inclusive of foreign investors, are allowed to invest up
to 40.0% of the bank's equity capital. Out of this 40.0%, foreign investment of
up to 20.0% is permitted by foreign banking companies or finance companies
including multilateral financial institutions. The Reserve Bank of India has
confirmed to us that portfolio investment in the secondary market in India by
foreign institutional investors and non-resident Indians described above is not
included in the above limit of 40.0%.]
Assuming the underwriters' over-allotment option is exercised in full,
foreign direct investment through this offering will be o% of our equity shares.
As an investor in ADSs, you do not need to seek the specific approval from
the government of India to purchase, hold or dispose of your ADSs. In the
offering, we are also required to obtain the approval of the Department of
Company Affairs and the relevant stock exchanges. We have sought these
approvals. The Reserve Bank of India has recently issued a notification under
the provisions of the Foreign Exchange Regulation Act relaxing the requirement
of prior approval for an Indian company making an ADS issue provided that the
issuer is eligible to issue ADSs pursuant to the guidelines issued by the
Ministry of Finance and has the necessary approval from the Foreign Investment
Promotion Board. We have sought approval of the Foreign Investment Promotion
Board and will not be require to obtain the prior approval
173
of the Reserve Bank of India for this offering. The Reserve Bank of India has
also granted general permission for foreign investors to acquire our ADSs.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person. However, you may not
receive sufficient advance notice of shareholder meetings to enable you to
withdraw the underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions, including the 10-24.0%
portfolio investment limitations, and the 5-10.0% non-resident Indian
limitation. The application of these limitations, however, is not clear.
Secondary purchases of securities of Indian companies in India by foreign
direct investors or investments by non-resident Indians, persons of Indian
origin, overseas corporate bodies and foreign institutional investors above the
ownership levels set forth above require government of India approval on a
case-by-case basis. It is unclear whether similar case-by-case approvals of
ownership of equity shares withdrawn from the depositary facility by foreign
institutional investors, non-resident Indians and overseas corporate bodies
would be required.
Further, if you withdraw your equity shares from the ADS program and your
direct or indirect holding in us exceeds 15.0% of our total equity (under the
Takeover Code), you would be required to make a public offer to the remaining
shareholders. If you withdraw your equity shares from the depositary facility,
you will not be able to redeposit them with the depositary.
If you wish to sell the equity shares withdrawn from the depositary
facility, you will be required to receive the prior approval of the Reserve
Bank of India, unless the sale is on a stock exchange or in connection with an
offer under the Takeover Code.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our equity shares, at February 9, 2000 and adjusted to give effect to the
offering (including the equity shares to be issued in the event the
underwriters' over-allotment option is exercised in full).
Actual Adjusted Actual Adjusted
----------- ------------ ------------- -----------
Percentage of total equity Number of equity
shares outstanding Shares sold
-------------------------- ---------------------------
ICICI(1)........................................... 74.3% o% 122,505,800 o
Unit Trust of India................................ 4.5 o 7,440,786 o
Other Indian institutional investors
and corporate bodies........................... 5.5 o 9,113,564 o
Individual domestic investors(2)................... 13.9 o 22,945,525 o
Foreign institutional investors,
foreign banks, overseas corporate
bodies and non-resident Indians
excluding the Depositary....................... 1.8 o 2,995,025 o
The Depositary..................................... - o - o
---------- ---------- ------------ -------
100.0% 100.0% 165,000,700 o
========== ========== ============ =======
- ---------
(1) Under the Indian Banking Regulation Act, no person holding shares in a
banking company can vote more than 10.0% of the outstanding equity
shares. This means that while ICICI owns 74.3% of our equity shares,
it can only vote 10.0% of our equity shares. Due to this voting
restriction, ICICI effectively controls a minimum of 28.0% of the
voting power of our outstanding equity shares. After the completion of
the offering, ICICI's effective voting power will decrease to a
minimum of o% since its shareholding in us will be diluted.
(2) Executive officers and directors as a group held less than 0.01% of our
equity shares at February 9, 2000.
174
DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each
fiscal year. The shareholders have the right to decrease but not increase the
dividend amount recommended by the board of directors. Dividends may be paid
out of company profits for the fiscal year in which the dividend is declared.
We have paid dividends consistently every year since fiscal 1996, the second
year of our operations.
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid on the equity shares,
both exclusive of dividend tax.
Dividend per equity Total amount of
For Fiscal Year share dividends paid
------------------- ----------------
(in millions)
1995.................................................. - -
1996.................................................. Rs. 0.80 Rs. 117
1997.................................................. 1.00 150
1998.................................................. 1.00 162
1999.................................................. 1.20 198
Until fiscal 1997, investors were required to pay tax on dividend income.
From fiscal 1998, dividend income was made tax-exempt. However, all companies
were required to pay a 10% tax on distributed profits. From fiscal 1999, this
tax rate rose to 11% because of a 10% surcharge imposed on all taxes by the
government.
Future dividends will depend upon our revenues, cash flow, financial
condition and other factors. As an owner of ADSs, you will be entitled to
receive dividends payable in respect of the equity shares represented by such
ADSs. The equity shares represented by ADSs will rank pari passu with existing
equity shares. At present, we have equity shares issued in India. See
"Description of the American Depositary Shares--Share Dividends and Other
Distributions" for payment and distribution of dividends.
As an owner of ADSs, you will be entitled to full dividends for fiscal
2001 and will not be entitled to any dividends for fiscal 2000 since, with
respect to equity shares issued by us during a particular fiscal year,
dividends declared and paid for such fiscal year generally are prorated from
the date of issuance to the end of such fiscal year. The equity shares in this
offering will be issued on March o, 1999, the o day of fiscal 2000.
Before paying any dividend on our shares, we are required under the Indian
Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). Before declaring dividends, we are required to
transfer at least 20.0% of the balance of profits of each year to a reserve
fund. The government of India may, however, on recommendation of the Reserve
Bank of India, exempt us from such requirement. We require prior approval from
the Reserve Bank of India to pay a dividend of more than 25.0% of the par value
of our shares. We also require prior approval from the Reserve Bank of India to
pay an interim dividend.
We have no agreement with ICICI regarding the payment of dividends by us
to ICICI or the contribution of capital by ICICI to us for maintenance of our
minimum capital adequacy ratio. Any declaration or payment of a dividend by us
to ICICI would have to be approved by our board of directors and shareholders,
and if the dividend is in excess of 25.0% of the par value of our shares, we
would have to obtain prior approval from the Reserve Bank of India. Pursuant to
the Banking Regulation Act, ICICI, though holding more than 10.0% of our share
capital, has voting power equal to only 10.0% of our outstanding equity shares.
For a description of the tax consequences of dividends paid to our
shareholders, see "Taxation--Indian Tax--Taxation of Distributions".
175
DILUTION
Our net tangible book value at o, 1999, under US GAAP was Rs. o billion
(US$ o million) or Rs. o (US$ o) per ADS. "Net tangible book value per ADS"
represents the amount of total tangible assets less total liabilities, divided
by the number of equity shares outstanding, adjusting for the ratio of oequity
shares per ADS.
After giving effect to the gross proceeds from the sale of o ADSs
representing o equity shares offered hereby (including the equity shares to be
issued in the event the underwriters' over-allotment option is exercised in
full) at the public offering price of Rs. o (US$ o) per ADS, net tangible book
value at o, 1999 would have been Rs. o billion (US$ obillion) or Rs. o (US$ o)
per ADS. This represents an immediate increase in the net tangible book value
of Rs. o (US$ o) per ADS to existing shareholders and an immediate dilution of
Rs. o (US$ o) per ADS to new investors purchasing ADSs.
The following table illustrates the per ADS dilution:
Public offering price per ADS............................................ Rs. o
Net tangible book value per ADS before the offering...................... o
Increase per ADS to existing shareholders................................ o
Pro forma net tangible book value per ADS after the offering............. o
Dilution per ADS to new investors........................................ o
The following table sets forth, for the period indicated, the number of
ADSs purchased from us, the total consideration and the average price per ADS
paid by the existing holders of equity shares and the price to be paid by the
new investors (before deducting the underwriting discount and commissions and
the estimated offering expenses payable by us) on an adjusted basis:
At o, 1999
------------------------------------------------------------------------
Average Price
ADS Purchased(1) Total Consideration(1) per ADS(1)
------------------- ------------------------------ ----------------
Number Percent Amount Percent
------ ------- --------------- ------------
(in millions)
Existing shareholders......... o o% Rs. o US$ o o% Rs. o US$ o
New investors................. o o o o o o o
Total......................... o o% Rs. o US$ o o% Rs. o US$ o
- ---------
(1) Equity shares purchased, have been converted into ADS equivalents for
comparison purposes.
176
DESCRIPTION OF EQUITY SHARES
Dividends
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each
fiscal year. The shareholders have the right to decrease but not increase the
dividend amount recommended by the board of directors. Dividends are generally
declared as a percentage of par value and distributed and paid to shareholders
in proportion to the paid up value of their equity shares, and pro rata for the
period for which the equity shares are paid up. It is customary in India to pay
to holders of newly issued shares only a portion of the annual dividend based
on a pro rata basis. The Indian Companies Act provides that shares of a company
of the same class must receive equal dividend treatment.
These distributions and payments are required to be made within six weeks
of the declaration by the shareholders at the annual general meeting where our
balance sheet and profit and loss account are approved by the shareholders. The
Indian Companies Act states that any dividends that remain unpaid or unclaimed
after that period are to be transferred to a special bank account. Any money,
which remains unclaimed for seven years from the date of the transfer is to be
transferred by us to a fund created by the Indian government. No claims for the
payment of dividends unpaid or unclaimed for a period of seven years shall lie
against the fund of the Indian government or against us.
Our Articles of Association authorize our board of directors to declare
and pay interim dividends with prior approval of the Reserve Bank of India.
Under the Indian Companies Act, dividends payable can be paid only in cash
to the registered shareholder to his order or to the order of his banker at a
record date fixed prior to the relevant annual general meeting.
Before paying any dividend on our shares, we are required under the Indian
Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). We require prior approval from the Reserve
Bank of India to pay a dividend of more than 25.0% of the par value of our
shares. We also require prior approval from the Reserve Bank of India to pay an
interim dividend.
Dividends may only be paid out of our profits for the relevant year.
Before declaring dividends, we are required to transfer at least 20.0% of the
balance of profits of each year to a reserve fund. The government of India may,
however, on recommendation of the Reserve Bank of India, exempt us from such
requirement.
Bonus Shares
In addition to permitting dividends to be paid out of current or retained
earnings, the Indian Companies Act permits our board of directors to distribute
to the shareholders, in the form of fully paid-up bonus equity shares, an
amount transferred from the capital surplus reserve or legal reserve to stated
capital. Bonus equity shares can be distributed only with the prior approval of
the Reserve Bank of India. These bonus equity shares must be distributed to
shareholders in proportion to the number of equity shares owned by them.
Preemptive Rights and Issue of Additional Shares
The Indian Companies Act gives shareholders the right to subscribe for new
shares in proportion to their existing shareholdings unless otherwise
determined by a resolution passed by three-fourths of the shareholders present
and voting at a general meeting. Under the Indian Companies Act and our
Articles of Association, in the event of an issuance of securities, subject to
the limitations set forth above, we must first offer the new shares to the
holders of equity shares on a fixed record date. The offer, required to be made
by notice, must include:
o the right, exercisable by the shareholders of record, to renounce the
shares offered in favor of any other person;
177
o the number of shares offered; and
o the period of the offer, which may not be less than 15 days from the
date of offer. If the offer is not accepted, it is deemed to have
been declined.
Our board of directors is permitted to distribute equity shares not
accepted by existing shareholders in the manner it deems beneficial for us in
accordance with our Articles of Association.
General Meetings of Shareholders
There are two types of general meetings of shareholders: annual general
meetings and extraordinary general meetings. We are required to convene our
annual general meeting within six months after the end of each fiscal year. We
may convene an extraordinary general meeting when necessary or at the request
of a shareholder or shareholders holding on the date of the request at least
10.0% of our paid up capital. A general meeting is generally convened by our
Secretary in accordance with a resolution of the board of directors. Written
notice stating the agenda of the meeting must be given at least 21 days prior
to the date set for the general meeting to the shareholders whose names are in
the register at the record date. Those shareholders who are not registered at
the record date do not receive notice of this meeting and are not entitled to
attend or vote at this meeting.
The annual general meeting is held in Vadodara, the city in which our
registered office is located. General meetings other than the annual general
meeting may be held at any location if so determined by a resolution of our
board of directors.
Voting Rights
A shareholder has one vote for each equity share and voting may be by a
show of hands or on a poll. However, under the Indian Banking Regulation Act,
on poll, a shareholder cannot exercise voting rights in excess of 10.0% of the
total voting rights of all shareholders. Resolutions are adopted at a general
meeting by a majority of the shareholders having voting rights present or
represented. The quorum for a general meeting is five members personally
present. Generally, resolutions may be passed by simple majority of the
shareholders present and voting at any general meeting. However, certain
resolutions, such as an amendment to the organizational documents, commencement
of a new line of business, an issue of additional equity shares without
preemptive rights and reductions of share capital, require that the votes cast
in favor of the resolution (whether by show of hands or on a poll) are not less
than three times the number of votes, if any, cast against the resolution. As
provided in our Articles of Association, a shareholder may exercise his voting
rights by proxy to be given in the form prescribed by us. This proxy, however,
is required to be lodged with us at least 48 hours before the time of the
relevant meeting. A shareholder may, by a single power of attorney, grant
general power of representation covering several general meetings. A corporate
shareholder is also entitled to nominate a representative to attend and vote on
its behalf at all general meetings.
ADS holders have no voting rights with respect to the deposited shares.
For a discussion of the voting rights, see "Description of the American
Depositary Shares--Voting Rights".
Annual Report
At least 21 days before an annual general meeting, we must circulate
either a detailed or abridged version of our audited financial accounts,
together with the Directors' Report and the Auditor's Report, to the
shareholders along with a notice convening the annual general meeting. We are
also required under the Indian Companies Act to make available upon request of
any shareholder our complete balance sheet and profit and loss account.
Under the Companies Act, we must file with the Registrar of Companies our
balance sheet and profit and loss account within 30 days of the conclusion of
the annual general meeting and our annual return within 60 days of the
conclusion of that meeting.
Register of Shareholders and Record Dates
The equity shares are in registered form. We maintain a register of our
shareholders in Vadodara. We register transfers of equity shares on the
register of shareholders upon presentation of certificates in respect of the
transfer of equity shares held in physical form together with a transfer deed
178
duly executed by the transferor and transferee. Such transfer deeds attract
stamp duty, which has been fixed at 0.5% of the transfer price.
For the purpose of determining equity shares entitled to annual dividends,
the register of shareholders is closed for a notified period prior to the
annual general meeting. The Indian Companies Act and our listing agreements
with the stock exchanges permit us, pursuant to a resolution of our board of
directors and upon at least thirty days' advance notice to the stock exchanges,
to set the record date and close the register of shareholders after seven days'
public notice for not more than 30 days at a time, and for not more than 45
days in a year, in order for us to determine which shareholders are entitled to
certain rights pertaining to the equity shares. Trading of equity shares and
delivery of certificates in respect of the equity shares may, however, continue
after the register of shareholders is closed.
Transfer of Shares
Shares held through depositaries are transferred in the form of book
entries or in electronic form in accordance with the regulations laid down by
the Securities and Exchange Board of India. These regulations provide the
regime for the functioning of the depositaries and the participants and set out
the manner in which the records are to be kept and maintained and the
safeguards to be followed in this system. Transfers of beneficial ownership of
shares held through a depositary are exempt from stamp duty.
The Securities and Exchange Board of India requires that our equity shares
for trading and settlement purposes be in book-entry form for all investors,
except for transactions that are not made on a stock exchange and transactions
that are not required to be reported to the stock exchange. However, up to 500
equity shares may be traded and settled in physical form. Transfers of equity
shares in book-entry form require both the seller and the purchaser of the
equity shares to establish accounts with depositary participants appointed by
depositaries established under the Depositaries Act, 1996. Charges for opening
an account with a depositary participant, transaction charges for each trade
and custodian charges for securities held in each account vary depending upon
the practice of each depositary participant. Upon delivery, the equity shares
shall be registered in the name of the relevant depositary on our books and
this depositary shall enter the name of the investor in its records as the
beneficial owner. The transfer of beneficial ownership shall be effected
through the records of the depositary. The beneficial owner shall be entitled
to all rights and benefits and subject to all liabilities in respect of his
securities held by a depositary.
The requirement to hold the equity shares in book-entry form will apply to
the ADS holders when the equity shares are withdrawn from the depositary
facility upon surrender of the ADSs. In order to trade the equity shares in the
Indian market, the withdrawing ADS holder will be required to comply with the
procedures described above.
Our equity shares are freely transferable, subject only to the provisions
of the Indian Companies Act under which, if a transfer of equity shares
contravenes the Securities and Exchange Board of India Act, 1992 or the
regulations issued under it or the Sick Industrial Companies (Special
Provisions) Act, 1985, or any other similar law, the Indian Company Law Board
may, on application made by us, a depositary incorporated in India, an
investor, the Securities and Exchange Board of India or certain other parties,
direct a rectification of the register of records. It is a condition of our
listing that we transfer equity shares and deliver share certificates duly
endorsed for the transfer within one month of the date of lodgment of transfer.
If a company without sufficient cause refuses to register a transfer of equity
shares within two months from the date on which the instrument of transfer is
delivered to the company, the transferee may appeal to the Company Law Board
seeking to register the transfer of equity shares. The Indian Company Law Board
may, in its discretion, issue an interim order suspending the voting rights
attached to the relevant equity shares before completing its investigation of
the alleged contravention. Our Articles of Association provide for certain
restrictions on the transfer of equity shares, including granting power to the
board of directors in certain circumstances, to refuse to register or
acknowledge transfer of equity shares or other securities issued by us.
However, under the Indian Companies Act, the enforceability of these transfer
restrictions is unclear. Further, the Reserve Bank of India requires us to
obtain their approval before registering a transfer of equity shares in favor
of a person which together with equity shares already held by him represent
more than 5.0% of our share capital.
179
Our transfer agent is ICICI Infotech Services Limited, located in Mumbai.
Certain foreign exchange control and security regulations apply to the transfer
of equity shares by a non-resident or a foreigner. See "Restriction on Foreign
Ownership of Indian Securities".
We have entered into listing agreements with the Vadodara Stock Exchange,
Vadodara and five other stock exchanges in India on which our outstanding
equity shares are listed. It is a condition of our listing that if an
acquisition of our equity shares results in the acquirer holding any securities
beyond 5.0% of our voting capital, we and the acquirer shall be subject to the
provisions of the Securities and Exchange Board of India (Substantial
Acquisitions of Shares & Takeovers) Regulations, 1997. See "Nature of the
Indian Securities Trading Market--Takeover Code". These provisions would not be
applicable to the equity shares so long as they are represented by ADSs. See
"Restriction on Foreign Ownership of Indian Securities".
