Housing Development Finance Corporation Ltd

TO THE MEMBERS

Your directors are pleased to present the Thirty-fourth Annual Report of yourCorporation with the audited accounts for the year ended March 31, 2011.

FINANCIAL RESULTS

Dividend

Your directors recommend payment of dividend for the year ended March 31, 2011 of Rs 9per equity share of face value of Rs 2 each. In the previous year, a dividend of Rs 36 perequity share of face value of Rs 10 each was paid ( Rs 7.2 per equity share of face valueof Rs 2 each).

The dividend payout ratio for the current year, inclusive of additional tax on dividendwill be 43.4% as compared to 42.7% for the previous year.

Sub-division of Shares

Pursuant to your approval at the 33^rd Annual General Meeting (AGM) of theCorporation held on July 14, 2010, the nominal face value of the equity shares of theCorporation was sub-divided from Rs 10 per equity share to Rs 2 per equity share, witheffect from August 21, 2010.

To facilitate this sub-division, shareholders were issued 5 equity shares of Rs 2 eachin lieu of one equity share of Rs 10 each held by them as on the record date i.e. August20, 2010, fixed for this purpose.

The total number of retail shareholders has increased to over 2,03,000 representing anincrease of 52% post the sub-division of shares.

Warrants

Consequent to the sub-division of the nominal face value of the equity shares of theCorporation from Rs 10 per share to Rs 2 per share, the Warrant Exercise Price wasadjusted from Rs 3,000 per equity share of Rs 10 each to Rs 600 per equity share of Rs 2each, to be paid by the Warrant holder at the time of exchange of each Warrant at any timeon or before August 24, 2012. As of date, no Warrants have been lodged with theCorporation for exchange into equity shares of the Corporation.

Lending Operations

Loan approvals during the year were Rs 75,185 crores as compared to Rs 60,611 crores inthe previous year, representing a growth of 24%. Loan disbursements during the year wereRs 60,314 crores as against Rs 50,413 crores in the previous year, representing a growthof 20%.

Cumulative loan approvals and disbursements as at March 31, 2011 were Rs 3,73,246crores and Rs 3,02,533 crores respectively. This is in respect of approximately 3.8million housing units.

The demand for individual home loans continued to be robust, despite rising interestrates. Other enabling factors included rising disposable incomes and continued fiscalincentives on housing loans. During the year, individual approvals grew at 25% anddisbursements grew by 27% as compared to the previous year. The average size of individualloans stood at Rs 18.6 lakhs.

Sale of Loans

During the year, the Corporation, under the loan assignment route sold individual loansof Rs 4,379 crores to HDFC Bank pursuant to the buyback option embedded in the home loanarrangement between the Corporation and HDFC Bank. Out of the total loans assigned duringthe year, Rs 4,053 crores qualify as priority sector advances for the bank.

As at March 31, 2011, total loans outstanding in respect of loans sold stood at Rs12,147 crores. HDFC continues to service the loans sold under these transactions and isentitled to the residual interest on the loans sold. The residual interest on theindividual loans sold is 1.57% per annum.

The residual income on the loans sold is being recognised over the life of theunderlying loans and not on an upfront basis. Issues through which loans have been soldhave been rated by external agencies and carry a rating indicating the highest degree ofsafety.

Repayments

During the year under review, Rs 36,756 crores were received by way of scheduledrepayment of principal through monthly instalments as well as redemptions ahead ofschedule, as compared to Rs 31,872 crores received last year.

Loan Book

As at March 31, 2011, the loan book stood at Rs 1,17,127 crores as against Rs 97,967crores in the previous year –an increase of 20%. The growth in the loan book wouldhave been higher at 24% if the loans sold were included in the loan book.

Foreign Currency Convertible Bonds (FCCB)

In September 2005, the Corporation concluded the issue of USD 500 million zero couponFCCB. The bonds were convertible into equity shares of the Corporation of the face valueof Rs 10 each up to the close of business hours on July 29, 2010 at the option of theholders, at Rs 1,399 per equity share, representing a conversion premium of 50% over theinitial reference share price.

All the bonds were lodged with the Corporation for conversion into equity shares on orprior to the last date for conversion. In aggregate, the Corporation allotted 1,56,23,732equity shares of Rs 10 each pursuant to the conversion of the FCCB. Hence, there are nooutstanding FCCB. The increase in net worth as a result of the FCCB over the life was Rs2,186 crores.