Disclosure of Ownership Interest
The provisions of the Indian Companies Act generally require beneficial
owners of equity shares of Indian companies that are not holders of record to
declare to the company details of the holder of record and holders of record to
declare details of the beneficial owner. While it is unclear whether these
provisions apply to holders of an Indian company's ADSs, investors who exchange
ADSs for equity shares are subject to this provision. Failure to comply with
these provisions would not affect the obligation of a company to register a
transfer of equity shares or to pay any dividends to the registered holder of
any equity shares in respect of which such declaration has not been made, but
any person who fails to make the required declaration may be liable for a fine
of up to Rs 1,000 (US$ 23) for each day such failure continues. Furthermore,
any charge, promissory note or any other collateral agreement created, executed
or entered into by the registered owner of any equity share in respect of which
a declaration as required by the Indian Companies Act has not been made is not
enforceable by the beneficial owner or any person claiming through him.
However, under the Indian Banking Regulation Act, a registered holder of any
equity shares, except in certain conditions, shall not be liable to any suit or
proceeding on the ground that the title to those equity shares vests in another
person.
Acquisition by the Issuer of Its Own Shares
Until recently, the Indian Companies Act did not permit a company to
acquire its own equity shares because of the resulting reduction in the
company's capital. However, the government of India amended the Indian
Companies Act and consequently this reduction in capital is permitted in
certain circumstances. The reduction of capital requires compliance with
buy-back provisions specified in the Indian Companies Act and by the Securities
and Exchange Board of India.
ADS holders will be eligible to participate in a buyback in certain cases.
An ADS holder may acquire equity shares by withdrawing them from the depositary
facility and then selling those equity shares back to us. ADS holders should
note that equity shares withdrawn from the depositary facility may not be
redeposited into the depositary facility.
There can be no assurance that the equity shares offered by an ADS
investor in any buyback of shares by us will be accepted by us. ADS investors
are advised to consult their Indian legal advisers prior to participating in
any buyback by us, including in relation to any tax issues relating to such
buyback.
Liquidation Rights
Subject to the rights of depositors, creditors, employees and holders of
any equity shares entitled to preferential prepayment over the equity shares,
in the event of our winding up, the holders of the equity shares are entitled
to be repaid the amounts of capital paid up or credited as paid up on such
equity shares. All surplus assets remaining after payments are made to the
holders of any preference shares belong to the holders of the equity shares in
proportion to the amount paid up or credited as paid up on such equity shares,
respectively, at the commencement of the winding-up.
Acquisition of the Undertaking by the Government
Under the Indian Banking Regulation Act, the government may, after
consultation with the Reserve Bank of India, in the interest of our depositors
or banking policy or better provision of credit
180
generally or to a particular community or area, acquire our banking
undertaking. The Reserve Bank of India may acquire our business if it is
satisfied that we have failed to comply with the directions given to us by the
Reserve Bank of India or that our business is being managed in a manner
detrimental to the interest of our depositors.
Some of the provisions specified above are proposed to be amended by way
of the Companies (Bill), 1999. These include the introduction of specific
guidelines regarding the declaration of an interim dividend, voting by postal
ballot, appointment of directors by nominee shareholder and removal of
requirements to disclose beneficial ownership of securities under Section 187C
of the Companies Act. These changes will become effective once this bill is
passed by the Indian parliament and is notified in the Official Gazette of
India.
181
DESCRIPTION OF THE AMERICAN DEPOSITARY SHARES
Bankers Trust Company, as depositary, will issue the ADSs. Each ADS will
represent an ownership interest in o equity shares. The equity shares will be
deposited by us with ICICI, the custodian. The custodian's office is located at
ICICI Towers, Bandra-Kurla Complex, Mumbai 400 051, India. The depositary's
principal executive office is located at 4 Albany Street, New York, NY 10006.
You may hold ADSs either directly or indirectly through your broker or
other financial institution. If you hold ADSs directly, you are an ADS holder.
This description assumes that you hold your ADSs directly. If you hold the ADSs
indirectly, you must rely on the procedures of your brokers or other financial
institutions to assert the rights of ADS holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
As the depositary will actually be the legal owner of the equity shares,
you must rely on it to exercise the rights of a shareholder. The obligations of
the depositary are set out in a deposit agreement among Bankers Trust Company,
you, as an ADS holder, and us. The deposit agreement and the ADSs are generally
governed by New York law.
The following is a summary of the material provisions of the deposit
agreement. As it is a summary, it does not contain all the information that may
be important to you. For more complete information, you should read the entire
deposit agreement and the ADR. Copies of the deposit agreement and the ADR will
be available for inspection at the Corporate Trust Office of the depositary and
at the office of the custodian set forth above.
Share Dividends and Other Distributions
The depositary has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on equity shares or other deposited
securities after deducting its fees and expenses. You will receive these
distributions in proportion to the number of equity shares your ADSs represent.
Cash
The depositary will, as promptly as practicable, convert any cash dividend
or other cash distribution we pay on the equity shares into U.S. dollars, if it
can do so on a reasonable basis and can transfer the U.S. dollars to the United
States. If that is not possible or if any approval from any government is
needed and cannot be obtained, the deposit agreement allows the depositary to
distribute the foreign currency only to those ADS holders to whom it is
possible to do so. It may hold the foreign currency it cannot convert for the
account of the ADS holders who have not been paid. It will not invest the
foreign currency and it will not be liable for interest.
Before making the distribution, any withholding taxes that must be paid
will be deducted. See "Taxation". The depositary will distribute only whole
U.S. dollars and cents and will round fractional cents to the nearest whole
cent. If exchange rates fluctuate during a time when the depositary cannot
convert foreign currency, you may lose some or all of the value of the
distribution.
Shares
The depositary will distribute new ADSs representing any equity share we
may distribute as a free distribution, if we request it to make this
distribution and provided that the depositary receives satisfactory evidence
that it is legal to do so. The depositary will only distribute whole ADSs. It
will sell equity shares which would require it to issue a fractional ADS and
distribute the net proceeds in the same way as it does with cash. If the
depositary does not distribute additional ADSs, each ADS will also represent
the new equity shares.
Rights to Receive Additional Shares
If we offer holders of securities any rights to subscribe for additional
equity shares or any other rights, the depositary, after consultation with us,
will have discretion as to the procedure to be followed in making those rights
available to you. If the depositary decides it is not legal or feasible to make
these rights available to you, the Depositary may sell the rights and
distribute the net proceeds.
182
The depositary may allow rights that are not distributed or sold to lapse. In
that case, you will receive no value for them.
After consultation with us, if the depositary makes rights available to
you, upon instruction from you, it will exercise the rights and purchase the
equity shares on your behalf. The depositary will then deposit the equity
shares and issue ADSs to you. It will only exercise rights if you pay it the
exercise price and any other charges the rights require you to pay.
The U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the ADSs issued after exercise of rights. For example, you may not
be able to trade the ADSs freely in the United States. In this case, the
depositary may issue the ADSs under a separate restricted deposit agreement
which will contain the same provisions as the deposit agreement, except for the
changes needed to put the restrictions in place. The depositary will not offer
you rights, unless those rights and the securities to which the rights relate
are either exempt from registration or have been registered under the
Securities Act with respect to a distribution to you. We will have no
obligation to register under the Securities Act those rights or the securities
to which they relate.
Other Distributions
The depositary will, after consultation with us, send to you anything else
that we distribute on deposited securities by any means it thinks is legal,
fair and practical, subject to the receipt of requisite approvals. If it cannot
make the distribution in that way, the depositary, after consultation with us,
may decide to sell what we distributed and distribute the net proceeds, subject
to the receipt of requisite approvals, in which case the ADSs will also
represent the newly distributed property.
The depositary is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. We have no
obligation to register ADSs, equity shares, rights or other securities under
the Securities Act. We also have no obligation to take any other action to
permit the distribution of ADSs, equity shares, rights or anything else to ADS
holders. This means that you may not receive the distribution we make on our
equity shares or any value for them if it is illegal or impractical for us to
make them available to you.
Deposit, Withdrawal and Cancellation
Subject to Indian law, the depositary will issue ADSs if you or your
broker deposits equity shares or evidence of rights to receive equity shares
with the custodian. Upon payment of its fees and expenses and of any taxes or
charges, such as stamp taxes or stock transfer taxes or fees, the depositary
will register the appropriate number of ADSs in the name you request and will
deliver the ADSs as promptly as practicable at its New York office to the
persons you request. Under current Indian laws and regulation, the depositary
cannot accept deposits of equity shares other than from us (except for equity
shares issued as bonus shares or pursuant to rights offerings) and issue ADRs
evidencing ADSs representing the equity shares.
Persons resident in India (other than us) may not, directly or indirectly,
deposit equity shares with the custodian.
If you surrender your ADSs and withdraw the underlying equity shares, you
or any subsequent transferee will not be permitted subsequently to deposit the
equity shares and obtain ADSs. Moreover, foreign institutional investors,
non-resident Indians or overseas corporate bodies who withdraw equity shares
will be subject to Indian legal restrictions governing the foreign ownership of
Indian securities. For a discussion, see "Restriction on Foreign Ownership of
Indian Securities". The depositary has agreed, subject to the terms of the
deposit agreement, to accept deposits of equity shares if current Indian laws
and regulations are amended to permit such deposits.
You may turn in your ADSs at the depositary's New York office. Upon
payment of its fees and expenses and any taxes and charges, such as stamp taxes
or stock transfer taxes or fees, the depositary will deliver (1) the underlying
equity shares to an account in the book-entry system in India and (2) any other
deposited securities underlying the ADSs at the office of the custodian.
If you surrender ADSs and withdraw equity shares, you will have to take
the equity shares in electronic dematerialized form. You will be required to
establish an account with a participant of the
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National Securities Depositary Limited or Central Depositary Services Limited
to hold or sell the shares in electronic dematerialized form, and you may incur
customary fees and expenses in doing so. Equity shares which are withdrawn from
the depositary also may not be sold on the stock exchanges in India until the
equity shares underlying the ADSs have been listed on those exchanges. The
process of being listed on those exchanges will be completed within six weeks
after the offering. In addition, the sale of withdrawn equity shares by a
non-resident of India to a resident of India may require approval from the
Reserve Bank of India. For further details on the sale of underlying equity
shares, see "Description of Equity Shares--Transfer of Shares".
Voting Rights
You will have no voting rights with respect to the deposited equity
shares. The depositary will exercise voting rights in respect of the deposited
equity shares as directed by the board of directors. The depositary will not,
under any circumstances, be obliged to exercise any discretion in relation to
the exercise or non-exercise of voting rights.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person. However, you may not
receive sufficient advance notice of shareholder meetings to enable you to
withdraw the underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the depositary facility, its investment in the equity shares would
be subject to the general restrictions on foreign ownership noted under
"Restriction on Foreign Ownership of Indian Securities" and may be subject to
the portfolio investment restrictions, including the 10-24.0% portfolio
investment limitations, and the 5-10.0% non-resident Indian limitation. The
application of these limitations, however, is not clear. Secondary purchases of
securities of Indian companies in India by foreign direct investors or
investments by non-resident Indians, persons of Indian origin, overseas
corporate bodies and foreign institutional investors above the ownership levels
set forth under "Restriction on Foreign Ownership of Indian Securities" require
government of India and Reserve Bank of India approval on a case-by-case basis.
It is unclear whether similar case-by-case approvals of ownership of equity
shares withdrawn from the depositary facility by foreign institutional
investors, non-resident Indians and overseas corporate bodies would be
required.
Fees and Expenses
ADS holders must pay: For:
US$ 5.00 (or less) per 100 ADSs Each issuance of an ADS, including
as a result of a distribution of
equity shares or rights or other
property.
Each cancellation of an
ADS, including if the
agreement terminates.
Registration or transfer fees Transfer and registration of
shares on the equity share
register of the foreign
registrar from your name to
the name of the depositary or
its agent when you deposit or
withdraw equity shares.
Expenses of the depositary Conversion of foreign
currency to US dollars.
Cable, telex and facsimile
transmission expenses.
Taxes and other governmental As necessary
charges that the depositary or
the custodian is required to pay
on any ADS or equity share
underlying an ADS, for
example, stock transfer taxes,
stamp duty or withholding
taxes.
184
Inspection of Transfer Books
The depositary will maintain at its transfer office in New York facilities
for the execution and delivery, registration of transfer, combination or
split-up of ADRs and a register for the registration of ADRs and the
registration of the transfer of ADSs that at reasonable times will be open for
inspection by the investors in the ADSs and by us provided that such inspection
shall not be for the purpose of communication with investors in the ADSs in the
interest of a business or object other than our business or a matter related to
the deposit agreement or the ADRs.
Reports and Notices
We will transmit to the depositary copies of any communications generally
distributed to holders of equity shares, including annual reports to
shareholders and notices of shareholder's meetings. The depositary will make
available for inspection by ADS holders at its principal office any notices,
reports and communications received from us that are both received by the
depositary or the custodian as the holder of the equity shares and made
generally available to holders of our equity shares. The depositary will also
send to ADS investors copies of such reports where furnished by us as provided
in the deposit agreement.
On or before the first date on which we give notice, by publication or
otherwise, of any meeting of shareholders, or of any adjourned meeting of such
holders, or of the taking of any action by such holders other than at a
meeting, or the taking of any action in respect of any cash or other
distributions or the offering of any rights, we will transmit to the depositary
and the custodian a written English-language version of the notice thereof in
the form given or to be given to shareholders. The depositary will arrange for
the mailing of such notices to all ADS holders.
Payment of Taxes
You will be responsible for any taxes or other governmental charges
payable on your ADRs or on the deposited securities underlying your ADSs. The
Depositary may refuse to transfer your ADSs or allow you to withdraw the equity
shares underlying your ADSs until such taxes or other charges are paid.
The depositary may deduct the amount of any taxes or other charges owed
from any payments due to you. The depositary may also sell deposited
securities, by public or private sale, to pay any taxes or other charges owed.
You will remain liable for any deficiency if the proceeds of the sale are not
enough to pay the taxes or other charges. If the depositary sells deposited
securities, it will, if appropriate, reduce the number of ADSs to reflect the
sale and pay to you any proceeds, or send to you any property, remaining after
it has paid the taxes.
Reclassifications, Recapitalizations and Mergers
If we: Then:
Change the nominal or par value of our The cash, equity shares or other securities received
equity shares by the depositary will become deposited securities.
Reclassify, split up or consolidate any Each ADS will automatically represent its equal share
of the deposited securities of the new deposited securities.
Distribute securities on the equity shares The depositary may, and will if we ask it to,
that are not distributed to you distribute some or all of the cash, equity shares or
Recapitalize, reorganize, merge, liquidate, other securities it receives. It may also issue new
sell all or substantially all of our ADSs or ask you to surrender your outstanding ADSs
assets, or take any similar action in exchange for new ADSs, identifying the new
deposited securities.
Amendment and Termination
We may agree with the depositary to amend the deposit agreement and the
ADRs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and
185
other governmental charges or certain expenses of the depositary, or prejudices
an important right of ADS investors, it will only become effective thirty days
after the depositary notifies you of the amendment. At the time an amendment
becomes effective, you are considered, by continuing to hold your ADS, to agree
to the amendment and to be bound by the ADR and the deposit agreement as
amended.
The depositary will terminate the deposit agreement if we ask it do so.
The depositary may also terminate the agreement if the depositary has told us
that it would like to resign and we have not appointed a new depositary bank
within 90 days. In both cases, the depositary must notify you at least 90 days
before termination.
After termination, the depositary and its agents will be required to do
only the following under the agreement: (1) collect dividends and distributions
on the deposited securities, (2) sell rights offered to you, and (3) deliver
equity shares and other deposited securities upon cancellation of ADSs. Any
time after one year after termination, the depositary will, if practical, sell
any remaining deposited securities by public or private sale. After that, the
depositary will hold the proceeds of the sale, as well as any other cash it is
holding under the deposit agreement for the pro rata benefit of the ADS holders
that have not surrendered the ADSs. It will not invest the money and will have
no liability for interest. The depositary's only obligations will be to account
for the proceeds of the sale and other cash. After termination, our only
obligations will be with respect to indemnification and to pay certain amounts
to the depositary.
Limitations on Obligations and Liability to ADS Holders
The agreement expressly limits our obligations and the obligations of the
depositary, and it limits our liability and the liability of the depositary. We
and the depositary:
o are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
o are not liable if either we or the depositary is prevented or delayed
by law or circumstances beyond our or its control from performing our
or its obligations under the deposit agreement;
o are not liable if either we or the depositary exercise discretion
permitted under the deposit agreement;
o have no obligation to become involved in a lawsuit or other
proceeding related to the ADRs or the deposit agreement on your
behalf or on behalf of any other party; and
o may rely upon any documents we or the depositary believe in good
faith to be genuine and to have been signed or presented by the
proper party, and may rely on advice or information from any person
we or the depositary believe, in good faith, to be competent to give
such advice or information.
In the deposit agreement, we and the depositary agree to indemnify each
other under certain circumstances.
Requirements for Depositary Actions
Before the depositary will issue or register transfer of an ADS, make a
distribution on an ADS, or allow a withdrawal of equity shares, the depositary
may require:
o payment of stock transfer or other taxes or other governmental
charges and transfer or registration fees charged by third parties
for the transfer of any equity shares or other deposited securities;
o production of satisfactory proof of the identity and genuineness of
any signature or other information it deems necessary; and
186
o compliance with laws or governmental regulations relating to ADSs or
the withdrawal of deposited securities and such reasonable
regulations, if any, that the depositary may establish, from time to
time, consistent with the deposit agreement, including presentation
of transfer documents.
The depositary may refuse to deliver, transfer, or register transfers of
ADSs generally when our books or the depositary's books are closed, or at any
time if the we or the depositary think it advisable to do so.
You have the right to cancel your ADSs and withdraw the underlying equity
shares at any time except:
o when temporary delays arise because: (1) we or the depositary have
closed our transfer books; (2) the transfer of equity shares is
blocked to permit voting at shareholders' meeting; or (3) we are
paying a dividend on the equity shares;
o you or other ADS holders seeking to withdraw equity shares owe money
to pay fees, taxes and similar charges; or
o when it is necessary to prohibit withdrawals in order to comply with
any laws or governmental regulations that apply to ADSs or to the
withdrawal of equity shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement. Foreign investors who withdraw equity shares will be subject
to Indian legal restrictions governing the ownership of Indian securities. For
a discussion, see "Restriction on Foreign Ownership of Indian Securities".
Pre-Release of ADSs
Subject to current Indian law and regulations, our consent and the
provisions of the deposit agreement, the depositary may issue ADSs before
deposit of the underlying equity shares. This is called a pre-release of ADSs.
The depositary may deliver equity shares upon the receipt and cancellation of
ADSs, including pre-released ADSs. The depositary may receive ADSs instead of
equity shares to close out a pre-release. The depositary may pre-release ADSs
only under the following conditions:
o before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to the depositary in writing
that it or its customer, as the case may be,
- beneficially owns the equity shares to be received,
- assigns all beneficial rights, title and interest in the equity
shares to the depositary in its capacity as the depositary and
for the benefit of the holders of the ADSs,
- will not take any action with respect to the ADSs or equity
shares that is inconsistent with the assignment of beneficial
ownership (including, without the consent of the depositary,
disposing of the equity shares) other than in satisfaction of
the pre-release, and
- the pre-release must be fully collateralized with cash or
collateral that the depositary considers appropriate; and
o the depositary must be able to close out the pre-release on not more
than five business days' notice.
The pre-release will be subject to whatever indemnities and credit
regulations the depositary considers appropriate. In addition, the depositary
will limit the number of ADSs that may be outstanding at any time as a result
of pre-release to 30.0% of the total equity shares deposited, although the
depositary may disregard such limit from time to time if it shall choose to do
so.
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TAXATION
Indian Tax
The following discussion is the opinion of Amarchand & Mangaldas & Suresh
A. Shroff & Co. The discussion of Indian tax consequences for investors in ADSs
and equity shares received upon redemption of ADSs who are not resident in
India whether of Indian origin or not is based on the provisions of the Indian
Income-Tax Act, 1961, including the special tax regime for ADSs contained in
Section 115AC, which has recently been extended to cover additional ADSs that
an investor may acquire in an amalgamation or restructuring of the company, and
certain regulations implementing the Section 115AC regime. The Indian Income
Tax Act is amended every year by the Finance Act of the relevant year. Some or
all of the tax consequences of the Section 115AC regime may be amended or
modified by future amendments to the Indian Income Tax Act.
The summary is not intended to constitute a complete analysis of the tax
consequences under Indian law of the acquisition, ownership and sale of ADSs
and equity shares by non-resident investors. Potential investors should,
therefore, consult their own tax advisers on the tax consequences of such
acquisition, ownership and sale, including specifically the tax consequences
under Indian law, the law of the jurisdiction of their residence, any tax
treaty between India and their country of residence, and in particular the
application of the regulations implementing the section 115 AC regime.
Residence
For the purpose of the Income Tax Act, an individual is a resident of
India during any fiscal year, if he (i) is in India in that year for 182 days
or more or (ii) having within the four years preceding that year been in India
for a period or periods amounting in all to 365 days or more, is in India for
period or periods amounting in all to 60 days or more in that year. The period
of 60 days is substituted by 182 days in case of Indian citizen or person of
Indian origin who being resident outside India comes on a visit to India during
the financial year or an Indian citizen who leaves India for the purposes of
his employment during the financial year. A company is resident in India in any
fiscal year if it is registered in India or the control and management of its
affairs is situated wholly in India in that year. A firm or other association
of persons is resident in India except where the control and the management of
its affairs are situated wholly outside India.
Taxation of Distributions
Dividend distributed will not be subject to tax in the hands of the
shareholders. Consequently, withholding tax on dividends paid to shareholders
does not apply. However, if dividends are declared, the company is required to
pay a 11.0% tax on distributable profits.
Taxation on Redemption of ADSs
The acquisition of equity shares upon a redemption of ADSs by a
non-resident investor will not give rise to a taxable event for Indian tax
purposes.
Taxation on Sale of Equity Shares or ADSs
Any transfer of ADSs or equity shares outside India by a non-resident
investor to another non-resident investor does not give rise to Indian capital
gains tax.
Subject to any relief under any relevant double taxation treaty, a gain
arising on the sale of an equity share to a resident of India or where the sale
is made inside India will generally give rise to a liability for Indian capital
gains tax. Such tax is required to be withheld at source. Where the equity
share has been held for more than 12 months (measured from the date of advice
of redemption of the ADS by the Depositary), the rate of tax is 10.0%. Where
the equity share has been held for 12 months or less, the rate of tax varies
and will be subject to tax at normal rates of income-tax applicable to
non-residents under the provisions of the Indian Income Tax Act, subject to a
maximum of 48.0% in the case of foreign companies. The actual rate depends on a
number of factors, including without limitation the nature of the non-resident
investor. During the period the underlying equity shares are held by
non-resident investors on a transfer from the Depositary upon redemption of
ADRs, the provisions of the Avoidance of Double Taxation Agreement entered into
by the government of India with the country of
188
residence of the non-resident investors will be applicable in the matter of
taxation of any capital gain arising on a transfer of the equity shares. The
double taxation treaty between the United States and India does not provide US
residents with any relief from Indian tax on capital gains.
For purposes of determining the amount of capital gains arising on a sale
of an equity share for Indian tax purposes, the cost of acquisition of an
equity share received upon redemption of an ADS will be the price of the share
prevailing on the BSE or the NSE on the date on which the depositary advises
the custodian of such redemption, not the acquisition cost of the ADS being
redeemed. The holding period of an equity share received upon redemption of an
ADS will commence from the date of advice of redemption by the depositary. The
exact procedures for the computation and collection of Indian capital gains tax
are not settled.
Rights
Distribution to non-resident holders of additional ADSs or equity shares
or rights to subscribe for equity shares made with respect to ADSs or equity
shares are not subject to tax in the hands of the non-resident holder.
It is unclear as to whether capital gain derived from the sale of rights
by a non-resident holder not entitled to exemption under a tax treaty to
another non-resident holder outside India will be subject to Indian capital
gains tax. If rights are deemed by the Indian tax authorities to be situated
within India, as our situs is in India, the gains realized on the sale of
rights will be subject to customary Indian taxation as discussed above.
Stamp Duty
Upon the issuance of the equity shares underlying the ADSs, we are
required to pay a stamp duty of 0.1% per share of the issue price. A transfer
of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of
equity shares from the depositary in exchange for ADSs representing such equity
shares in physical form, an investor would be liable for Indian stamp duty at
the rate of 0.5% of the market value of the equity shares at the date of
registration. Similarly, a sale of equity shares by an investor would also be
subject to Indian stamp duty at the rate of 0.5% of the market value of the
equity shares on the trade date, although customarily such tax is borne by the
transferee, that is, the purchaser. However, our equity shares are compulsorily
deliverable in dematerialized form except for trades up to 500 shares only
which may be for delivery in physical form. Under Indian stamp law, no stamp
duty is payable on the acquisition or transfer of equity shares in
dematerialized form.
Other Taxes
At present, there are no taxes on wealth, gifts and inheritance which may
apply to the ADSs and underlying equity shares.
Service Tax
Brokerage or commissions paid to stockholders in connection with the sale
or purchase of shares is subject to a service tax of 5.0%. The stockbroker is
responsible for collecting the service tax and paying it to the relevant
authority.
United States Tax
The following discussion is the opinion of Davis Polk & Wardwell. The
discussion describes the material US federal income tax consequences of the
acquisition, ownership and sale of ADSs that are generally applicable to US
investors. For these purposes, you are an US investor if you are:
o a citizen or resident of the United States under US federal income
tax laws;
o a corporation organized under the laws of the United States or of any
political subdivision of the United States; or
o an estate or trust the income of which is includable in gross income
for US federal income tax purposes regardless of its source.
189
This discussion only applies to ADSs that you purchase through the
offering, and only if you own ADSs as capital assets.
This discussion assumes that we are not a passive foreign investment
company. Please see the discussion under "Passive Foreign Investment Company
Rules" below.
Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address purchasers subject to special rules, including:
o insurance companies;
o tax-exempt entities;
o dealers in securities;
o financial institutions;
o persons who own the ADSs as part of an integrated investment
(including a straddle, hedging or conversion transaction)
comprised of the ADS, and one or more other positions for tax
purposes;
o persons whose functional currency is not the US dollar; or
o persons who own, actually or constructively, 10.0% or more of our
voting stock.
This discussion is based on the tax laws of the United States currently in
effect (including the Internal Revenue Code of 1986, as amended, referred to as
"the Code", Treasury Regulations, Revenue Rulings and judicial decisions).
These laws may change, possibly with retroactive effect.
For US federal income tax purposes, if you own an ADS, you will generally
be treated as the owner of the equity shares underlying the ADS.
Please consult your tax advisors with regard to the application of the US
federal income tax laws to the ADSs, including the passive foreign investment
company rules described below, as well as any tax consequences arising under
the laws of any state, local or other taxing jurisdiction.
Taxation of Dividends
Dividends you receive on the ADSs, other than certain pro rata
distributions of common shares, will generally constitute foreign source
dividend income for US federal income tax purposes. The amount of the dividend
you will be required to include in income will equal the US dollar value of the
rupees, calculated by reference to the exchange rate in effect on the date the
payment is received by Bankers Trust Company, as the depositary, regardless of
whether the payment is converted into US dollars. If you realize gain or loss
on a sale or other disposition of rupees, it will be US source ordinary income
or loss. You will not be entitled to claim a dividends-received deduction for
dividends paid by ICICI Bank.
Taxation of Capital Gains
You will recognize capital gain or loss for U.S. federal income tax
purposes on the sale or exchange of ADSs in the same manner as you would on the
sale or exchange of any other shares held as capital assets. The gain or loss
will generally be U.S. source income or loss. You should consult your own tax
advisors about the treatment of capital gains, which may be taxed at lower
rates than ordinary income for non-corporate taxpayers, and capital losses, the
deductibility of which may be limited.
Passive Foreign Investment Company Rules
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, ICICI Bank does not expect
to be considered a passive foreign investment company. In general, a foreign
corporation is a passive foreign investment company for any taxable year in
which (i) 75.0% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties) or (ii) 50.0% or more of the average
quarterly value of its assets consists of assets that produce, or are held for
the production of, passive income. ICICI Bank has based the expectation that it
is not a passive foreign investment company on, among other things, provisions
in the proposed regulations that provide that certain restricted reserves
(including cash and securities)
190
of banks are assets used in connection with banking activities and are not
passive assets, as well as the composition of our income and our assets from
time to time. Since there can be no assurance that the proposed regulations
will be finalized in their current form and the composition of income and
assets of ICICI Bank will vary over time, there can be no assurance that ICICI
Bank will not be considered a passive foreign investment company for any fiscal
year. If ICICI Bank is a passive foreign investment company at any time that
you own ADSs,
o you may be subject to additional taxes and interest charges on
certain dividends and on any gain recognized on the disposition of
the shares. This tax is assessed at the highest tax rate applicable
for corporate or individual taxpayers for the relevant periods; and
o You will be subject to additional US tax filing requirements for each
year that you hold the shares.
Please consult your tax advisors about the possibility that ICICI Bank
will be a passive foreign investment company and the rules that would apply to
you if ICICI Bank were.
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UNDERWRITING
Subject to the terms and conditions set forth in the US underwriting
agreement between us and each of the US underwriters named below, and
concurrently with the sale of o ADSs to the international underwriters, We have
agreed to sell to each of the US underwriters, and each of the US underwriters
severally has agreed to purchase from us, the aggregate number of ADSs set
forth opposite its name below.
US Underwriters Number of ADSs
- --------------------------------------------------------- --------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................ o
Morgan Stanley & Co. Incorporated........................ o
Total.................................................... o
Subject to the terms and conditions set forth in the international
underwriting agreement between us and each of the international underwriters
named below, and concurrently with the sale of o ADSs to the US underwriters,
we have agreed to sell to each of the international underwriters, and each of
the international underwriters severally has agreed to purchase from us, the
aggregate number of ADSs set forth opposite its name below.
International Underwriters Number of ADSs
- --------------------------------------------------------- --------------
Merrill Lynch (Singapore) Pte. Ltd....................... o
Morgan Stanley & Co. International Limited............... o
Total.................................................... o
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley &
Co. Incorporated are the joint global coordinators and joint book runners for
the US offering and the international offering. The consummation of each of the
US offering and the international offering is a condition to the closing of the
other offering. The US underwriters and the international underwriters are
collectively referred to as the "underwriters".
Prior to the US offering and the international offering, there has been no
established market in the US, India or elsewhere for the ADSs. The equity
shares represented by the ADSs trade in the Indian stock markets. The public
offering price for the ADSs will be determined by us in consultation with the
joint global coordinators and joint book runners by reference to the market
prices for our equity shares and other relevant factors, including an
assessment of our results of operations and future prospects, demand for the
ADSs, general economic conditions, recent offering prices for similar
securities of reasonably comparable companies and the general condition of the
securities markets at the time of the offering.
The joint global coordinators and joint book runners have advised us that
the underwriters propose initially to offer the ADSs to the public at the
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of o per ADS.
After the public offering, the public offering price and concession may be
changed. The public offering price per ADS in the US offering and the
international offering is identical.
The US underwriting agreement and the international underwriting agreement
provide that the obligations of the underwriters are subject to certain
conditions precedent and that the underwriters are committed to purchase all of
the ADSs if they purchase any ADSs. The underwriters reserve the right to
withdraw, cancel or modify the US offering and the international offering and
to completely or partially reject any orders.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed 5.0% of the total number of ADSs offered by
them.
The US underwriters may engage in transactions that affect the price of
the ADSs. In particular, the US underwriters may over-allot, creating a
situation where more ADSs are sold than are set forth on the cover page of this
prospectus (a short position in the ADSs). In order to cover the
over-allotments or to stabilize the price of the ADSs, the US underwriters may
purchase up to an aggregate of o additional ADSs at the public offering price
set forth on the cover page of this prospectus less the
192
underwriting concession and discount referred to above. To the extent that the
US underwriters exercise this option, each underwriter will be obligated,
subject to conditions set out in the US underwriting agreement, to purchase
additional ADSs proportionate to each underwriter's initial amount reflected in
the first table above. In addition, the US underwriters may bid for and
purchase the ADSs to stabilize the price of the ADSs as an exception to SEC
rules limiting such activities until the distribution of the ADSs is completed.
As a result of such purchases, the price of the security would generally be
higher than it would have been without such purchases. The US underwriters may
or may not engage in these transactions, and once commenced, they may
discontinue their actions without notice. We do not, nor do the US
underwriters, make any representation or prediction as to the direction and
magnitude of any effect that the transactions we have described above may have
on the price of the ADSs. Finally, the underwriting syndicate may reclaim
selling concessions allowed to a US underwriter or a dealer for distributing
the ADSs in the US offering if any US underwriter repurchases previously
distributed ADSs in transactions to cover syndicate short positions, in
stabilization transactions or otherwise.
The joint global coordinators and joint book runners may allocate the ADSs
for the US offering and the international offering as they deem appropriate.
The ADSs will be listed on the New York Stock Exchange under the symbol o.
Unless we and ICICI have obtained the prior written consent of the joint
global coordinators and joint book runners, we and ICICI have agreed that we
and ICICI will not, from the date of this prospectus through and including 180
days after such date, sell, offer or contract to sell, or otherwise dispose of
any of our equity shares (including ADSs) or any securities (which are
convertible into or exchangeable for shares, or any options or warrants),
except in connection with the offering or other than shares or other securities
or options, the rights or warrants for equity shares or other securities,
issued, offered, allotted, appropriated, modified or granted to our employees
(including directors) or former employees (including directors), directly or
indirectly, pursuant to any employee share scheme or arrangement for any one or
more employee or employees generally or as required by law.
From time to time, the underwriters have provided, and continue to
provide, commercial and investment banking services to us for which they have
received customary compensation
We have agreed with the underwriters to indemnify each other against
certain liabilities, including liabilities arising under the Securities Act, or
to contribute to payments that the other may be required to make in respect
thereof.
The underwriters have, subject to the completion of this offering, agreed
to reimburse us for certain expenses incurred in connection with this offering.
Pursuant to the agreement among US and international underwriters, each
underwriter has represented and agreed to the following selling restrictions:
o Each US underwriter has represented and agreed that, with certain
exceptions: (a) it is not purchasing any ADSs for the account of
anyone other than a United States or Canadian person (as defined
below) and (b) it has not offered or sold, and will not offer or
sell, directly or indirectly, any ADSs or distribute any prospectus
relating to the ADSs outside the United States or Canada or to anyone
other than a United States or Canadian person.
Each international underwriter has represented and agreed that, with
certain exceptions: (a) it is not purchasing any ADSs for the account
of any United States or Canadian person (as defined below) and (b) it
has not offered or sold, and will not offer or sell, directly or
indirectly, any ADSs or distribute any prospectus relating to the
ADSs in the United States or Canada or to any United States or
Canadian person.
With respect to any underwriter that is a US underwriter and an
international underwriter, the foregoing representations and
agreements (a) made by it in its capacity as a US underwriter apply
only to it in its capacity as a US underwriter and (b) made by it in
its capacity as an international underwriter apply only to it in its
capacity as an international underwriter. The foregoing limitations
do not apply to stabilization transactions or to certain other
transactions specified in the agreement among underwriters.
193
"United States or Canadian person" means any national or resident of
the United States or Canada, or any corporation, pension,
profit-sharing or other trust or other entity organized under the
laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and
Canada of any United States or Canadian person), and includes any
United States or Canadian branch of a person who is otherwise not a
United States or Canadian person.
o Sales may be made between U.S. underwriters and international
underwriters of any number of ADSs as may be mutually agreed. The per
ADS price of any ADSs so sold shall be the public offering price set
forth on the cover page of this prospectus, in US dollars, less an
amount not greater than the per ADS amount of the concession to
dealers described above.
Each U.S. underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any ADSs, directly or
indirectly, in Canada or to, or for the benefit of, any resident of
Canada in contravention of the Canadian securities laws and has
represented that any offer or sale of ADSs in Canada will be made
only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer
or sale is made. Each U.S. underwriter has further agreed to send a
notice to any dealer who purchases from it any of the ADSs which
states in substance that, by purchasing such ADSs, such dealer
represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such ADSs in Canada or
to, or for the benefit of, any resident of Canada in contravention of
the Canadian securities laws and that any offer or sale of ADSs in
Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of
Canada in which such offer or sale is made, and that such dealer
will, in turn, deliver to any other dealer to whom it sells any of
such ADSs a notice containing substantially the same statement as is
contained in this sentence. References to "Canada" includes all
provinces and territories of Canada or in the particular province or
territory of Canada as applicable. References to "Canadian securities
laws" include the securities laws of Canada and all provinces and
territories of Canada or of that particular province or territory of
Canada as applicable.
o Each international underwriter has represented and agreed that (a) it
has not offered or sold and will not offer or sell prior to the date
six months after the closing date for the sale of the ADSs to the
international underwriters, any ADSs to persons in the United Kingdom
except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise
in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995; (b) it has complied and
will comply with all applicable provisions of the Financial Services
Act 1986 with respect to anything done by it in relation to the ADSs
in, from or otherwise involving the United Kingdom; and (c) it has
only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the offering
of the ADSs to a person who is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (as amended) or is a person to whom such
document may otherwise lawfully be issued or passed on.
o Each international underwriter has represented and agreed that it has
not offered and will not offer, directly or indirectly, any ADSs in
The Netherlands to the account of any person or entity other than to
persons or entities who or which trade or invest in the ADSs in the
conduct of a profession or business within the meaning of the
Securities Transactions Supervision Act 1995 (Wet Toezicht
Effectenverkeer 1995) and its implementing regulations (which persons
and entities include banks, brokers, pension funds, insurance
companies, securities firms, investment institutions, other
institutional investors and other parties).