During the year an amount of Rs 2.83 crores has been credited to the Share CapitalAccount and an amount of Rs 407.89 crores has been credited to the Securities PremiumAccount.

Resource Mobilisation

Subordinated Debt

During the year, the Corporation raised Rs 1,000 crores through the issue of long-termUnsecured Redeemable Non-Convertible Subordinated Debentures. The subordinated debt wasassigned a ‘AAA’ rating from both, CRISIL Limited (CRISIL) and ICRA Limited(ICRA).

As at March 31, 2011, the Corporation’s outstanding subordinated debt stood at Rs2,875 crores. The debt is subordinated to present and future senior indebtedness of theCorporation and has been assigned the highest rating by CRISIL and ICRA. Based on thebalance term to maturity, as at March 31, 2011, Rs 2,375 crores of the book value ofsubordinated debt is considered as Tier II under the guidelines issued by the NationalHousing Bank (NHB) for the purpose of capital adequacy computation.

Non-Convertible Debentures (NCD)

During the year, the Corporation issued NCD amounting to Rs 13,865 crores on a privateplacement basis. The Corporation’s NCD issues have been listed on the Wholesale DebtMarket segment of the NSE and have been assigned the highest rating of ‘AAA’ byboth, CRISIL and ICRA. As at March 31, 2011, NCD outstanding stood at Rs 41,624 crores.

Loans from Banks

During the year, the Corporation raised loans amounting to Rs 29,538 crores fromcommercial banks, of which Rs 2,610 crores were under the priority sector category ofcommercial banks. The Corporation further raised Rs 2,528 crores from the banking sectoras FCNR (B) loans.

HDFC’s long-term and short-term bank loan facilities have been assigned thehighest rating of ‘AAA’ and ‘PR1+’ respectively by CARE Limited,signifying highest safety for timely servicing of debt obligations.

Refinance from National Housing Bank (NHB)

NHB has an internal rating mechanism for housing finance companies (HFCs) and theCorporation has been assigned the highest rating for its refinance schemes by NHB. Duringthe year, the Corporation has drawn refinance amounting to Rs 687 crores under NHB’sRefinance Scheme to Housing Finance Companies, 2003.

Deposits

Deposits continued to grow during the financial year under review despite strongcompetition from banks. As at March 31, 2011, outstanding deposits stood at Rs 24,625crores. The depositor base stood at approximately 9.67 lakh depositors.

CRISIL and ICRA have for the sixteenth consecutive year, reaffirmed their‘AAA’ rating for HDFC’s deposits. This rating represents ‘highestsafety, attractive returns and impeccable service standards’ as regards timelyrepayment of principal and interest.

The support of the agents and their commitment to the Corporation has been instrumentalin HDFC’s deposit products continuing to be a preferred investment for households andtrusts.

Unclaimed Deposits

As of March 31, 2011, public deposits amounting to Rs 250 crores had not been claimedby 35,898 depositors. Since then, 8,595 depositors have claimed or renewed deposits of Rs68 crores. Depositors were intimated regarding the maturity of deposits with a request toeither renew or claim their deposits. Where the deposit remains unclaimed, reminderletters are sent to depositors periodically and follow up action is initiated through theconcerned distributor/branch.

As per the provisions of Section 205C of the Companies Act, 1956, deposits remainingunclaimed for a period of seven years from the date they became due for payment have to betransferred to the Investor Education and Protection Fund (IEPF) established by theCentral Government. Accordingly, during the year, despite repeated reminders being sent todepositors, an amount of Rs 31.76 lakhs has been transferred to the IEPF. In terms of thesaid section, no claims would lie against the Corporation or the IEPF after the transfer.

Non-Performing Loans

Gross non-performing loans as at March 31, 2011 amounted to Rs 903.85 crores. This isequivalent to 0.77% of the portfolio (as against 0.79% in the previous year). This is thetwenty-fifth consecutive quarter end at which the percentage of non-performing loans havebeen lower than the corresponding quarter in the previous year.

Based on a six months overdue basis, the non-performing loans as at March 31, 2011stood at 0.46% of the loan portfolio as against 0.53% in the previous year.