194
o Each international underwriter has further represented that it has
not offered or sold, and has agreed not to offer or sell, directly or
indirectly, in Japan or to or for the account of any resident
thereof, any of the ADSs acquired in connection with the distribution
contemplated hereby, except for offers or sales to Japanese
international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions
of Japanese law. Each international underwriter has further agreed to
send to any dealer who purchases from it any of the ADSs a notice
stating in substance that, by purchasing such ADSs, such dealer
represents and agrees that it has not offered or sold, and will not
offer or sell, any of such ADSs directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or
sales to Japanese international underwriters or dealers and except
pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with
applicable provisions of Japanese law, and that such dealer will send
to any other dealer to whom it sells any of such ADSs a notice
containing substantially the same statement as is contained in this
sentence.
o Each international underwriter has represented and agreed that it has
not distributed and will not distribute, directly or indirectly, any
prospectus relating to the ADSs in India or to residents of India and
that it has not offered or sold and will not offer or sell, directly
or indirectly, any ADSs in India or to, or for the account or benefit
of, any resident of India.
o Each international underwriter has represented and agreed that no
prospectus in relation to the ADSs has been or will be lodged with,
or registered by, the Australian Securities and Investments
Commission and that it has not, directly or indirectly, offered for
purchase or sale, nor issued invitations to buy or sell and will not,
directly or indirectly, offer for purchase or sale, nor issue
invitations to buy or sell any ADSs and has not distributed and will
not distribute any draft or definitive document in relation to any
such offer, invitation, purchase or sale in Australia, except in
accordance with the Corporations Law in force in Australia and any
other applicable Australian laws.
o Each international underwriter has represented and agreed that it has
not applied for any license issued by the Central Bank of the United
Arab Emirates ( "Central Bank ") with respect to the ADSs and that it
has not distributed and will not distribute any prospectus relating
to the ADSs in the United Arab Emirates ( "UAE ") or to residents of
the UAE and that it has not offered or sold and will not offer or
sell and ADSs in the UAE for the account or benefit of any resident
of the UAE, except through a bank or financial institution operating
in the UAE and duly licensed by the Central Bank in accordance with
UAE Federal Law No. 10 of 1980 (as amended) and the Resolutions and
Circulars of the Board of Directors of the Central Bank and the
Regulations issued by or on behalf of the Central Bank from time to
time.
o Each international underwriter has represented and agreed that it has
not offered or sold and will not offer or sell in Hong Kong, by means
of any document, any ADSs other than to persons whose ordinary
business it is to buy or sell shares or debentures, whether as
principal or agent, or in circumstances which do not constitute an
offer to the public within the meaning of the companies ordinance
(Cap32) of Hong Kong and that, except as permitted under the
securities laws of Hong Kong, it has not issued and will not issue in
Hong Kong any document, invitation or advertisement relating to the
ADSs other than with respect to ADSs which are intended to be
disposed of to persons outside Hong Kong or only to persons whose
business involves the acquisition, disposal or holding of securities,
whether as principal or agent.
o Each international underwriter has represented and agreed that it has
not offered or sold and will not offer or sell any ADSs or circulate
or distribute any document or other material relating to the ADSs,
either directly or indirectly to the public or any member of the
public in Singapore other than (a) to an institutional investor or
other person specified in Section 106C of the Companies Act, Cap. 50
of Singapore, (b) to a sophisticated investor, and in accordance with
the conditions specified in Section 106D of the Singapore Companies
Act or (c) otherwise pursuant to, and in accordance with the
conditions of, any other provision of the Singapore Companies Act.
195
LEGAL MATTERS
The validity of the ADSs offered by us in this prospectus will be passed
upon for us by Davis Polk & Wardwell, our United States counsel, and for the
underwriters by Shearman & Sterling, US counsel to the underwriters. The
validity of the equity shares represented by the ADSs and certain other Indian
legal matters will be passed upon by Amarchand & Mangaldas & Suresh A. Shroff &
Co., our Indian counsel , and by Bhaishankar Kanga & Girdharlal, Indian counsel
to the underwriters. Davis Polk & Wardwell may rely upon Amarchand & Mangaldas
& Suresh A. Shroff & Co. and Shearman & Sterling may rely upon Bhaishankar
Kanga & Girdharlal with respect to all matters of Indian law.
EXPERTS
Our US GAAP financial statements at March 31, 1998 and 1999, and for each
of the years in the three-year period ended March 31, 1999, have been included
in this prospectus in reliance upon the report of KPMG, India, independent
accountants, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in auditing and accounting.
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our historical financial statements in accordance with
Indian generally accepted accounting principles. Starting in fiscal 2000, we
intend to adopt US generally accepted accounting principles and publish in our
annual shareholders' report our financial statements in US GAAP as well as in
Indian GAAP.
The financial information in this prospectus has been prepared in
accordance with US GAAP, unless we have indicated otherwise. Our fiscal year
ends on March 31 of each year so all references to a particular fiscal year are
to the year ended March 31 of that year. The financial statements, including
the notes to these financial statements, audited by KPMG, India, independent
accountants, are set forth at the end of this prospectus.
Although we have translated in this prospectus certain rupee amounts into
dollars for convenience, this does not mean that the rupee amounts referred to
could have been, or could be, converted into dollars at any particular rate,
the rates stated below, or at all. Except in the sections on "The Republic of
India", and "Reforms in Some Key Sectors of the Indian Economy" which are based
on publicly available data, all translations from rupees to dollars are based
on the noon buying rate in the City of New York for cable transfers in rupees
at December 31, 1999. The Federal Reserve Bank of New York certifies this rate
for customs purposes on each date the rate is given. The noon buying rate on
December 31, 1999 was Rs. 43.51 per US$ 1.00. The exchange rates used for
convenience translations differ from the actual rates used in the preparation
of our financial statements.
FORWARD-LOOKING STATEMENTS
We have included statements in this prospectus which contain words or
phrases such as "will", "aim", "will likely result", "believe", "expect", "will
continue", "anticipate", "estimate", "intend", "plan", "contemplate", "seek
to", "future", "objective", "goal", "project", "should", "will pursue" and
similar expressions or variations of such expressions, that are
"forward-looking statements". Actual results may differ materially from those
suggested by the forward-looking statements due to certain risks or
uncertainties associated with our expectations with respect to, but not limited
to, our ability to successfully implement our strategy, the market acceptance
of and demand for Internet banking services, future levels of non-performing
loans, our growth and expansion, the adequacy of our allowance for credit and
investment losses, technological changes, investment income, cash flow
projections and our exposure to market risks. By their nature, certain of the
market risk disclosures are only estimates and could be materially different
from what actually occur in the future. As a result, actual future gains,
losses or impact on net interest income could materially differ from those that
have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this document include, but are not limited to : general economic and political
conditions in India, south east Asia, and the other countries which have an
impact on our business activities or investments, the monetary and interest
rate policies of India, inflation, deflation, unanticipated turbulence in
interest rates, foreign exchange rates, equity prices or
196
other rates or prices, the performance of the financial markets and level of
Internet penetration in India and globally, changes in domestic and foreign
laws, regulations and taxes, changes in competition and the pricing environment
in India, and regional or general changes in asset valuations. For further
discussion on the factors that could cause actual results to differ, see the
discussion under "Risk Factors" contained in this prospectus.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
In accordance with the Securities Act, we have filed a registration
statement on Form F-1, including its amendments, exhibits, and schedules, with
the Commission with respect to the ADSs and the underlying equity shares we are
offering in this prospectus. This prospectus, which forms part of the
registration statement, omits certain parts of the registration statement in
accordance with rules and regulations of the Commission. Statements made in
this prospectus regarding any contract, agreement or other document are not
necessarily complete. If any statement refers to a contract, agreement or
document that is filed as an exhibit to the registration statement, please
refer to that exhibit for a more complete description of the matter involved.
For more information about us, the ADSs, and the equity shares, please
refer to the registration statement. The registration statement, including its
exhibits and schedules, may be inspected and copied at the Public Reference
Room maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room is available from the Commission at 1-800-SEC-0330. The SEC
maintains an internet site at http://www.sec.gov that contains reports, proxy
and information statements and the information regarding issuers, like us, that
file electronically with the SEC.
As a result of the offering made by this prospectus, we will become
subject to the reporting requirements of the U.S. Securities Exchange Act of
1934, as amended, applicable to a foreign private issuer. In accordance with
the Exchange Act, we will file annual reports on Form 20-F and other
information with the Commission. The annual reports and information we file
with the Commission can be inspected and copied at the Public Reference Room
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York 10048, and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. In addition, these materials may be inspected and copied at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
Under the Exchange Act, we will not be required to publish financial
statements as frequently or as promptly as US companies. However, our audited
summary financial information prepared under Indian GAAP will be published
quarterly. In addition, we intend to give the depositary annual reports with
annual audited financial statements prepared under US GAAP. The depositary has
agreed that, upon our request, it will promptly mail these annual reports to
all registered holders of ADSs. We will also give the depositary all notices of
shareholders' meetings and other reports and communications that are made
generally available to our shareholders although, as described in this
prospectus, investors in ADSs will not be entitled to vote, or request the
depositary to vote, the ADSs or the underlying equity shares at any meeting of
shareholders. The depositary will arrange for the mailing of these documents to
registered holders of ADSs.
We have an internet site at http://www.icicibank.com. This web site and
the information contained in or connected to it is not incorporated into this
prospectus or registration statement and you should not rely on any of the
information contained in the web site in making a decision to acquire ADSs in
the offering.
As a foreign private issuer, we will be exempt from the rules under the
Exchange Act requiring the furnishing and content of proxy statements. Our
officers, directors and principal shareholders are exempt from the reporting
and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
ENFORCEMENT OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
We are incorporated under the laws of India. All our directors and
executive officers, and substantially all experts named in this prospectus,
reside outside of the United States. All of our assets
197
are located outside the United States. In addition, a substantial portion of
the assets of our directors and officers and of the non-resident experts are
located outside the United States. As a result, it may be difficult to effect
service of process within the United States upon these persons or to enforce in
U.S. courts judgments obtained in U.S. courts against these persons, including
judgments predicated upon the civil liability provisions of the federal
securities laws of the United States.
Section 44A of the Indian Code of Civil Procedure provides that where a
foreign judgment has been rendered by a court in any country or territory
outside India which the government of India has by notification declared to be
a reciprocating territory, it may be enforced in India by proceedings in
execution as if the judgment had been rendered by the relevant court in India.
The United States has not been declared by the government of India to be a
reciprocating territory for the purposes of Section 44A.
Amarchand & Mangaldas & Suresh A. Shroff & Co., our Indian counsel, has
advised us that, accordingly, a judgment of a court in the United States may be
enforced in India only by a suit upon the judgment in terms of Section 13 of
the Indian Code of Civil Procedure, and not by proceedings in execution. This
section, which is the statutory basis for the recognition of foreign judgments,
states that a foreign judgment is conclusive as to any matter directly
adjudicated upon except:
o where the judgment has not been pronounced by a court of competent
jurisdiction;
o where the judgment has not been given on the merits of the case;
o where the judgment appears on the face of the proceedings to be
founded on an incorrect view of international law or a refusal to
recognize the law of India in cases where such law is applicable;
o where the proceedings in which the judgment was obtained were opposed
to natural justice;
o where the judgment has been obtained by fraud; or
o where the judgment sustains a claim founded on a breach of any law in
force in India.
The suit must be brought in India within three years from the date of the
judgment in the same manner as any other suit filed to enforce a civil
liability in India. It is unlikely that a court in India would award damages on
the same basis as a foreign court if an action is brought in India.
Furthermore, it is unlikely that an Indian court would enforce foreign
judgments if it viewed the amount of damages awarded as excessive or
inconsistent with Indian practice. A party seeking to enforce a foreign
judgment in India is required to obtain prior approval from the Reserve Bank of
India under the Foreign Exchange Regulation Act to execute such a judgment or
to repatriate any amount recovered. Any judgment in a foreign currency would be
converted into rupees on the date of judgment and not on the date of payment.
We also have been advised by our Indian counsel that a party may file suit
in India against us, our directors and executive officers as an original action
based upon the provisions of the federal securities laws of the United States.
To our knowledge, no such suit has ever been brought in Indian courts.
Generally, there are considerable delays in the disposal of suits by Indian
courts. Moreover, it is unlikely that an Indian court would award damages on
the same basis as a foreign court.
198
SELECTED FINANCIAL INFORMATION FOR ICICI BANK UNDER INDIAN GAAP
The selected financial and other data given in the table below have been
derived from our financial statements, prepared in accordance with Indian GAAP.
These financial statements are not included in this prospectus. Our Indian GAAP
financial statements for fifteen months ended March 31, 1995, 1996,1997 and
1998 have been audited by Lodha & Co., Chartered Accountants and for fiscal
1999 by S. B. Billimoria and Company, Chartered Accountants.
Fifteen
months
ended Year ended March 31,
March 31, --------------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
--------- --------- ---------- ---------- ---------- ---------
(in millions)
Income :
Interest income(2)......................... Rs. 148 Rs. 1,066 Rs. 1,827 Rs. 2,585 Rs. 5,441 US$ 125
Other income(3)............................ 93 249 426 851 890 20
------- --------- --------- --------- --------- --------
Total income............................... 241 1,315 2,253 3,436 6,331 145
Expenses :
Interest expense........................... 82 754 1,171 1,855 4,255 98
Operating expenses (excluding 114 223 323 431 654 15
depreciation on fixed assets) (4).....
Depreciation on fixed assets............... 14 45 82 145 175 4
------- --------- --------- --------- --------- --------
Expenses before provisions and write-offs.. 210 1,022 1,576 2,431 5,084 117
Provisions and write-offs :
Provisions for depreciation on investments. 5 52 54 138 (48) (1)
Other provisions and contingencies(5)...... 1 9 51 137 323 7
------- --------- --------- --------- --------- --------
Provisions and write-offs.................. 6 61 105 275 275 6
Profit :
Profit before tax.......................... 25 232 572 730 972 22
Provision for taxes........................ 11 61 171 228 338 8
------- --------- --------- --------- --------- --------
Profit for the year........................ Rs. 14 Rs. 171 Rs. 401 Rs. 502 Rs. 634 US$ 15
======= ========= ========= ========= ========= ========
- ---------
(1) For your convenience, rupee amounts for fiscal 1999 have been
translated into US dollars using the noon buying rate in effect on
December 31, 1999 of Rs. 43.51 = US$ 1.00.
(2) Represents interest income on advances, income on investments and discount
on bills. purchased and discounted and interest earned on cash balances.
(3) Represents commission, exchange and brokerage, profit on sale or
revaluation of investments, sale of land, buildings and other assets and
profit on exchange transactions.
(4) Represents employee expenses, establishment expenses and other expenses.
(5) Primarily represents provisioning for bad and doubtful debts.
199
At March 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
---------- --------- ---------- ----------- ----------- --------
(in millions)
Assets:
Cash and balances with the Reserve Bank
of India................................ Rs. 997 Rs. 1,043 Rs. 1,503 Rs. 3,101 Rs. 4,658 US$ 107
Balances with banks and money at call and
short notice............................... 685 586 2,226 5,628 11,725 269
Advances(2)................................ 1,212 6,507 7,980 11,278 21,101 485
Investments................................ 1,450 2,628 4,354 10,234 28,612 658
Fixed assets............................... 99 465 964 1,837 1,996 46
Other assets(3)............................ 116 342 792 716 1,725 40
--------- --------- ---------- --------- ---------- --------
Total assets............................... Rs. 4,559 Rs.11,571 Rs. 17,819 Rs.32,794 Rs. 69,817 US$1,605
========= ========= ========== ========= ========== ========
Liabilities:
Borrowings:
Deposits(4)........................... 3,306 7,299 13,476 26,290 60,730 1,396
Other borrowings(5)................... 72 2,090 930 1,922 1,999 46
--------- --------- ---------- --------- ---------- --------
Total borrowings........................... 3,378 9,389 14,406 28,212 62,729 1,442
Other liabilities and provisions(6)........ 117 615 1,594 1,914 4,005 92
--------- --------- ---------- --------- ---------- --------
Total liabilities.......................... 3,495 10,004 16,000 30,126 66,734 1,534
Shareholders' funds
Equity capital......................... 1,050 1,500 1,500 1,650 1,650 38
Reserves and surplus................... 14 67 319 1,018 1,433 33
--------- --------- ---------- --------- ---------- --------
Total shareholders' funds.................. 1,064 1,567 1,819 2,668 3,083 71
--------- --------- ---------- --------- ---------- --------
Total liabilities and shareholders' funds.. Rs. 4,559 Rs.11,571 Rs. 17,819 Rs.32,794 Rs. 69,817 US$1,605
========= ========= ========== ========= ========== ========
- ---------
(1) For your convenience, rupee amounts for fiscal 1999 have been
translated into US dollars using the noon buying rate in effect on
December 31, 1999 of Rs. 43.51 = US$ 1.00.
(2) Includes bills purchased and discounted.
(3) Includes current assets and advances for capital assets.
(4) Represents deposits received from banks as well as others.
(5) Represents borrowings from the Reserve Bank of India and from other banks
and institutions.
(6) Includes debentures issued by us.
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SIGNIFICANT DIFFERENCES BETWEEN INDIAN GAAP AND US GAAP
Indian GAAP differs in several respects from US GAAP. A summary of the
significant differences between Indian GAAP and US GAAP is presented below:
Subject Indian GAAP US GAAP
- --------------------------------------------------------------------------------------------------------
Statement of cash flows..... Statement is required for companies Statement is required.
listed on the stock exchanges and is
recommended for other companies.
Statement of changes in
stockholders' equity........ Statement is not required. Statement is required.
Consolidation............... The practice of consolidation is not When company controls more than
followed. 50.0% of the voting securities of
another company, the investee company is
known as a subsidiary and is generally
considered to be a part of the
controlling company (parent). In these
circumstances, the financial statements
of the investee are generally required
to be consolidated with the financial
statements of its parent in which all
material transactions between them are
eliminated.
Equity method............... Equity accounting is not recognized When a company controls 20.0% to
as an acceptable method of 50.0% of the investee's voting
accounting. securities or has a subsidiary that is
not consolidated, the investment is
generally stated at the underlying net
asset value, with the equity in the
investee's earnings or loss included in
the investor's income statement for the
current period (equity accounting).
Business combination........ The conditions for applying the Business combinations are accounted
purchase method are different and for either under the purchase method
business combinations are generally or the pooling method.
accounted as per the pooling of
interest method.
201
Subject Indian GAAP US GAAP
- --------------------------------------------------------------------------------------------------------
Allowance for credit losses. Allowance for credit losses are Loans are identified as non-
based on defaults expected both on performing and placed on non- accrual
principal and interest. The basis, where management estimates
allowance does not consider present that payment of interest or principal
value of future inflows. is doubtful of collection.
Non-performing loans are reported after
considering the impact of impairment.
The impairment is measured by comparing
the carrying amount of the loan to the
present value of expected future cash
flows or the fair value of the
collateral (discounted at the loans'
effective rate).
Loan origination fees/costs. Loan origination fees and costs are Loan origination fees (net of loan
taken to the income statement in the origination costs) are deferred and
year accrued/incurred. recognized as an adjustment to yield
over the life of the loan.
Interest capitalization..... Capitalization of interest is Interest cost incurred for funding an
optional. asset during its construction period
is required to be capitalized based on
the average outstanding investment in
the asset and the average cost of funds.
The capitalized interest cost is
included in the cost of the relevant
asset and is depreciated over the useful
life of the asset.
Redeemable preference
shares..................... Redeemable preference shares are a Redeemable preference shares do not component
component of shareholders' equity, form a part of the shareholders' equity and
and preference dividend is reported dividends on such shares are charged to the
as an appropriation of income. income statement.