In terms of the prudential norms as stipulated by NHB, the Corporation is required tocarry a provision in respect of non-performing assets and a general provision onoutstanding standard non-housing loans. In addition, during the year, NHB furtherstipulated a general provision of 0.40% on standard assets under housing loans tonon-individuals and a 2% provision on standard assets in respect of housing loans grantedunder the Dual Rate Home Loan scheme. This requirement has been partly met by utilisationof Rs 298.59 crores (net) from Additional Reserve under Section 29 C of the NationalHousing Bank Act, 1987. Based on the aforesaid as per NHB norms, the Corporation isrequired to carry a total provision of Rs 813.53 crores. The balance in the provision forcontingencies account as at March 31, 2011 stood at Rs 1,124.37 crores, which isequivalent to 0.95% of the portfolio. Thus as at March 31, 2011, the Corporation’snet non-performing loans was nil.

The Securitisation and Reconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 (SARFAESI) has proved to be a useful recovery tool and the Corporationhas been able to successfully initiate recovery action under this Act in the case ofwilful individual and corporate defaulters.

Regulatory Guidelines/Amendments

HDFC has complied with the Housing Finance Companies (NHB) Directions, 2010 prescribedby NHB regarding accounting standards, prudential norms for asset classification, incomerecognition, provisioning, capital adequacy and credit rating. The Corporation is incompliance with the concentration of investments and capital market exposure norms otherthan on its investments in HDFC Bank and GRUH Finance Limited. NHB has granted theCorporation time for such compliance.

During the year, NHB stipulated that the loan to value ratio (LTV) for individualhousing loans up to Rs 20 lakhs should not exceed 90% and for loans above Rs 20 lakhs, theLTV should not exceed 80%.

NHB also amended the risk weights for individual housing loans. Thus risk weights onindividual housing loans range from 50% to 125%, depending on the loan amount and LTV.

HDFC’s capital adequacy ratio stood at 14% of the risk weighted assets, as againstthe minimum requirement of 12%. Tier I capital was 12.2% against a minimum requirement of6%.

Codes and Standards

NHB has issued comprehensive Know Your Customer (KYC) Guidelines and Anti MoneyLaundering Standards in the context of recommendations made by the Financial Action TaskForce on Anti Money Laundering Standards and on Combating Financing of TerrorismStandards. During the year, the board reviewed and approved the amendments to theCorporation’s KYC and Prevention of Money Laundering Policy as stipulated by NHB. TheCorporation has adhered to the compliance requirements in terms of the said policyrelating to monitoring and reporting of cash/suspicious transactions.

The Fair Practices Code framed by NHB seeks to promote good and fair practices bysetting minimum standards in dealing with customers, increase transparency so customershave a better understanding of what they can reasonably expect of the services beingoffered, encourage market forces through competition to achieve higher operatingstandards, promote fair and cordial relationships between customers and the housingfinance company and foster confidence in the housing finance system. During the year, theboard reviewed and approved the amendments to the Corporation’s Fair Practices Codeas notified by NHB. The Corporation has put in place a mechanism to monitor and reviewadherence to the Fair Practices Code as approved by the Board of Directors.

The Corporation has adopted the Model Code of Conduct for Direct Selling Agents andGuidelines for Recovery Agents engaged by HFCs as stipulated by NHB and duly approved bythe Board of Directors.

Risk Management Framework

The Corporation has a Risk Management Framework, which provides the mechanism for riskassessment and mitigation. The Risk Management Committee (RMC) of the Corporationcomprises the Managing Director as the chairperson, the Executive Director and somemembers of senior management.

The RMC reviewed the risks associated with the business of the Corporation, its rootcauses and the efficacy of the measures taken to mitigate the same, twice during the year.Thereafter, the Board of Directors also reviewed the key risks associated with thebusiness of the Corporation, the procedures adopted to assess the risks and efficacy ofthe mitigation measures.

Marketing and Distribution

To reach out effectively to customers, the Corporation’s distribution network nowspans 289 outlets, which include 71 offices of the HDFC’s wholly owned distributioncompany, HDFC Sales Private Limited (HSPL). To further augment this network, HDFC coversover 90 additional locations through its outreach programmes. HDFC has internationaloffices in London, Singapore and Dubai. The Dubai office reaches out to its customersacross West Asia through its service associates based in Kuwait, Qatar, Oman, Sharjah, AbuDhabi and Saudi Arabia – Al Khobar, Jeddah and Riyadh.