202
Subject Indian GAAP US GAAP
- --------------------------------------------------------------------------------------------------------
Investment in debt and
equity securities........... Securities are classified as current Securities are classified as trading,
or permanent. Current securities are held to maturity or available for
valued at the lower of cost or market sale based on management's intention
value with any unrealized loss on the acquisition date. While
charged to the income statement trading and available for sale
unrealized gains are not recorded securities are valued at fair value,
permanent investments are held to maturity securities are
valued at cost, adjusted for valued at cost, adjusted for amortization
permanent diminution. of premiums and accretion of discount.
The unrealized gains and losses on
trading securities are taken to the
income statement, while those on
available for sale securities are
reported as a separate component of
stockholders' equity, net of applicable
taxes.
Revaluation of property,
plant and equipment......... Revaluation of property, plant and Revaluation of property, plant and
equipment is permitted. equipment is not permitted except in
certain cases.
Accounting for finance
leases...................... Assets under finance leases are Assets under finance leases should
not required to be capitalized be capitalized and depreciated by
by lessees but, instead, are lessees, with the corresponding
capitalized and depreciated by recognition of the lease obligation
lessors at statutory rates. The lease rentals are recognized as
difference between the depreciation payments of the lease obligation
charge and annual lease charge is and interest thereon. Lessors should
adjusted in the income statement recognize the minimum lease payments
through a lease equalization less unearned income, i.e., the net
account. investment in the lease, as an asset
and the interest component of the
lease rental as income.
Lessees recognize lease rental
payments as expenses as they are
incurred.
Sale of securities under
repurchase agreements....... Recorded as sales and removed from Sales proceeds are recorded as
balance sheet of seller. borrowings in the balance sheet of
seller/borrower. Securities continue
to be reflected as assets in the
balance sheet of seller/borrower.
203
Subject Indian GAAP US GAAP
- --------------------------------------------------------------------------------------------------------
Income taxes................ The amount of tax that is payable is Income taxes are provided against
recorded. current period income as reflected in
the financial statements, even though
all or some of such income will not be
reported for tax purposes in the
current period and taxes will not
become payable at a later date. This
means that, even though certain amount
of the current period accounting
income is not taxable, income tax must
be provided in the financial
statements against both income on
which taxes are payable and income on
which the tax liability is deferred
regardless of the length of that
deferral, subject to valuation
allowances for deferred tax assets.
Share issue expenses........ Share issue expenses are Direct costs to sell shares are
generally deferred and amortized treated as a reduction of the issue
over a period of three to five proceeds; indirect costs are expensed
years. They may also be written as incurred.
off against share premium account.
Debt issue costs.......... Debt issue expenses may be Debt issue costs are deferred and
written off against share premium Amortized over the life of the debt
account or accounted as deferred Using the 'interest method'.
revenue expenses and amortized.
Extraordinary items......... Extraordinary items are disclosed Extraordinary items are disclosed
separately in the statement of profit separately in the statement of profit
and loss. and loss net of applicable tax effects.
Prior period items.......... Prior period items are disclosed Prior period items, less related tax
separately in the current statement effects, are excluded from the current
of profit and loss. statements of profit and loss and
reflected as adjustments to the
opening balance of retained earnings.
204
Subject Indian GAAP US GAAP
- --------------------------------------------------------------------------------------------------------
Related party transactions.. Requirements to report related party Financial statements are generally
transactions in the financial required to include full disclosures
statements are limited to reporting of all material related party
(a) accounts receivable and loans transactions and balances, other
given to management, or to than compensation arrangements,
enterprises in which management is expense allowances, and other
interested or which are under the similar items in the ordinary course
same management; and (b) loans taken of business.
from management. Disclosure is also
required of guarantees given by or
for management and of remuneration to
management.
Segmental information....... Segmental information is not required. Information regarding total
revenues, operating costs, gross
profit, assets and liabilities for
each operating segment is required
to be disclosed.
205
Until o, all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscription.
206
ICICI Bank Limited
Financial Statements
Prepared in accordance with US GAAP
Years ended March 31, 1998, March 31, 1999
and nine months ended December 31, 1999 (unaudited)
ICICI Bank Limited
Financial statements
for the years ended March 31, 1998 and 1999 and nine months ended December 31,
1999 (Unaudited)
Contents Page
Independent Auditors' Report on the financial statements F-1
Independent Accountants' Review Report on the financial statements F-2
Balance sheets at March 31, 1998 and 1999 and December 31, 1999 (Unaudited) F-3
Statements of income for the years ended March 31, 1997, 1998 and 1999
and for the nine months ended December 31, 1998 (Unaudited) and 1999 (Unaudited) F-4
Statements of changes in stockholders' equity for the years ended March 31, 1997,
1998 and 1999 and nine months ended December 31, 1999 (Unaudited) F-5
Statements of cash flows for the years ended March 31, 1997, 1998 and 1999
and for the nine months ended December 31, 1998 (Unaudited) and 1999 (Unaudited) F-6
Notes to financial statements F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and stockholders of ICICI Bank Limited
We have audited the accompanying balance sheet of ICICI Bank Limited as of March
31, 1999 and 1998, and the related statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended March 31,
1999. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ICICI Bank Limited as of March
31, 1999 and 1998, and the result of its operations and its cash flows for each
of the years in the three-year period ended March 31, 1999, in conformity with
accounting principles generally accepted in United States.
The accompanying financial statements as of March 31, 1999 and for the year
ended March 31, 1999 have been translated in United States dollar solely for the
convenience of the reader. We have audited the translation and, in our opinion,
the financial statements expressed in Indian rupees have been translated into
dollars on the basis set forth in note 1.1.3 to the financial statements.
KPMG
Mumbai, India
9 February 2000
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the board of directors and stockholders of ICICI Bank Limited
We have reviewed the accompanying balance sheet of ICICI Bank Limited as of
December 31, 1999 and the related statements of income, stockholders' equity and
cash flows for the nine-month periods ended December 31, 1999 and 1998. These
financial statements are the responsibility of the Bank's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements as of and for the nine-month period ended
December 31, 1999 have been translated into United States dollars solely for the
convenience of the reader. We have reviewed the translation and, in our opinion,
the financial statements expressed in Indian rupees have been translated into
dollars on the basis set forth in note 1.1.3 to the financial statements.
KPMG
Mumbai, India
9 February 2000
ICICI Bank Limited
Balance sheets
At March 31, 1998 and 1999 and December 31, 1999 (unaudited)
At March 31, At December 31,
1998 1999 1999(1) 1999 1999(1)
---- ---- ------- ---- -------
(Unaudited)
(in millions)
--------------------------------------------------------------
Rs Rs USD Rs USD
Assets
Cash and cash equivalents................. 8,728 18,488 425 18,590 427
Trading account assets.................... 7,387 15,822 364 28,606 657
Securities, available for sale............ 1,476 3,963 91 4,402 101
Loans, net................................ 12,765 27,597 634 37,749 868
Acceptances............................... 2,866 5,587 128 7,822 180
Property and equipment.................... 1,363 1,761 41 1,902 44
Other assets.............................. 693 1,607 37 3,134 72
------ ------ ----- ------- -----
Total assets.............................. 35,278 74,825 1,720 102,205 2,349
------ ------ ----- ------- -----
Liabilities
Interest bearing deposits................. 22,658 54,963 1,263 76,987 1,769
Non-interest bearing deposits............. 3,632 5,766 133 8,015 184
------ ------ ----- ------- -----
Total deposits............................ 26,290 60,729 1,396 85,002 1,953
Trading account liabilities............... 1,793 418 10 1,797 41
Acceptances .............................. 2,866 5,587 128 7,822 180
Long-term debt............................ 129 1,764 41 1,734 40
Other liabilities......................... 1,729 3,497 80 2,181 50
------ ------ ----- ------- -----
Total liabilities......................... 32,807 71,995 1,655 98,536 2,264
------ ------ ----- ------- -----
Stockholders' equity
Common stock.............................. 1,650 1,650 38 1,650 38
Additional paid in capital................ 375 375 9 375 9
Retained earnings......................... 430 756 17 1,564 36
Other comprehensive income................ 16 49 1 80 2
------ ------ ----- ------- -----
Total stockholders' equity................ 2,471 2,830 65 3,669 85
------ ------ ----- ------- -----
Total liabilities and stockholders'
equity.................................. 35,278 74,825 1,720 102,205 2,349
====== ====== ===== ======= =====
(1) Exchange rate : Rs43.51 = US$1.00
See accompanying notes to the financial statements.
F-3
ICICI Bank Limited
Statements of income
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
For the nine months
Year ended March 31, ended December 31,
-------------------------------------- --------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
---- ---- ---- ------- ---- ---- -------
(Unaudited)
(in millions, except per share data)
-----------------------------------------------------------------------
Rs Rs Rs USD Rs Rs USD
Interest revenue
Loans, including fees......................... 1,341 1,499 2,707 62 1,853 3,080 71
Securities, including dividend................ 421 148 305 7 209 525 12
Trading account assets, including dividend.... - 865 2,247 52 1,618 2,079 48
Other......................................... 81 67 131 3 78 153 3
----- ----- ----- ----- ----- ----- -----
Total interest revenue........................ 1,843 2,579 5,390 124 3,758 5,837 134
----- ----- ----- ----- ----- ----- -----
Interest expense
Deposits...................................... 972 1,618 3,707 85 2,609 4,172 96
Long term debt................................ 13 16 155 4 102 184 4
Trading account liabilities................... 159 216 256 6 215 367 9
Other......................................... 26 4 126 3 36 60 1
----- ----- ----- ----- ----- ----- -----
Total interest expense........................ 1,170 1,854 4,244 98 2,962 4,783 110
----- ----- ----- ----- ----- ----- -----
Net interest revenue.......................... 673 725 1,146 26 796 1,054 24
Provision for credit losses................... 187 360 540 12 398 218 5
----- ----- ----- ----- ----- ----- -----
Net interest revenue after provision for
credit losses .............................. 486 365 606 14 398 836 19
Non-interest revenue, net
Fees, commission and brokerage................ 149 240 370 9 261 408 9
Trading account revenue....................... - 147 134 3 11 698 16
Securities transactions....................... 80 32 21 - 22 70 2
Foreign exchange transactions................. 86 171 341 8 257 167 4
Other ........................................ 2 1 - - - - -
----- ----- ----- ----- ----- ----- -----
Net revenue................................... 803 956 1,472 34 949 2,179 50
----- ----- ----- ----- ----- ----- -----
Non-interest expense
Salaries...................................... 55 116 172 4 100 158 4
Employee Benefits............................. 12 21 32 1 30 48 1
----- ----- ----- ----- ----- ----- -----
Total Employee expenses....................... 67 137 204 5 130 206 5
Premise and equipment expense................. 116 162 232 5 186 222 5
Administration and other expense.............. 223 255 363 8 201 422 9
----- ----- ----- ----- ----- ----- -----
Total non-interest expense.................... 406 554 799 18 517 850 19
----- ----- ----- ----- ----- ----- -----
Income before taxes........................... 397 402 673 16 432 1,329 31
Income tax expense............................ 155 104 170 4 112 303 7
----- ----- ----- ----- ----- ----- -----
Net income ................................... 242 298 503 12 320 1,026 24
===== ===== ===== ===== ===== ===== =====
Earnings per share
Basic and diluted ............................ 1.61 1.84 3.05 0.07 1.94 6.22 0.15
Weighted average number of common shares (in
millions) used for computing earnings per
share......................................... 150 162 165 165 165 165 165
(1) Exchange rate : Rs 43.51 = US$1.00
See accompanying notes to the financial statements.
F-4
ICICI Bank Limited
Statements of changes in stockholders' equity
for the years ended March 31, 1997, 1998 and 1999 and nine months ended
December 31, 1999 (Unaudited)
For the nine months
Year ended March 31, ended December 31,
-------------------- ------------------
1997 1998 1999 1999(1) 1999 1999(1)
---- ---- ---- ------- ---- -------
(Unaudited)
(in millions)
--------------------------------------------------------------------
Rs Rs Rs USD Rs USD
Common stock
Balance, beginning of period................. 1,500 1,500 1,650 38 1,650 38
Common stock issued to parent company........ - 150 - - - -
----- ----- ----- ----- ----- -----
Balance, end of period....................... 1,500 1,650 1,650 38 1,650 38
----- ----- ----- ----- ----- -----
Additional paid in capital
Balance, beginning of period................. - - 375 9 375 9
Common stock issued to parent company........ - 375 - - - -
----- ----- ----- ----- ----- -----
Balance, end of period....................... - 375 375 9 375 9
----- ----- ----- ----- ----- -----
Retained earnings
Balance, beginning of period................. 158 283 431 10 756 17
Net income................................... 242 298 503 12 1,026 24
Dividend declared on common stock ........... (117) (150) (178) (5) (218) (5)
----- ----- ----- ----- ----- -----
Balance, end of period....................... 283 431 756 17 1,564 36
----- ----- ----- ----- ----- -----
Other comprehensive income
Balance, beginning of period................. (66) (33) 15 - 49 1
Unrealized gain on securities, net........... 33 48 34 1 31 1
----- ----- ----- ----- ----- -----
Balance, end of period....................... (33) 15 49 1 80 2
----- ----- ----- ----- ----- -----
Total stockholders' equity
Balance, beginning of period................. 1,592 1,750 2,471 57 2,830 65
Common stock issued to parent company........ - 525 - - - -
Net income................................... 242 298 503 12 1,026 24
Dividend declared on common stock............ (117) (150) (178) (5) (218) (5)
Unrealized gain on securities, net........... 33 48 34 1 31 1
----- ----- ----- ----- ----- -----
Balance, end of period....................... 1,750 2,471 2,830 65 3,669 85
----- ----- ----- ----- ----- -----
Statement of comprehensive income
For the nine months
Year ended March 31, ended December 31,
-------------------- ------------------
1997 1998 1999 1999(1) 1999 1999(1)
---------- -------- ------- -------- --------- --------
(Unaudited)
(in millions)
--------------------------------------------------------------------
Rs Rs Rs USD Rs USD
Net income................................... 242 298 503 12 1,026 24
Other comprehensive income, net of tax
Unrealized gains on securities............... 33 48 34 1 31 1
----- ----- ----- ----- ----- -----
Comprehensive income......................... 275 346 537 13 1,057 25
----- ----- ----- ----- ----- -----
(1) Exchange rate : Rs 43.51 = US$1.00
See accompanying notes to the financial statements.
F-5
ICICI Bank Limited
Statements of cash flows
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
For the nine months
Year ended March 31, ended December 31,
----------------------------------------- --------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
---- ---- ---- ------- ---- ---- -------
(Unaudited)
(in millions)
-------------------------------------------------------------------
Rs Rs Rs USD Rs Rs USD
Cash flows from operating activities
Net income......................................... 242 298 503 12 320 1,026 24
Adjustments to reconcile net income to net cash
from operating activities:
Provision for credit losses........................ 187 360 540 12 398 218 5
Depreciation and amortization ..................... 65 148 163 4 148 163 4
Provision for deferred taxes ...................... 22 (99) (130) (3) (79) 36 1
Unrealized (gain)/loss on trading securities....... - 127 (23) (1) 76 (334) (8)
Net gain on sale of securities,
available for sale .............................. (80) (32) (21) - (22) (70) (2)
Change in assets and liabilities
Other assets....................................... (87) (301) (914) (21) (1,316) (1,528) (35)
Other liabilities.................................. 561 727 1,898 44 421 (1,315) (30)
Trading account assets............................. (3) (7,511) (8,412) (194) (4,288) (12,450) (286)
Trading account liabilities........................ (1,166) 952 (1,375) (32) 414 1,378 32
------- ------ ------- ------ ------- ------- ------
Net cash used in operating activities.............. (259) (5,331) (7,771) (179) (3,928) (12,876) (295)
------- ------ ------- ------ ------- ------- ------
Cash flows from investing activities
Securities, available for sale
Purchases.......................................... (2,992) (142) (3,610) (83) (2,221) (3,020) (70)
Proceeds from sales................................ 1,178 2,609 1,103 25 590 2,611 60
Net increase in loans.............................. (1,704) (4,751) (15,373) (353) (8,513) (10,369) (239)
Capital expenditure on property and equipment...... (396) (985) (487) (11) (295) (267) (6)
Proceeds from sale of property and equipment...... - 1 1 - - - -
------- ------ ------- ------ ------- ------- ------
Net cash used in investing activities.............. (3,914) (3,268) (18,366) (422) (10,439) (11,045) (255)
======= ====== ======= ====== ======= ======= ======
(1) Exchange rate : Rs 43.51 = US$1.00
See accompanying notes to the financial statements.
F-6
ICICI Bank Limited
Statements of cash flows
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
For the nine months
Year ended March 31, ended December 31,
------------------------------------- -------------------------
1997 1998 1999 1999(1) 1998 1999 1999(1)
---- ---- ---- ------- ---- ---- -------
(Unaudited)
(in millions)
---------------------------------------------------------------
Rs Rs Rs USD Rs Rs USD
Cash flows from financing activities
Net increase in deposits................................. 6,176 12,813 34,439 792 20,133 24,271 558
Proceeds from issuance of long term debt................. 7 40 1,636 38 981 - -
Maturity and redemption of long term debt................ - - - - - (30) (1)
Proceeds from issuance of common stock to parent company. - 525 - - - - -
Payment of dividend...................................... (117) (150) (178) (5) (178) (218) (5)
----- ------ ------ --- ------ ------ ---
Net cash from financing activities....................... 6,066 13,228 35,897 825 20,936 24,023 552
===== ====== ====== === ====== ====== ===
Net increase in cash and cash equivalents................ 1,893 4,629 9,760 224 6,569 102 2
Cash and cash equivalents at beginning of period......... 2,206 4,099 8,728 201 8,728 18,488 425
----- ------ ------ --- ------ ------ ---
Cash and cash equivalents at end of the period........... 4,099 8,728 18,488 425 15,297 18,590 427
===== ===== ====== === ====== ====== ===
(1) Exchange rate : Rs 43.51 = US$1.00
See accompanying notes to the financial statements.
F-7
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended
December 31, 1998 (Unaudited) and 1999 (Unaudited)
1 Significant accounting policies
1.1 Basis of presentation
1.1.1 ICICI Banking Corporation Limited incorporated in Vadodara, India
provides a wide range of banking and financial services including
commercial lending, trade finance and treasury products. The name of
ICICI Banking Corporation Limited was changed to ICICI Bank Limited
("ICICI Bank") on September 10, 1999. ICICI Bank is a banking company
governed by the Banking Regulations Act, 1949. ICICI Bank is a 74.25%
owned subsidiary of ICICI Limited ("the parent company"), a leading
financial institution in India. ICICI Bank does not have any majority
owned subsidiaries or investments where its shareholding exceeds 20% of
the voting stock of the investee.
1.1.2 The accounting and reporting policies of ICICI Bank used in the
preparation of these financial statements reflect industry practices
and conform to generally accepted accounting principles in the United
States of America ("US GAAP"). The preparation of financial statements
in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities
at the date of the financial statements and the reported income and
expenses during the reporting period. Management believes that the
estimates used in the preparation of the financial statements are
prudent and reasonable. Actual results could differ from these
estimates.