HDFC’s reach and presence is also enhanced by its distribution channels, whichinclude HSPL, HDFC Bank and a third party direct selling associates (DSAs). During theyear, efforts were focused on empanelling financial consultants with a pan-India presenceas business sourcing associates for HDFC. All distribution channels only source loans,while HDFC continues to retain control over the credit, legal and technical appraisal,thereby ensuring that the quality of loans disbursed is not compromised in any way and isconsistent across all distribution channels.

HDFC organises property fairs across major cities in the country. The aim of thesefairs is to provide a wide spectrum of approved projects under a single roof. These fairsin turn help customers in making their decision to buy a home. Under ‘India HomesFair’, HDFC brings together eminent builders who showcase their properties for theIndian Diaspora. During the year, HDFC organised ‘India Homes Fair’ in London,Singapore, Kuwait, Saudi Arabia and Qatar.

Besides running various product-based campaigns during the year, the Corporation alsoran a brand campaign highlighting its leadership position in the Indian mortgage industry.

Cross Selling and Distribution of Financial Products and Services

HDFC’s subsidiary companies have strong synergies with HDFC and hence efforts arechannelled into cross selling so as to offer customers a wide range of financial productsand services under the ‘HDFC’ brand.

HDFC is a Composite Corporate Agent for HDFC Standard Life Insurance Company Limited(HDFC Life) and HDFC ERGO General Insurance Company Limited (HDFC-ERGO). In addition, thedistribution networks of HDFC and HSPL are used by Credila Financial Services PrivateLimited, which offers education loans.

International Housing Finance Initiatives

HDFC’s expertise in housing finance is well regarded and therefore a number ofexisting and new housing finance companies in various parts of the world are keen to tapHDFC for training, strategic input and technical assistance in housing finance.

During the year, the Corporation under its Technical Services Agreement with HousingDevelopment Finance Corporation Plc., Maldives, provided technical and consultancyservices in key mortgage functions.

Senior executives of the Corporation were invited to Indonesia, Maldives, Mauritius andGhana for seminars, consultancy or training assignments in housing finance.

In July 2010, the Frankfurt School of Finance & Management and HDFC jointlyorganised the third ‘Housing Finance Summer Academy’ in Germany, which is acourse that aims to provide housing finance solutions for emerging markets through acombination of academic knowledge and practical experience.

In November 2010, HDFC conducted its own international training programme

‘Housing Finance Management’ at its training centre, Centre for HousingFinance, located at Lonavla, India. Participants from different countries across Asia andAfrica attended a weeklong residential training programme.

Delegates from Bangladesh, Indonesia and Kenya visited the Corporation to understandkey mortgage finance operations.

Shelter Assistance Reserve (SAR)

HDFC continued to partner and support worthwhile projects undertaken by non-governmentorganisations, foundations and local bodies through the SAR. During the year, theCorporation disbursed Rs 11.48 crores from the SAR towards a wide spectrum of developmentprogrammes and activities.

Corpus contributions were made out of the SAR to the Indian Council for Research onInternational Economic Relations (ICRIER) – New Delhi, Armed Forces Flag Day Fund– Mumbai, M. S. Swaminathan Research Foundation –Chennai and Folk Arts –Rajasthan, amongst others. Support was also extended towards running a centre forrehabilitation of adults affected by cerebral palsy in Pune, partnering The Energy andResources Institute (TERI) in undertaking an integrated development scheme for sustainablelivelihood across remote villages in Uttarakhand, providing scholarships to children fromimpoverished backgrounds through an organisation working with the rural poor in WestBengal and supporting the construction of a centre catering to the rehabilitation ofhearing impaired individuals in New Delhi. The Corporation supported the Indian CancerSociety towards meeting the treatment expenses of patients. HDFC continued partneringmunicipal schools to showcase high-performing schools through public-private partnerships,through initiatives such as the Akanksha School Project, Bhavishya Yaan and Teach forIndia. The SAR was also utilised towards providing relief assistance to victims of the Lehcloudburst in August 2010.

During the year, the Corporation disbursed Rs 2 crores to the Indian Institute of HumanSettlements (IIHS) –Bengaluru, taking the Corporation’s total contribution toIIHS to Rs 4 crores. IIHS is a privately funded education institution focusing on variousaspects of urban practice.

Training and Human Resource Management

The Corporation believes that the ability to keep learning is a key sustainableadvantage and hence strong emphasis is placed on constantly upgrading the skills of itsemployees.