1.1.3 The accompanying financial statements have been prepared in Indian
rupees ("Rs"), the national currency of India. Solely for the
convenience of the reader, the financial statements at and for the year
ended March 31, 1999 and at and for the nine months period ended
December 31, 1999 have been translated into US dollars, at the noon
buying rate in New York city at December 31, 1999 for the cable
transfers in rupees, as certified for customs purposes by the Federal
Reserve of New York of US$1.00 = Rs 43.51. No representation is made
that the rupee amounts have been, could have been or could be converted
into US dollars at such rate or any other rate on March 31, 1999 and
December 31, 1999 or at any other certain date.
1.2 Revenue recognition
1.2.1 Interest income is accounted on an accrual basis except in respect of
impaired loans, where it is recognized on a cash basis.
1.2.2 Income from leasing operations is accrued in a manner to provide a
fixed rate of return on outstanding investments.
1.2.3 Discount on bills is recognized on a straight line basis over the
tenure of the bills.
1.2.4 Fees from non-fund based activities such as guarantees and letters of
credit are amortized over the contractual period of the commitment.
1.3 Cash and cash equivalents
1.3.1 ICICI Bank considers all highly liquid investments, which are readily
convertible into cash and have contractual maturities of three months
or less from the date of purchase, to be cash equivalents. The carrying
value of cash equivalents approximates fair value.
F-9
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
1.4 Securities and trading account activities
1.4.1 ICICI Bank has adopted the Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". SFAS No. 115 requires that investments in debt and
equity securities be reported at fair value, except for debt securities
classified as held-to-maturity securities, which are reported at
amortized cost. Equity securities and debt securities available for
sale are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of
applicable income taxes. Realized gains and losses on sale of
securities are included in earnings on a weighted average cost basis.
1.4.2 Any "other than temporary diminution" in the value of held to maturity
or securities, available for sale is charged to the income statement.
"Other than temporary diminution" is identified based on management's
evaluation.
1.4.3 Trading account assets include securities held for the purpose of sale
in the short term. These securities are valued at fair value, with the
unrealized gains/losses being taken to trading account revenue. Trading
account activities also include foreign exchange products. Foreign
exchange trading positions are valued at prevailing market rates on the
date of the balance sheet and the resulting gains/losses are included
in foreign exchange revenue.
1.5 Loans
1.5.1 Loans are reported at the principal amount outstanding, inclusive of
interest accrued and due pursuant to the contractual terms. Loan
origination fees (net of loan origination costs) are deferred and
recognized as an adjustment to yield over the period of the loan.
Interest is accrued on the unpaid principal balance and is included in
interest income.
1.5.2 Loans are identified as impaired and placed on a non-accrual basis,
when it is determined that payment of interest or principal is doubtful
of collection or that interest or principal is past due beyond specific
periods. Such loans are classified as non-performing. Any interest
accrued (and not received) on impaired loans is reversed and charged
against current earnings, and interest is thereafter included in
earnings only to the extent actually received in cash. Non-performing
loans are returned to an accrual status when all contractual principal
and interest amounts are reasonably assured of repayment and there is a
sustained period of repayment performance in accordance with the
contractual terms.
1.5.3 Non-performing loans are reported after considering the impact of
"non-performance". Non-performance is measured by comparing the
carrying amount of the loan with the present value of the expected
future cash flows/fair value of the collateral, discounted at the
effective rate of the loan. In cases of default wherein ICICI Bank does
not have adequate security and/or the borrower is not traceable and
legal recourse is not expected to result in recovery, ICICI Bank writes
off all or part of the carrying value of the loan.
1.5.4 Loans include aggregate rentals on lease financing transactions and
residual values, net of related unearned income and security deposit
collected from the lessee. Substantially all of the lease financing
transactions represent direct financing leases. Unearned income is
amortized under a method which primarily results in an approximate
level rate of return when related to the unrecovered lease investment.
Income on non-performing leases is recognised on the same basis as
non-performing loans.
F-9
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
1.5.5 Loans further include credit substitutes, such as privately
placed/negotiated debt instruments and preferred shares, which are not
readily marketable.
1.6 Aggregate allowance for credit losses
1.6.1 ICICI Bank evaluates its entire credit portfolio on a periodic basis
and grades its accounts considering both qualitative and quantitative
criteria. This analysis includes an account by account analysis of the
entire loan portfolio, and an allowance is made for any probable loss
on each account. In evaluating its credit losses, management has
estimated recovery of such loans at various stages of time to recovery
and has discounted these using the effective interest rate of the
loans. In estimating recovery, ICICI Bank considers its past credit
loss experience and such other factors, which in its judgement, deserve
recognition in estimating probable credit losses. Actual recovery may
differ from estimates and consequently actual loss could differ from
the estimated loss. The aggregate allowance for credit losses is
increased by amounts charged to the provisions for credit losses, net
of write-offs and releases of provisions as a result of cash
collections.
1.7 Property and equipment
1.7.1 Property and equipment are stated at cost, less accumulated
depreciation. The cost of additions, capital improvements and interest
during the construction period are capitalized, while repairs and
maintenance are charged to expenses when incurred.
1.7.2 Depreciation is provided over the estimated useful lives of the assets.
1.7.3 The cost and accumulated depreciation for property and equipment sold,
retired or otherwise disposed of are relieved from the accounts, and
the resulting gains/losses are reflected in the income statement.
1.7.4 Property under construction and advances paid towards acquisition of
property, plant and equipment are disclosed as capital work in
progress.
1.8 Interest capitalization
1.8.1 The interest cost incurred for funding an asset during its construction
period is capitalized based on the actual outstanding investment in the
asset from the date of purchase/expenditure and the average cost of
funds. The capitalized interest cost is included in the cost of the
relevant asset and is depreciated over the asset's estimated useful
life.
1.9 Income taxes
1.9.1 Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss carry forwards. Deferred tax
assets are recognized subject to management's judgement that
realization is more likely than not. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected
to be received and settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the income
statement in the period of change.
F-10
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
1.10 Retirement benefits
Gratuity
1.10.1 In accordance with Indian law, ICICI Bank provides for a gratuity to
its employees in the form of a defined benefit retirement plan covering
all employees. The plan provides a lump sum payment to vested employees
at retirement, on death while in employment or on termination of
employment based on the respective employee's salary and the years of
employment with ICICI Bank. The gratuity benefit conferred by ICICI
Bank on its employees is equal to or greater than the statutory
minimum.
1.10.2 ICICI Bank provides the gratuity benefit through annual contributions
to a fund administered by trustees and managed by the Life Insurance
Corporation of India. Under this scheme, the Life Insurance Corporation
of India assumes the obligation to settle the gratuity payment to ICICI
Bank's employees. ICICI Bank contributed Rs 2 million, Rs 3 million and
Rs 5 million to the gratuity fund in fiscal 1997, 1998 and 1999
respectively. The contribution, including provision, for nine months
ended December 31, 1998 and 1999 was Rs 3 million and Rs 4 million
respectively.
Superannuation
1.10.3 The permanent employees of ICICI Bank are entitled to receive
retirement benefits under the superannuation fund operated by ICICI
Bank. The Superannuation fund is a defined contribution plan under
which ICICI Bank contributes annually a sum equivalent to 15% of the
employee's eligible annual salary to Life Insurance Corporation of
India the manager of the fund, that undertakes to pay the lump sum and
annuity payments pursuant to the scheme. ICICI Bank contributed Rs 5
million, Rs 10 million and Rs 12 million to the superannuation plan in
fiscal 1997, 1998 and 1999 respectively. The contribution, including
provision, for nine months ended December 31, 1998 and 1999 was Rs 11
million and Rs 17 million respectively.
Provident fund
1.10.4 In accordance with Indian law, all employees of ICICI Bank are entitled
to receive benefits under the provident fund, a defined contribution
plan in which both the employee and ICICI Bank contribute monthly at a
determined rate (currently 12% of employees' salary). These
contributions are made to a fund set up by ICICI Bank and administered
by a board of trustees. ICICI Bank contributed Rs 4 million, Rs 7
million and Rs 11 million, Rs 7 million and Rs 11 million to the
provident fund in fiscal 1997, 1998 and 1999 and nine months ended
December 31, 1998 and 1999, respectively. Further, in the event the
return on the fund is lower than 12% (current guaranteed rate of return
to the employees), such difference will be contributed by ICICI Bank
and charged to income.
Leave encashment
1.10.5 The liability for leave encashment on retirement or on termination of
services of the employee of ICICI Bank is valued on the basis of the
employee's last drawn salary and provided for. Accordingly ICICI Bank
has made a provision of Rs 1 million, Rs 1 million, Rs 4 million, Rs 3
million and Rs 6 million for fiscal 1997, 1998, 1999, and nine months
ended December 31 1998 and 1999 respectively.
F-11
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
1.11 Foreign currency transactions
1.11.1 Revenue and expenses in foreign currency are accounted at the exchange
rate on the date of the transaction. Foreign currency balances at
year-end are translated at the year-end exchange rates and the
revaluation gains/losses are adjusted through the income statement.
1.11.2 Foreign exchange contracts are revalued at year-end based on forward
exchange rates for residual maturities and the revaluation gain/loss is
adjusted through the income statement. Foreign exchange contracts, that
are accounted for as hedges of foreign currency exposures, are revalued
at the year-end spot rates with any forward premium or discount
recognized over the life of the contracts.
1.12 Derivative instruments
1.12.1 ICICI Bank enters into currency swaps with its corporate clients which
it hedges with the parent company. These swap contracts are designated
as hedge transactions and accounted for under accrual method.
1.12.2 Foreign exchange contracts designated as hedges have been accounted for
as hedge transactions and the premium/discount has been amortized over
the period of the contract.
1.12.3 The Bank has entered into interest rate swap contracts for its own
balance sheet management purposes as well as for taking trading
positions. The contracts which have been entered into for its balance
sheet management purposes have been designated as hedge transactions
and accounted for under the accrual method. The contracts entered into
for trading purposes have been designated as 'Traded Contracts' and
have been accounted at their fair value.
1.13 Debt issuance costs
1.13.1 Debt issuance costs are amortized over the tenure of the debt.
1.14 Dividends
1.14.1 Dividends on common stock and the related dividend tax are recorded as
a liability at the point of their approval by the board of directors.
1.15 Earnings per share
1.15.1 Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share is computed by adjusting outstanding shares
assuming conversion of all potentially dilutive stock options and other
convertible securities.
1.16 Interim information (Unaudited)
1.16.1 The interim information presented in the financial statements have been
prepared by management without audit and, in the opinion of the
management, includes all adjustments of a normal recurring nature that
are necessary for the fair presentation of financial position, results
of operations, and cash flows for the periods shown, in accordance with
generally accepted accounting principles.
F-12
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
2 Financial instruments
2.1.1 ICICI Bank provides a wide variety of financial instruments as products
to its customers, and it also uses these instruments in connection with
its own activities. Following are explanatory notes regarding financial
assets and liabilities, off-balance sheet financial instruments,
concentration of credit risk and the estimated fair value of financial
instruments.
2.1.2 Collateral requirements are assessed on a case-by-case evaluation of
each customer and product, and may include cash, securities,
receivables, property, plant and equipment and other assets.
2.2 Financial assets and liabilities
Cash and cash equivalents
2.2.1 Cash and cash equivalents at December 31, 1999 include a balance of Rs
4,307 million (March 31, 1999: Rs 4,565 million and March 31, 1998: Rs
3,031 million) maintained with the Reserve Bank of India being the
minimum daily stipulated amount to be maintained. This balance is
subject to withdrawal and usage restrictions.
2.2.2 Cash and cash equivalents at December 31, 1999 also includes,
interest-bearing deposits with banks aggregating Rs 12,269 million
(March 31, 1999: Rs 11,083 million and March 31 1998: Rs 5,211
million).
Trading account assets
2.2.3 A listing of the trading account assets is set out below:
At March 31, At December 31,
----------------------- ---------------
1998 1999 1999
----------- ------- ---------
(Unaudited)
(in Rs millions)
----------------------------------------
Government of India securities ................................ 6,987 14,449 28,100
Equity securities.............................................. 101 198 165
Revaluation gains on derivative
and foreign exchange contracts................................ 77 425 341
Commercial paper /certificates of deposits...................... 222 750 -
----- ------ ------
Total........................................................... 7,387 15,822 28,606
===== ====== ======
2.2.4 In accordance with the Banking Regulation Act, 1949, ICICI Bank is
required to maintain a specified percentage of its net demand and time
liabilities by way of liquid unencumbered assets like cash, gold and
approved securities. The amount of securities required to be maintained
at December 31, 1999 was Rs 18,271 million (March 31, 1999: Rs 12,875
million and March 31, 1998: Rs 6,499 million).
F-13
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Trading account revenue
2.2.5 A listing of trading account revenue is set out below:
Nine months ended
Year ended March 31, December 31,
---------------------------- ---------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
--------------------------------------------------
Gain on sale of trading securities.............. - 274 111 87 364
Revaluation gain/(loss) on trading securities... - (127) 23 (76) 334
---- ---- --- --- ---
Total ......................... - 147 134 11 698
==== ==== === == ===
Repurchase transactions
2.2.6 During the period under review, ICICI Bank has undertaken repurchase
and reverse repurchase transactions in Government of India securities.
The average level of repurchase outstandings during fiscal 1998, fiscal
1999 and nine months ended 31 December 1999 was Rs 160 million, Rs 417
million and Rs 299 million, respectively. The average level of reverse
repurchase transactions outstanding during fiscal 1998, fiscal 1999 and
nine months ended December 31, 1999 was Rs 299 million, Rs 211 million
and Rs 91 million, respectively. At 31 December 1999 outstanding
repurchase and outstanding reverse repurchase contracts amounts to Nil
and Rs 8,015 million respectively. At March 31, 1998 and March 31, 1999
ICICI Bank had no outstanding repurchase or reverse repurchase
contracts.
Securities, available for sale
2.2.7 The portfolio of securities, available for sale is set out below:
At March 31, 1998
-----------------------------------------------------
(in Rs millions)
-----------------------------------------------------
Amortized Gross Gross Fair
cost unrealized unrealized Value
gain loss
(in Rs millions)
-----------------------------------------------------
Corporate debt securities....................... 1,117 33 (14) 1,136
Government of India securities.................. 59 1 - 60
----- -- --- -----
Total debt securities........................... 1,176 34 (14) 1,196
Mutual fund units............................... 280 - - 280
----- -- --- -----
Total securities, available for sale ........... 1,456 34 (14) 1,476
===== == === =====
At March 31, 1999
-----------------------------------------------------
Amortized Gross Gross Fair
cost unrealized unrealized Value
gain loss
(in Rs millions)
-----------------------------------------------------
Corporate debt securities....................... 2,860 - - 2,860
Government of India securities.................. 775 50 - 825
----- -- ---- -----
Total debt securities........................... 3,635 50 - 3,685
Mutual fund units............................... 266 12 - 278
----- -- ---- -----
Total securities, available for sale ............ 3,901 62 - 3,963
===== == ==== =====
F-14
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
At December 31, 1999
-----------------------------------------------------
(Unaudited)
Amortized Gross Gross Fair
cost unrealized unrealized Value
gain loss
(in Rs millions)
-----------------------------------------------------
Corporate debt securities...................... 2,218 45 - 2,263
Government of India securities................. 916 75 - 991
----- --- -- -----
Total debt securities.......................... 3,134 120 - 3,254
Mutual fund units.............................. 1,158 - 10 1,148
----- --- -- -----
Total securities available for sale ........... 4,292 120 10 4,402
===== === == =====
Income from securities, available for sale
2.2.8 A listing of interest and dividends on securities, available for sale
and net gains from sale of such securities is set out below:
For the nine months
Year ended March 31, ended December 31,
-------------------------- -------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
-----------------------------------------------------
Interest...................................... 419 129 248 165 285
Dividends .................................... 2 19 57 44 240
--- --- --- --- ---
Total interest, including dividends........... 421 148 305 209 525
=== === === === ===
Maturity profile of debt securities
2.2.9 A listing of debt securities of securities, available for sale at March
31, 1999 and December 31, 1999 by original contractual maturity is set
out below:
March 31, 1999 December 31, 1999
-------------- -----------------
Amortized Fair Amortized Fair
cost Value cost Value
---- ----- ---- -----
(in Rs millions)
------------------------------------------------
Corporate debt securities (Unaudited)
Less than one year............................ 266 266 263 263
One to five years............................. 1,894 1,894 1,467 1,492
Five to 10 years.............................. 700 700 488 508
----- ----- ----- -----
Total......................................... 2,860 2,860 2,218 2,263
===== ===== ===== =====
F-15
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Loans
2.2.10 A listing of loans by category is set out below:
At March 31, At December 31,
------------------------- ----------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
---------------------------------------------
Corporate
Working capital finance......................... 9,256 17,508 26,005
Term loans...................................... 1,462 2,731 3,237
Credit substitutes.............................. 1,424 6,762 8,471
Leasing and related activities.................. 458 366 339
Retail loans ........................ .......... 590 1,110 780
------ ------ ------
Gross loans..................................... 13,190 28,477 38,832
Aggregate allowance for credit losses........... (425) (880) (1,083)
------ ------ ------
Net loans....................................... 12,765 27,597 37,749
====== ====== ======
2.2.11 Loans given to persons domiciled outside India at December 31, 1999
were Rs 240 million (March 31, 1999: Rs 91.2 million and March 31,
1998: nil).
2.2.12 Normally, the working capital advances are secured by a first lien on
current assets, principally comprising inventory and receivables.
Additionally, in certain cases ICICI Bank may obtain additional
security through a first or second lien on property and equipment, a
pledge of financial assets like marketable securities and
corporate/personal guarantees. The term loans are normally secured by a
first lien on the property and equipment and other tangible assets of
the borrower.
Net investment in leasing activities
2.2.13 Contractual maturities of ICICI Bank's net investment in leasing
activities and its components, which are included in loans, are set out
below:
At March 31,
-------------------------
1998 1999
---- ----
(in Rs millions)
-------------------------
Gross finance receivable for the year ended/ending March 31
1999.............................................................. 150 -
2000.............................................................. 138 162
2001.............................................................. 139 121
2002.............................................................. 112 128
2003 and beyond................................................... 74 88
--- ---
613 499
Less: Unearned income............................................. (106) (84)
Security deposits....................................... (49) (49)
--- ---
Investment in leasing and other receivables....................... 458 366
Less: Aggregate allowance for credit losses....................... - (144)
--- ---
Net investment in leasing and other receivables..................... 458 222
=== ===
F-16
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
At December 31,
-----------------
1999
-----------------
(Unaudited)
(in Rs millions)
-----------------
Gross finance receivable for
Three months ending March 31, 2000 111
Year ending March 31,
2001.................................................... 108
2002.................................................... 128
2003 ................................................... 47
2004.................................................... 40
2004 beyond ............................................ 26
----
460
Less: Unearned income................................... (75)
Security deposits............................. (46)
----
Investment in leasing and other receivables............. 339
Less: Aggregate allowance for credit losses............. (155)
----
Net investment in leasing and other receivables......... 184
====
Maturity profile of loans
2.2.14 A listing of each category of loan other than net investment in leasing
and other receivables, by maturity is set out below:
March 31, 1999
--------------
Up to 1 Year 1-5 years More than Total
5 years
------------- --------- ---------- ------
(in Rs millions)
-------------------------------------------------
Term loan........................ 784 1,736 211 2,731
Working capital finance.......... 15,240 2,268 - 17,508
Credit substitutes............... - 5,744 1,018 6,762
Retail loans..................... 1,110 - - 1,110
------ ----- ----- ------
Total............................ 17,134 9,748 1,229 28,111
====== ===== ===== ======
December 31, 1999 (Unaudited)
-------------------------------------------------
Up to 1 Year 1-5 years More than Total
5 years
------------- --------- ---------- ------
(in Rs millions)
-------------------------------------------------
Term loan........................ 913 2,117 207 3,237
Working capital finance.......... 10,961 15,044 - 26,005
Credit substitutes............... 1,754 3,909 2,808 8,471
Retail loans..................... 780 - - 780
------ ------ ----- ------
Total............................ 14,408 21,070 3,015 38,493
====== ====== ===== ======
F-17
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Interest and fees on loans
2.2.15 A listing of interest and fees on loans (net of unearned income) is set
out below:
Year ended March 31, For the nine months ended
----------------------------------- --------------------------
December 31,
------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
-----------------------------------------------------------------
Working capital finance ............. 1,056 1,136 1,755 1,235 1,795
Term loan ........................... 184 176 338 228 339
Credit substitutes .................. 17 74 465 295 707
Leasing and related activities ...... 35 38 21 25 12
Retail loans ........................ 49 75 128 70 227
----- ----- ----- ----- -----
Total 1,341 1,499 2,707 1,853 3,080
===== ===== ===== ===== =====
Non-performing loans
2.2.16 A listing of non-performing loans is set out below:
At March 31, At December 31,
------------------------- ---------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
--------------------------------------------
Working capital finance 558 1,158 1,408
Term loan 46 236 245
Credit substitutes - 75 75
Leasing and related activities - 144 237
----- ----- -----
Total 604 1,613 1,965
Allowance for credit losses (425) (880) (1083)
----- ----- -----
Impaired loans net of valuation allowance 179 733 882
===== ===== =====
Loans without valuation allowance 26 466 467
Loans with valuation allowance 578 1,147 1,498
----- ----- -----
Total 604 1,613 1,965
===== ===== =====
Interest foregone on non-performing assets 81 93 74
Average non-performing loans 559 1,343 1,827
F-18
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Changes in the allowance for credit losses
2.2.17 A listing of the changes in allowance for credit losses is set out
below:
Year ended March 31, For the nine months
---------------------- ended December 31,
---------------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
-----------------------------------------------
Aggregate allowance for credit losses at
beginning of the year/period ......................... 187 425 880
Additions
Provisions for credit losses, net of release
of provisions as a result of cash collections ........ 360 540 218
----- ----- -----
547 965 1,098
Write offs ............................................... (122) (85) (15)
----- ----- -----
Aggregate allowance for credit losses at end of the
year/period ........................................... 425 880 1,083
===== ===== =====
Troubled debt restructuring
2.2.18 Loans at December 31, 1999 include loans aggregating Rs 44 million
(March 31, 1999: Rs 38 million and March 31, 1998: nil), which are
currently under a scheme of debt restructuring and which have been
identified as impaired loans. The gross recorded investment in these
loans is Rs 44 million (March 31, 1999: Rs 38 million and March 31,
1998: nil) against which an allowance for credit losses aggregating Rs
26 million (March 31, 1999: Rs 22 million and March 31, 1998: nil) has
been established.
2.2.19 There are no commitments to lend incremental funds to any borrower who
is party to a troubled debt restructuring.
Concentration of credit risk
2.2.20 Concentrations of credit risk exist when changes in economic, industry
or geographic factors similarly affect groups of counterparties whose
aggregate credit exposure is material in relation to ICICI Bank's total
credit exposure. ICICI Bank's portfolio of financial instruments is
broadly diversified along industry, product and geographic lines within
the country.
F-19
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
2.2.21 A listing of the concentration of loan exposures by industry is set out
below:
At March 31, At December 31,
------------------------------------------ ------------------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs % (in Rs % (in Rs %
millions) millions) millions)
----------- ----------- ------------
Light manufacturing ................ 1,300 9.86 2,800 9.83 4,528 11.66
Chemical, Paints and Pharmaceuticals 1,092 8.28 2,420 8.50 4,221 10.87
Finance ............................ 780 5.91 1,949 6.84 2,700 6.95
Transport .......................... 360 2.73 159 0.56 111 0.29
Electricity ........................ 540 4.09 1,488 5.23 1,645 4.24
Textiles ........................... 1,170 8.87 1,405 4.93 1,375 3.54
Metal and metal products ........... 330 2.50 1,370 4.81 1,120 2.88
Automobile ......................... 600 4.55 1,006 3.53 1,518 3.91
Construction ....................... 770 5.84 740 2.60 940 2.42
Iron and steel ..................... 460 3.49 620 2.18 715 1.84
Cement ............................. 170 1.29 540 1.90 1,060 2.73
Software ........................... 230 1.74 460 1.62 650 1.67
Agriculture ........................ 501 3.80 675 2.37 1,912 4.92
Personal loans ..................... 590 4.47 1,110 3.90 780 2.01
Paper and paper products ........... 240 1.82 373 1.30 663 1.71
Other industries ................... 4,057 30.76 11,362 39.90 14,894 38.36
------ ------ ------ ----- ------ ------
Total 13,190 100.00 28,477 100.00 38,832 100.00
====== ====== ====== ====== ====== ======
Unearned income
2.2.22 A listing of unearned income is set out below:
Year ended March 31, For the nine months
--------------------- ended December 31,
------------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
---------------------------------------------
Unearned income on leasing and other
receivable transactions ....................... 106 84 75
Unearned commission on guarantees ................ 38 73 104
Unearned income on letters of credit ............. 12 17 25
Unamortised loan origination fees ................ - - 14
F-20
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Deposits
2.2.23 Deposits include demand deposits, which are non-interest-bearing and
savings and time deposits, which are interest-bearing. A listing of
deposits is set out below:
At March 31, At December 31,
----------------------- ----------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
--------------------------------------------
Interest bearing
Savings deposits .............. 1,037 2,271 4,313
Time deposits.................. 21,621 52,692 72,674
------ ------ ------
22,658 54,963 76,987
Non-interest bearing
Demand deposits................ 3,632 5,766 8,015
------ ------ ------
Total.......................... 26,290 60,729 85,002
====== ====== ======
2.2.24 At December 31, 1999, term deposits of Rs 67,522 million (March 31,
1999: Rs 48,720 milion and March 31, 1998: Rs 18,560 million) have a
residual maturity of less than one year. The balance of the deposits
mature between one to seven years.
Trading account liabilities
2.2.25 Trading account liabilities at December 31, 1999 include borrowings
from banks in the inter-bank call money market of Rs 1,318 million
(March 31, 1999: Rs 418 million and March 31, 1998: Rs 293 million) and
short term borrowings from other institutions and agencies of Rs 479
million (March 31, 1999: Rs nil and March 31, 1998: Rs 1,500 million).
Long-term debt
2.2.26 Long-term debt represent debt with an original maturity of greater than
one year. Long term debt bears interest at a fixed contractual rate
ranging from 12.5% to 17%. A listing of long-term debt by residual
maturity is set out below:
At March 31, 1999 At December 31, 1999
--------------------- ----------------------
Unaudited
(in Rs millions) % (in Rs millions) %
------------------- ----------------
Residual maturity
One year to five years................... 1,084 62 1,054 61
Five years to 10 years................... 680 38 680 39
----- --- ----- ---
Total ................................... 1,764 100 1,734 100
===== === ===== ===
2.2.27 Long term debt at December 31, 1999 includes unsecured non-convertible
subordinated debt of Rs 1,680 million (March 31, 1999: Rs 1,680 million
and March 31, 1998: nil).
F-20
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
2.3 Off-balance sheet financial instruments
Foreign exchange and derivative contracts
2.3.1 ICICI Bank enters into foreign exchange forward contracts and currency
swaps with interbank participants and customers. These transactions
enable customers to transfer, modify or reduce their foreign exchange
and interest rate risks.
2.3.2 Forward foreign exchange contracts are commitments to buy or sell
foreign currency at a future date at the contracted rate. Currency
swaps are commitments to exchange cash flows by way of interest in one
currency against another currency and exchange of notional principal
amount at maturity based on predetermined rates. Currency swaps offered
to customers are hedged by opposite contracts with the parent company
and are accounted for as hedge contracts.
2.3.3 The market and credit risk associated with these products, as well as
the operating risks, are similar to those relating to other types of
financial instruments. Market risk is the exposure created by movements
in interest rates and exchange rates, during the currency of the
transaction. The extent of market risk affecting such transactions
depends on the type and nature of the transaction, value of the
transaction and the extent to which the transaction is uncovered.
Credit risk is the exposure to loss in the event of default by
counterparties. The extent of loss on account of a counterparty default
will depend on the replacement value of the contract at the ongoing
market rates.
2.3.4 The following table presents the aggregate notional principal amounts
of ICICI Bank's outstanding foreign exchange and derivative contracts
at March 31, 1999 and at March 31, 1998, together with the related
balance sheet credit exposure.
Notional principal amounts Balance sheet credit exposure (Note 1)
At March 31, At December 31, At March 31, At December 31,
------------ --------------- ------------ ---------------
(Unaudited) (Unaudited)
1998 1999 1999 1998 1999 1999
---- ---- ---- ---- ---- ----
(in Rs millions)
-------------------------------------------------------------------------
Interest rate agreements
Swap agreements............... - - 900 - - -
------ ------ ------ -- --- ---
- - 900 - - -
Foreign exchange products
Forward contracts............. 23,528 36,705 49,591 77 425 341
Swap agreements............... - 2,962 7,658 - - -
------ ------ ------ -- --- ---
23,528 39,667 57,249 77 425 341
====== ====== ====== == === ===
Note 1: Balance sheet credit exposure denotes the mark-to-market impact of the
derivative and foreign exchange products on the reporting date.
Loan commitments
2.3.5 ICICI Bank has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs 18,091
million and Rs 11,643 million at December 31, 1999 and March 31, 1999
respectively (March 31, 1998: Rs 3,700 million). The interest rate on
these commitments is dependent on the lending rates on the date of the
loan disbursement. Further, the commitments have fixed expiry dates and
may be contingent upon the borrowers ability to maintain specific
credit standards.
F-22
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Guarantees
2.3.6 As a part of its commercial banking activities, ICICI Bank has issued
guarantees and letters of credit to enhance the credit standing of its
customers. These generally represent irrevocable assurances that ICICI
Bank will make payments in the event that the customer fails to fulfill
his financial or performance obligations. Financial guarantees are
obligations to pay a third party beneficiary where a customer fails to
make payment towards a specified financial obligation. Performance
guarantees are obligations to pay a third party beneficiary where a
customer fails to perform a non-financial contractual obligation. The
guarantees are generally for a period not exceeding 18 months.
2.3.7 The credit risk associated with these products, as well as the
operating risks, are similar to those relating to other types of
financial instruments. Fees are recognised over the term of the
facility.
2.3.8 Details of facilities outstanding are set out below:
At March 31, At December 31,
------------ ---------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
-----------------------------------------
Financial guarantees............. 1,636 2,733 3,730
Performance guarantees........... 1,010 1,897 2,993
----- ----- -----
Total ........................... 2,646 4,630 6,723
===== ===== =====
2.4 Estimated fair value of financial instruments
2.4.1 ICICI Bank's financial instruments include financial assets and
liabilities recorded on the balance sheet, as well as off-balance sheet
instruments such as foreign exchange and derivative contracts. A
listing of the fair value of these financial instruments is set out
below:
Carrying Estimated Estimated Carrying Estimated Estimated fair
value fair value fair value value fair value value in excess of
in excess of /(less than)
/(less than) carrying value
carrying
value
March 31,
---------
1998 1999
----------------------------------- ------------------------------------------
(in Rs millions)
-------------------------------------------------------------------------------------
Financial assets 35,278 35,201 (77) 74,825 74,742 (83)
Financial liabilities 32,807 32,960 153 71,995 72,397 402
Carrying Estimated Estimated fair
value fair value value in excess of
/(less than)
carrying value
December 31,
1999
(in Rs millions)
--------------------------------------------
(Unaudited)
Financial assets................ 102,205 102,094 (111)
Financial liabilities........... 98,536 99,354 818
F-23
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
2.4.2 Fair values vary from period to period based on changes in a wide range
of factors, including interest rates, credit quality, and market
perception of value and as existing assets and liabilities run off and
new items are generated.
2.4.3 A listing of the fair values by category of financial assets and
financial liabilities is set out below:
Particulars Carrying Estimated Estimated Carrying Estimated Estimated
value fair value fair value value fair value fair value in
in excess excess of
of /(less /(less than)
than) carrying value
carrying
value
March 31,
---------
1998 1999
---------------------------------- -----------------------------------
(in Rs millions)
-------------------------------------------------------------------------
Financial assets
Securities ..................... 1,476 1,476 - 3,963 3,963 -
Trading assets ................. 7,387 7,387 - 15,822 15,822 -
Loans (Note 1) ................. 12,765 12,688 (77) 27,597 27,514 (83)
Other financial
assets (Note 2) .............. 13,650 13,650 - 27,443 27,443 -
------ ------ ------ ------ ----
Total .......................... 35,278 35,201 (77) 74,825 74,742 (83)
====== ====== === ====== ====== ====
Financial liabilities
Interest-bearing deposits ...... 22,658 22,811 153 54,963 55,365 402
Non-interest-bearing deposits... 3,632 3,632 - 5,766 5,766 -
Trading account liabilities .... 1,793 1,793 - 418 418 -
Long-term debt ................. 129 129 - 1,764 1,764 -
Other financial liabilities
(Note 3) .................... 4,595 4,595 - 9,084 9,084 -
------ ------ ------ ------ ----
Total .......................... 32,807 32,960 153 71,995 72,397 402
====== ====== === ====== ====== ====
Derivatives
Currency swaps (Note 4) - - - - - 12
------ ------ ------ ------ ----
Particulars Carrying Estimated Estimated fair
value fair value value in excess
of /(less than)
carrying value
December 31,
1999
------------------------------------
(in Rs millions)
-----------------------------------------
(Unaudited)
Financial assets -
Securities ..................................... 4,402 4,402 -
Trading assets ................................. 28,606 28,606
Loans (Note 1) ................................. 37,749 37,638 (111)
Other financial assets (Note 2) ................ 31,448 31,448 -
------- ------- ----
Total .......................................... 102,205 102,094 (111)
======= ======= ====
Financial liabilities
Interest-bearing deposits ...................... 76,987 77,747 760
Non-interest-bearing deposits .................. 8,015 8,015 -
Trading account liabilities .................... 1,797 1,797 -
Long-term debt ................................. 1,734 1,792 58
Other financial liabilities (Note 3) ........... 10,003 10,003 -
------- ------- ----
Total .......................................... 98,536 99,354 818
====== ====== ===
Derivatives
Currency swaps (Note 4) ........................ - - 52
Interest rate swaps ............................ - - (10)
------- ------- ----
F-24
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Note 1: The carrying value of loans is net of allowance for credit
losses.
Note 2: Includes cash, due from banks, deposits at interest with
banks, short-term highly liquid securities, and customers
acceptance liability for which the carrying value is a
reasonable estimate of fair value.
Note 3: Represents acceptances and other liabilities outstanding, for
which the carrying value is a reasonable estimate of the fair
value.
Note 4: All customer positions are hedged by opposite contracts with
the parent company.
2.4.4 The above data represents management's best estimates based on a range
of methodologies and assumptions. Quoted market prices are used for
many securities. For performing loans, contractual cash flows are
discounted at current market origination rates for loans with similar
terms and risk characteristics. For impaired loans, the impairment is
considered while arriving at the fair value. For liabilities, market
borrowing rates of interest of similar instruments are used to discount
contractual cash flows.
2.4.5 The estimated fair value of loans, interest-bearing deposits and long
term debt reflects changes in market rates since the loans were given
and deposits were taken.
3 Property and equipment
3.1.1 Property and equipment are stated at cost less accumulated
depreciation. Generally, depreciation is computed over the estimated
useful life of the asset.
3.1.2 A listing of property and equipment by asset category is set out below:
At March 31, At December 31,
---------------------- ---------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
---------------------------------------
Land ....................................... 121 121 121
Building ................................... 927 977 1024
Equipment and furniture .................... 518 738 891
Capital work in progress ................... 32 308 401
----- ----- -----
Gross value of property and equipment ...... 1,598 2,144 2,437
Less: Accumulated depreciation ............ (235) (383) (535)
----- ----- -----
Net value of property and equipment ........ 1,363 1,761 1,902
===== ===== =====
3.1.3 Capital work in progress at December 31, 1999 include capital advances
of Rs 154 million (March 31, 1999: Rs 91 million and March 31, 1998: Rs
13 million). Interest capitalized for nine months ended December 31,
1999 is Rs 24 million (March 31, 1999: Rs 12 million and March 31,
1998: Rs 1 million).
3.1.4 Depreciation charges in fiscal 1997, 1998 and 1999 and nine months
ended December 31, 1998 and 1999 amounts to Rs 88 million, Rs 160
million and Rs 203 million, Rs 147 million and Rs 177 million,
respectively.
F-25
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
4 Other assets
4.1.1 Other assets at December 31, 1999 includes interest accrued of Rs 1,455
million (March 31, 1999: Rs 662 million and March 31, 1998: Rs 274
million), deposits in leased premises of Rs 171 million (March 31,
1999: Rs 157 million and March 31, 1998: Rs 130 million) and prepaid
expenses of Rs 8 million (March 31, 1999: Rs 18 million and March 31,
1998: Rs 7 million).
5 Other liabilities
5.1.1 Other liabilities at December 31, 1999 include accounts payable of Rs
524 million (March 31, 1999: Rs 1,121 million and March 31, 1998: 1,078
million) and interest accrued but not due on deposits amounting to Rs
377 million (March 31, 1999: Rs 235 million and March 31, 1998: Rs 176
million).
6 Common stock
6.1.1 At December 31, 1999, March 31, 1999 and March 31, 1998, the
authorized common stock was 300 million shares with a par value of Rs
3,000 million. At December 31, 1999 and March 31, 1999 and March 31,
1998, the issued common stock was 165 million shares with paid-up
values of Rs 1,650 million.
7 Restricted retained earnings
7.1.1 Retained earnings at December 31, 1999 and March 31, 1999 computed as
per generally accepted accounting principles of India include profits
aggregating to Rs 789 million (March 31, 1998: Rs 589 million) which
are not distributable as dividends under the Banking Regulation Act,
1949. These relate to requirements regarding earmarking a part of the
profits under banking laws. Utilization of these balances is subject
to approval of the Board of Directors and needs to be reported tothe
Reserve Bank of India. Statutes governing the operations of ICICI Bank
mandate that dividends be declared out of distributable profits only
after the transfer of at least 20% of net income, computed in
accordance with current banking regulations, to a statutory reserve.
Additionally, the remittance of dividends outside India is governed by
Indian statutes on foreign exchange transactions.
F-26
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
8 Income taxes
8.1 Components of deferred tax balances
8.1.1 The tax effects of significant temporary differences are reflected
through a deferred tax asset/liability, which is included in the
balance sheet of ICICI Bank.