During the year, all new recruits underwent an induction training programme. Inaddition, employees who were promoted across various grades attended Executive Developmentand Managerial Skills programmes. During the year, a leadership programme was designed andconducted by the Indian Institute of Management, Ahmedabad, for a select group ofemployees identified on the basis of their performance and future potential.

Amongst many others, internal training programmes were conducted in the areas of ruralhousing finance, corporate risk management, negotiative selling skills, credit riskmanagement and six sigma.

The Corporation also nominated staff members for a variety of external programmesincluding real estate and housing, education, treasury and risk management, informationtechnology, taxation and International Financial Reporting Standards.

New Initiatives

HDFC RED

During the year, HDFC Real Estate Destination (HDFC RED), an on-line real estate portalwas launched with the key objective of providing a single destination to potential homebuyers to search and short-list desired properties that suit their requirements. HDFC REDfunctions as a centralised digital platform to bridge the gap between home buyers anddevelopers across India. Developers are charged a subscription fee to list their projectson HDFC RED and in turn are able to attract potential buyers. HDFC RED is currentlyoperational in six cities in India – Bengaluru, Chennai, Hyderabad, Mumbai, New Delhiand Pune.

Awards and Recognitions

During the year, some of the awards and recognitions received by the Corporationinclude:

• HDFC is the only Indian company to be included in the fifth annual list of the‘2011 World’s Most Ethical Companies’ by EthisphereInstitute, USA.

• Best Governed Company Award, 2010 – Asian Centre for Corporate Governance& Sustainability.

• ‘India Shining Star CSR Award’ –for outstanding CSR in theBanking and Financial Sector.

• HDFC one of India’s ‘Best Managed Companies’ – FinanceAsia’s 10^th Annual Poll.

• ‘HDFC the most admired company in the Financial Sector in India’–Wall Street Journal’s Asia 200 survey.

Subsidiary Companies

In terms of Section 212(8) of the Companies Act, 1956, the Central Government hasgranted its approval, exempting the Corporation from the requirement of attaching to itsannual report, the balance sheet, profit and loss account and the report of the directorsand auditors thereon, in respect of all its sixteen subsidiary companies. Accordingly, acopy of the balance sheet, profit and loss account, report of the Board of Directors andReport of the Auditors of the following subsidiary companies of the Corporation –HDFC Developers Limited, HDFC Investments Limited, HDFC Holdings Limited, HDFC AssetManagement Company Limited, HDFC Trustee Company Limited, HDFC Realty Limited, HDFCStandard Life Insurance Company Limited, HDFC ERGO General Insurance Company Limited, GRUHFinance Limited, HDFC Sales Private Limited, HDFC Ventures Trustee Company Limited, HDFCVenture Capital Limited, HDFC Property Ventures Limited and Credila Financial ServicesPrivate Limited and the following step-down subsidiary companies - HDFC Asset ManagementCompany (Singapore) Pte. Limited and Griha Investments have not been attached to thebalance sheet of the Corporation for the financial year ended March 31, 2011.

The Annual Report of the Corporation, the annual accounts and the related documents ofthe Corporation’s subsidiary companies are posted on the website of the Corporation,www.hdfc.com. Shareholders who wish to have a copy of the annual accounts and detailedinformation on any subsidiary company can download the same from the website or may writeto the Corporation for the same. Further, the said documents shall be available forinspection by the shareholders at the registered office of the Corporation. TheCorporation has not made any loans or advances in the nature of loans to any of itssubsidiary or associate company or companies in which its directors are deemed to beinterested, other than in the ordinary course of business.

Review of Key Subsidiary and Associate Companies HDFC Bank Limited (HDFC Bank)

HDFC and HDFC Bank continue to maintain an arm’s length relationship in accordancewith the regulatory framework. Both organisations, however, capitalise on the strongsynergies through a system of referrals, special arrangements and cross selling in orderto effectively provide a wide range of products and services under the HDFC brand name.

As at March 31, 2011, net advances of HDFC Bank stood at Rs1,59,983 crores - anincrease of 27% over the previous year. As at March 31, 2011, HDFC Bank’sdistribution network included 1,986 branches and 5,471 ATMs in 996 cities as against 1,725branches and 4,232 ATMs in 779 cities as of March 31, 2010. The bank has a customer baseof 21.9 million as at March 31, 2011.

For the year ended March 31, 2011, HDFC Bank reported a profit after tax of Rs 3,926crores as against Rs 2,949 crores in the previous year, representing an increase of 33%.HDFC Bank recommended a dividend of Rs 16.50 per share as against Rs 12 per share in theprevious year.