8.1.2 A listing of the temporary differences is set out below:
At March 31, At December 31,
------------ ---------------
1998 1999 1999
---- ---- ----
(Unaudited)
(in Rs millions)
-------------------------------------------
Deferred tax assets
Provision for loan losses .................................. 144 309 383
Contingency reserve ........................................ 6 6 10
Unrealized loss on securities, available for sale .......... 8 21 -
Others ..................................................... 13 12 10
---- ---- ----
Total deferred tax asset ................................... 171 348 403
Valuation allowances ....................................... - - -
---- ---- ----
Net deferred tax asset ..................................... 171 348 403
Deferred tax liabilities
Property and equipment ..................................... (148) (187) (235)
Investments ................................................ (2) (3) (58)
Unrealized gains on securities, available for sale.......... - (11) (20)
Amortization of software cost .............................. (8) (12) (12)
Amortization of debt issue costs ........................... - (4) (4)
Others ..................................................... - (1) (4)
---- ---- ----
Total deferred tax liability ............................... (158) (218) (333)
---- ---- ----
Net deferred tax asset/(liability) ......................... 13 130 70
==== ==== ====
Current .................................................... 12 10 (59)
Non-current ................................................ 1 120 129
8.1.3 Management is of the opinion that the realization of the recognized net
deferred tax asset of Rs 70 million at December 31, 1999 (March 31,
1999: Rs 130 million and March 31 1998: Rs 13 million) is more likely
than not based on expectations as to future taxable income.
F-27
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
8.2 Reconciliation of tax rates
8.2.1 The following is the reconciliation of estimated income taxes at Indian
statutory income tax rate to income tax expense as reported.
For the nine months
Year ended March 31, ended December 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
------------------------------------------------
Net income before taxes ................... 397 402 673 432 1,329
Statutory tax rate ........................ 43% 35% 35% 35% 38.5%
Income tax expense at statutory tax rate .. 171 141 236 151 511
Increase (reductions) in taxes on account of
Income exempt from taxes .................. (6) (30) (81) (57) (211)
Effect of change in statutory tax rate .... (4) (15) - - 13
Others .................................... (6) 8 15 18 (10)
--- --- --- --- -----
Reported income tax expense ............... 155 104 170 112 303
=== === === === =====
8.3 Components of income tax expense
8.3.1 The components of income tax expense are set out below:
For the nine months
Year ended March 31, ended December 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
------------------------------------------------
Current.................. 133 203 300 191 267
Deferred................... 22 (99) (130) (79) 36
--- --- ---- --- --
Total income tax expense... 155 104 170 112 303
=== === === === ===
9 Segmental disclosures and related information
9.1 Segmental disclosures
9.1.1 ICICI Bank has adopted SFAS No.131, "Disclosures about Segments of an
Enterprise and Related Information".
9.1.2 ICICI Bank carries out commercial lending, treasury operations and
deposit mobilization activities through branches across India.
Management has identified commercial lending and treasury operations as
operating segments. While the commercial lending segment provides
working capital, term loans and other trade finance services to
corporate customers, the treasury segment operates in the money markets
and provides foreign exchange products to customers.
F-28
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
9.1.3 Resource allocation and financial performance assessment of the above
segments is done by management based on the financial information given
below:
Commercial lending Treasury operations
Year ended March 31,
--------------------------------------------------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
(in Rs millions)
---------------------------------------------------------------
Interest revenue............ 1,341 1,499 2,707 421 1,013 2,552
Non-interest revenue........ 149 240 370 166 350 496
----- ----- ----- --- ----- -----
Total revenue............... 1,490 1,739 3,077 587 1,363 3,048
===== ===== ===== === ===== =====
Commercial lending Treasury operations
For the nine months period ended December 31,
---------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(Unaudited)
(in Rs millions)
-------------------------------------------------
Interest revenue.................... 1,853 3,080 1,827 2,604
Non-interest revenue................ 261 408 290 935
----- ----- ----- -----
Total revenue....................... 2,114 3,488 2,117 3,539
===== ===== ===== =====
9.1.4 Management evaluates performance of the segments based on the volume
movements in the assets and the gross interest yields on the assets.
Interest expense and operating costs are not allocated to individual
segments but are monitored at the entity level. The costs and volumes
of deposits mobilized, which are managed in a aggregate basis are given
below:
At March 31, At December 31,
--------------------- ---------------
(Unaudited)
1998 1999 1999
---- ---- ----
(in Rs millions)
---------------------------------------
Deposits............................ 26,290 60,729 85,002
Trading account liabilities......... 1,793 418 1,797
------ ------ ------
Total .............................. 28,083 61,147 86,799
====== ====== ======
For the nine months
Year ended March 31, ended December 31,
------------------------------ --------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
----------------------------------------------------------
Interest on
Deposits....................... 972 1,618 3,707 2,609 4,172
Trading account liabilities.... 159 216 256 215 367
----- ----- ----- ----- -----
Total.......................... 1,131 1,834 3,963 2,824 4,539
===== ===== ===== ===== =====
F-29
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
9.1.5 A reconciliation between the segment revenues and the totals is given
below:
For the nine months
Year ended March 31, ended December 31,
-------------------------------- -------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(in Rs millions)
----------------------------------------------------------
Commercial lending ................ 1,490 1,739 3,077 2,114 3,488
Treasury operations ............... 587 1,363 3,048 2,117 3,539
Other ............................. 83 68 131 78 153
----- ----- ----- ----- -----
Total revenue ..................... 2,160 3,170 6,256 4,309 7,180
===== ===== ===== ===== =====
9.1.6 A reconciliation between the segment assets and the total assets is
given below:
At March 31, At December 31,
--------------------- ---------------
(Unaudited)
1998 1999 1999
---- ---- ----
(in Rs millions)
----------------------------------------
Commercial lending................ 15,631 33,184 45,571
Treasury Operations .............. 17,591 38,273 51,598
Other............................. 2,056 3,368 5,036
------ ------ -------
Total assets...................... 35,278 74,825 102,205
====== ====== =======
9.2 Geographic distribution
9.2.1 The business operations of ICICI Bank are largely concentrated in
India. Accordingly the entire revenue assets and net income are
attributed to Indian operations.
Major customers
9.2.2 ICICI Bank provides banking and financial services to a wide base of
customers. There is no major customer which contributes more than 10%
of total revenues.
10 Commitments and contingent liabilities
10.1.1 ICICI Bank is obligated under a number of capital contracts. Capital
contacts are job orders of a capital nature which have been committed.
Estimated amounts of contracts remaining to be executed on capital
account aggregated to Rs 50 million at December 31, 1999 (March 31,
1999: Rs 62 million and March 31, 1998: Rs 6 million).
F-30
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
Lease commitments
10.1.2 ICICI Bank has commitments under long-term operating leases principally
for premises and Automated Teller Machines. Lease terms for premises
generally cover periods of nine years. The following is a summary of
future minimum lease rental commitments for non-cancelable leases.
March 31, 1999 December 31, 1999
(Unaudited)
(in Rs millions)
---------------------------------------
2000.............................. 90 116
2001.............................. 99 127
2002.............................. 109 137
2003.............................. 120 153
2004......................... .... 132 170
Thereafter ....................... 324 409
--- ---
Total minimum lease commitments... 874 1,112
=== =====
10.1.3 Various tax-related legal proceedings are pending against ICICI Bank.
Potential liabilities, if any, have been adequately provided for, and
management does not estimate any incremental liability in respect of
legal proceedings.
11 Related party transactions
11.1.1 ICICI Bank has entered into transactions with the following related
parties:
|X| The parent company;
|X| Affiliates of the Bank;
|X| Employees Provident Fund Trust; and
|X| Directors and employees of the group.
11.1.2 The related party transactions can be categorized as follows:
Banking services
11.1.3 ICICI Bank provides banking services to all the related parties on the
same terms that are offered to other customers.
11.1.4 The revenues earned from these related parties are set out below:
For nine months period
Year ended March 31, ended December 31,
--------------------------------- ----------------------
(Unaudited)
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(in Rs millions)
---------------------------------------------------------
Parent company......... 6 15 12 8 15
Affiliates ............ 3 5 4 3 4
--- --- --- --- ---
Total.................. 9 20 16 11 19
=== === === === ===
F-31
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
11.1.5 ICICI Bank has paid to the parent company interest on deposits and
borrowings in call money markets amounting to Rs 27 million, Rs 105
million, Rs 125 million, Rs 40 million and Rs 99 million in fiscal
1997, 1998 and 1999 and nine months ended December 31, 1998 and 1999
respectively.
Leasing of premises and infrastructural facilities
11.1.6 ICICI Bank has entered into lease agreements with the parent company
for the lease of certain premises and infrastructural facilities to
ICICI Bank. Total amount paid as rent for fiscal 1997, 1998 and 1999
and the nine months ended December 31, 1998 and 1999 is Rs 92 million,
Rs 20 million, Rs 7 million, Rs 5 million and Rs 9 million
respectively.
Acquisition of premises
11.1.7 ICICI Bank purchased premises from the parent company for Rs 532
million in fiscal 1998.
Derivative transactions
11.1.8 ICICI Bank enters into foreign exchange currency swaps and interest
rate swaps with the parent company on a back to back basis. The
outstanding contracts at December 31, 1999 are cross currency swaps
amounting to Rs 3,829 million and interest related swaps amounting to
Rs 900 million.
Expenses for services rendered
11.1.9 ICICI Bank paid Rs 2 million, Rs 1 million, Rs 1 million, Rs 0.4
million and Rs 2 million in fiscal 1997, 1998 and 1999 and the nine
months ended December 1998 and 1999 respectively to the parent company
for use of the parent company's employees. ICICI Bank also paid Rs 5
million in the nine months ended December 31, 1999 to an affiliate
company for use of the affiliate's employees for information technology
services.
Share transfer activities
11.1.10 ICICI Bank has paid Rs 3 million, Rs 6 million, Rs 4 million and Rs 3
million in fiscal 1998 and 1999 and nine months ended December 31, 1998
and 1999 respectively to an affiliate company for share transfer
services provided by the affiliate.
Other transaction with related parties
11.1.11 ICICI Bank has advanced loans to employees, bearing interest ranging
from 3.5% to 6%. These are housing, vehicle and general purpose loans.
The tenure of these loans ranges from five to twenty years. Further,
ICICI Bank has advanced loans at 16% to employees for purchase of its
equity shares at the time of the public issues. The balance outstanding
at March 31, 1998, March 31, 1999 and December 31, 1999 was Rs 100
million, Rs 136 million and Rs 197 million respectively.
11.1.12 During the nine months ended December 31, 1999 ICICI Bank entered into
an agreement with an affiliate company for availing telephone banking
call centers services.
F-32
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
11.1.13 ICICI Bank sold certain investments to an affiliate company and booked
a gain of Rs 9 million during the nine months ended December 31, 1999.
11.1.14 The balances pertaining to receivables from and payable to related
parties are as follows:
Parent Affiliates
company
(in Rs millions)
---------------------------
At March 31, 1998
Accounts payable............................. 2,237 630
At March 31, 1999
Accounts payable ............................ 3,081 217
At December 31, 1999 (Unaudited)
Accounts receivable.......................... 2 1
Accounts payable ............................ 2,147 1,119
12 Capital adequacy requirements
12.1.1 The Company is a banking company within the meaning of the Indian
Banking Regulation Act, 1949, registered with and subject to
examination by the Reserve Bank of India.
12.1.2 ICICI Bank is subject to the capital adequacy requirements set by the
Reserve Bank of India, which stipulate a minimum ratio of capital to
risk adjusted assets and off-balance sheet items of 8%, at least half
of which must be Tier I capital. The Reserve Bank of India is
increasing the minimum capital adequacy ratio to 9.0% effective March
31, 2000. The capital adequacy ratio of the Bank calculated in
accordance with he Reserve Bank of India guidelines at December 31,
1999, March 31, 1998 and March 31, 1999 was 9.41%, 13.48% and 11.06%
respectively.
13 Employee stock option scheme
13.1.1 In January 2000 ICICI Bank's Board of Directors approved on employee
stock option plan which will be submitted to the shareholders for
approval on February 21, 2000. Under the plan, up to 5% of the issued
equity shares on February 21, 2000 may be allocated to employee stock
option.
14 Future impact of new accounting standards
14.1.1 The Financial Accounting Standards Board ("FASB") recently issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes standards for accounting and
reporting for derivative instruments and hedging activities. As the
derivative activities of ICICI Bank are not significant, the future
impact of SFAS No. 133 on the financial statements of ICICI Bank is
unlikely to be material. SFAS No. 133 is effective for fiscal periods
beginning after June 15, 1999.
F-33
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1997, 1998 and 1999 and nine months ended December
31, 1998 (Unaudited) and 1999 (Unaudited)
15 Year 2000
15.1.1 To date, ICICI Bank has not encountered any material Year 2000 issues
concerning its respective computer programs. ICICI Bank's plan for the
Year 2000 included replacing or updating existing systems (which were
not Year 2000 compliant), assessing the Year 2000 preparedness of
clients and counterparties and formulating a contingency plan to ensure
business continuity in the event of unforeseen circumstances.
For and on behalf of the Board of directors
- ----------------------------
HN Sinor
Managing Director & CEO
- ----------------------------
Uday M Chitale
Director
----------------------------- ---------------------
G Venkatakrishnan Bhashyam Seshan
Executive Vice President & Company Secretary
Chief Financial Officer
F-34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the registrant in connection with the
sale of the securities being registered. All amounts shown are estimates except
for the SEC registration fee.
SEC registration fee...................................... US$ 33,000
New York Stock Exchange fees.............................. 102,000
Blue sky qualification fees and expenses.................. 15,000
Printing and engraving expenses........................... *
Accountant's fees and expenses............................ 156,000
Legal fees and expenses................................... 500,000
----------
Total.......................................... *
==========
- ---------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers
Under Section 201 of the Indian Companies Act, 1956, a company is
prohibited from indemnifying any officer of the company or any person employed
by the company as an auditor against any liability which, by virtue of any rule
of law, would otherwise attach to him in respect of any negligence, default,
misfeasance, or breach of duty of which he may be guilty in relation to ICICI
Bank.
Article 215 of ICICI Bank's Articles of Association provides that the
directors and officers of ICICI Bank shall be indemnified by ICICI Bank against
all costs, losses and expenses which any director or officer may incur or
become liable for by reason of any contract entered into or act done by him in
his capacity as officer or director, including any liability incurred by him in
defending any proceeding brought against officers and directors in their
capacity if the indemnified officer or director receives judgment in his favor
or is acquitted in such proceeding.
The form of Underwriting Agreement to be filed as Exhibit 1.1 to this
registration statement will also provide for indemnification of ICICI Bank and
its officers and directors.
ICICI has obtained directors and officers insurance providing
indemnification for certain of ICICI Bank's directors, officers or employees
for certain liabilities.
Item 15. Recent Sales of Unregistered Securities
ICICI Bank has not sold any unregistered securities to the public in the
last three years.
Item 16. Exhibits and Financial Statement Schedules
Exhibit No. Description of the Document
- ----------- -----------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 ICICI Bank Articles of Association, as amended.
3.2 ICICI Bank Memorandum of Association, as amended (including
in Exhibit 3.1)
*4.1 Form of Deposit Agreement among ICICI Bank, Bankers Trust
Company and the holders from time to time of American
Depositary Receipts issued thereunder (including as an
exhibit), the form of American Depositary Receipt).
4.2 ICICI Bank's Specimen Certificate for Equity Shares.
*5.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co.
8.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co. as
to certain Indian tax matters (included under "Taxation--
Indian Tax" in the Prospectus included as part of this
Registration Statement).
8.2 Opinion of Davis Polk & Wardwell as to certain US tax
matters (included under "Taxation --United States Tax" in
the Prospectus included as part of this Registration
II-1
Statement).
15.1 Letter of KPMG, India, Independent Auditors, as to unaudited
interim financial information
23.1 Consent of KPMG, India, Independent Auditors.
23.2 Consent of Amarchand & Mangaldas & Suresh A. Shroff & Co.
23.3 Consent of Davis Polk & Wardwell
24.1 Powers of Attorney
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules.
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Financial Statements or the
Notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement, ADRs
representing the ADSs in such denominations and registered in such names as
required by the Underwriters to permit prompt deliver to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1993 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification by it is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Mumbai, India on February 11, 2000.
ICICI BANK LIMITED
By: /s/ H. N. SINOR
---------------------------------------
H. N. Sinor
Managing Director and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ------------------------------------ --------------------------------- ------------------
/s/ H. N. SINOR
- ------------------------------------ Managing Director and Chief February 11, 2000
H.N. Sinor Executive Officer and Director
K. V. KAMATH*
- ------------------------------------ Director February 11, 2000
K.V. Kamath
LALITA D. GUPTE*
- ------------------------------------ Director February 11, 2000
Lalita D. Gupte
SATISH C. JHA*
- ------------------------------------ Director February 11, 2000
Satish C. Jha
R. RAJAMANI*
- ------------------------------------ Director February 11, 2000
R. Rajamani
B.V. BHARGAVA*
- ------------------------------------ Director February 11, 2000
B.V. Bhargava
UDAY M. CHITALE*
- ------------------------------------ Director February 11, 2000
Uday M. Chitale
SOMESH R. SATHE*
- ------------------------------------ Director February 11, 2000
Somesh R. Sathe
/S/ G. VENKATAKRISHNAN
- ------------------------------------ Executive Vice President and February 11, 2000
G. Venkatakrishnan Chief Financial Officer
/S/ BHASHYAM SESHAN
- ------------------------------------ Company Secretary February 11, 2000
Bhashyam Seshan
* By: /s/ H. N. SINOR
----------------------------------------------------
Name: H.N. Sinor
Title: Managing Director and Chief Executive Officer
AUTHORIZED REPRESENTATIVE
PUGLISI & ASSOCIATES,
As the duly authorized representative
Of ICICI Bank Limited in the United States
By: /s/ DONALD J. PUGLISI
----------------------------------------
Name: Donald J. Puglisi
Title: Managing Director
EXHIBIT INDEX
Exhibit No. Description of the Document
- ----------- ---------------------------
1.1 Form of Underwriting Agreement
3.1 ICICI Bank Articles of Association, as amended.
3.2 ICICI Bank Memorandum of Association, as amended (including in
Exhibit 3.1)
*4.1 Form of Deposit Agreement among ICICI Bank, Bankers Trust Company
and the holders from time to time of American Depositary Receipts
issued thereunder (including as an exhibit), the form of American
Depositary Receipt).
4.2 ICICI Bank's Specimen Certificate for Equity Shares.
*5.1 Opinion of & Mangaldas & Suresh A. Shroff & Co.
8.1 Opinion of Amarchand & Mangaldas & Suresh A. Shroff & Co. as to
certain Indian tax matters (included under "Taxation--Indian Tax"
in the Prospectus included as part of this Registration
Statement).
8.2 Opinion of Davis Polk & Wardwell as to certain US tax
matters (included under "Taxation --United States Tax" in
the Prospectus included as part of this Registration
Statement).
15.1 Letter of KPMG, India, Independent Auditors, as to unaudited
interim financial information
23.1 Consent of KPMG, India, Independent Auditors.
23.2 Consent of Amarchand & Mangaldas & Suresh A. Shroff & Co.
23.3 Consent of Davis Polk & Wardwell
24.1 Powers of Attorney
- ----------------
* To be filed by amendment.