HDFC together with its wholly owned subsidiaries, HDFC Investments Limited and HDFCHoldings Limited holds 23.4% of the equity share capital of HDFC Bank.

HDFC Standard Life Insurance Company Limited (HDFC Life)

Gross premium income of HDFC Life for the year ended March 31, 2011 stood at Rs 9,004crores as compared to Rs 7,005 crores in the previous year – a growth of 29%. The sumassured in force for the current year was Rs 98,917 crores as compared to Rs 72,610 croresin the previous year.

The company has a portfolio of 27 retail products and 6 group products covering saving,investment, protection and retirement needs of the customers, along with 9 optional riderbenefits.

HDFC Life covers approximately 495 cities and towns in India through its 780distribution points in the country with approximately 1.36 lakh financial consultantsappointed by the company. HDFC Life also has a strong association with its bancassurancepartners, which has contributed significantly to the growth of the company during theyear.

HDFC Life has reported a loss of Rs 99 crores for the year ended March 31, 2011. Likemost life insurance companies in the initial phase, HDFC Life has reported losses. This isessentially due to the accounting norms applicable to insurance companies wherein thecommission expenses are charged upfront in the year in which they are incurred while thecorresponding income is recognised over the entire life of the policies issued. Themismatch between expenses and income has the effect of magnifying the initial losses ofHDFC Life.

HDFC holds 72.4% of the equity share capital in HDFC Life.

HDFC Asset Management Company Limited (HDFC-AMC)

HDFC and Standard Life Investment Limited are the co-sponsors of HDFC Mutual Fund.

As at March 31, 2011, HDFC-AMC managed 36 debt, equity and exchange traded fund schemesof HDFC Mutual Fund. During the year, the average assets under management stood at Rs95,950 crores (which is inclusive of average assets under discretionary portfoliomanagement/advisory services). The number of investor accounts increased to over 46 lakhsas at March 31, 2011 as compared to 39 lakhs in the previous year.

As at March 31, 2011, HDFC-AMC has points of acceptances in 114 locations across thecountry.

For the year ended March 31, 2011, HDFC-AMC reported a profit after tax of Rs 242.18crores as against Rs 208.37 crores in the previous year. HDFC-AMC paid an interim dividendof Rs 29 per share for the financial year ended March 31, 2011.

HDFC holds 60% of the equity share capital of HDFC-AMC.

HDFC ERGO General Insurance Company Limited (HDFC-ERGO)

For the year ended March 31, 2011, HDFC-ERGO retained the ranking as the fifth largestprivate sector player in the general insurance industry. Continuing its multi-product andmulti-channel strategy, HDFC-ERGO leverages on its distribution infrastructure developedover the years.

The company offers a complete range of insurance products like motor, health, travel,home and personal accident in the retail segment and customised products like property,marine, aviation and liability insurance in the corporate segment. The company continuesto leverage on the HDFC group’s distribution capability to drive its growth andrelies on the technical capability of ERGO in the field of general insurance. The companyhas a balanced portfolio mix with the retail segment accounting for 57% of the business.

The general insurance industry registered a growth of 23% in FY 2010-11 as compared to13% in the previous year. In comparison, during the year, HDFC-ERGO recorded a growth of40%, with a Gross Written Premium (including cessions from the motor pool) of Rs 1,408crores as against Rs 1,005 crores in the previous year.

After providing for the higher losses from the Indian Motor Third Party Insurance Pool(IMTPIP), during the year, the company made a loss of Rs 36.4 crores as against a loss ofRs 94.3 crores in the previous year. Loss from IMTPIP was Rs 69 crores as against loss ofRs 15 crores in the previous year.

HDFC holds 74% of the equity share capital of HDFC-ERGO.

HDFC Property Funds

HDFC Venture Capital Limited (HVCL) is the investment manager to HDFC Property Fund, aregistered venture capital fund with the Securities and Exchange Board of India (SEBI).

HDFC Property Fund currently has two schemes. The first scheme is HDFC India RealEstate Fund (HI-REF), with a corpus of Rs 1,000 crores, which has been fully invested.During the year, the scheme fully exited from one investment and made partial exits fromtwo other investments.

The second scheme, HDFC IT Corridor Fund has a corpus of Rs 446.40 crores. This schemehas disbursed the entire corpus in rental income yielding commercial properties in majorcities in India and exits are being explored for some investments of the scheme.

During the year, HVCL made a profit after tax of Rs 12.21 crores. The directors of HVCLapproved the payment of two interim dividends aggregating Rs 200 per equity share.

HDFC holds 80.5% of the equity share capital of HVCL.

HDFC Property Ventures Limited (HPVL) provides investment advisory services to Indianand overseas asset management companies (AMCs). Such AMCs in turn manage and advise Indianand offshore private equity funds.

During the year, HPVL made a profit after tax of Rs 3.39 crores. The directors of HPVLapproved the payment of two interim dividends aggregating Rs 20 per equity share.

HDFC holds 100% of the equity share capital of HPVL.

GRUH Finance Limited (GRUH)

GRUH is a housing finance company with operations primarily in the states of Gujaratand Maharashtra and has now expanded its network to other states like Karnataka, MadhyaPradesh, Rajasthan, Chhattisgarh and Tamil Nadu. During the year, GRUH disbursed loansamounting to Rs 1,211 crores as compared to Rs 780 crores in the previous year – anincrease of 55%.

For the year ended March 31, 2011, GRUH reported a profit after tax of Rs 91.51 croresas compared to Rs 68.96 crores in the previous year - an increase of 33%. The companyrecommended a dividend of Rs 8.50 per share and in addition also recommended a specialdividend of Rs 2.50 per share to commemorate the Silver Jubilee of the company, taking thetotal recommended dividend to Rs 11 per share as compared to Rs 6.50 per share in theprevious year.

HDFC’s holding in GRUH currently stands at 60.6%.

HDFC Sales Private Limited (HSPL)

HDFC Sales Private Limited (HSPL) continues to strengthen the Corporation’smarketing and sales efforts by providing a dedicated sales force to sell home loans andother financial products.

HSPL has a presence in 71 locations. During the period under review, HSPL sourced loansaccounting for 46% of individual loans disbursed by HDFC.

HSPL is a wholly owned subsidiary of HDFC.

Credila Financial Services Private Limited (Credila)

Credila is India’s first dedicated education loan company, providing loans tostudents pursuing higher education in India and abroad. Credila has funded studentsstudying in over 500 educational institutes, pursuing higher studies in more than 20countries.

As at March 31, 2011, Credila had cumulatively disbursed Rs 190 crores in respect of2,741 loans. The average loan amount disbursed is Rs 7 lakhs.

In addition to having its own offices and sourcing applications through the web,Credila capitalises on HDFC’s distribution network to source and market educationloans.

The Reserve Bank of India has categorised education loans as ‘prioritysector’ lending. Credila’s borrowers are entitled to income tax exemption underSection 80E of the Income Tax Act, 1961.

HDFC holds 62.3% of the equity share capital of Credila.

Particulars of Employees

HDFC had 1,607 employees as of March 31, 2011. During the year, 8 employees employedthroughout the year were in receipt of remuneration of Rs 60 lakhs or more per annum.

In accordance with the provisions of Section 217(2A) of the Companies Act, 1956 and therules framed thereunder, the names and other particulars of employees are set out in theannex to the Directors’ Report. In terms of the provisions of Section 219(1)(b)(iv)of the Companies Act, 1956, the Directors’ Report is being sent to all theshareholders of the Corporation excluding the annex. Any shareholder interested inobtaining a copy of the said annex may write to the Corporation.

Employees Stock Option Scheme (ESOS)

The Corporation had not granted any stock options during the year. The options werelast granted in November 2008. Unexercised options as at April 1, 2010 relates to ESOS-05,ESOS-07 and ESOS-08.

During the year, options vested aggregated to 1,54,668 and options exercised aggregatedto 34,36,095. Pursuant to the said exercise, the Corporation received from the employeesRs 473.54 crores as exercise consideration (excluding tax), of which Rs 3.44 crores wastowards share capital and Rs 470.10 crores towards securities premium. During the year,pursuant to the exercise of options, 1,71,80,475 equity shares of Rs 2 each have beenallotted to the concerned employees.

During the year, 9,736 options lapsed. Options in force as at March 31, 2011 stood at83,22,488. Pursuant to the subdivision of the face value of the equity shares of theCorporation from Rs 10 to Rs 2, upon exercise, each option is entitled to 5 equity sharesof Rs 2 each as against one equity share of Rs 10 each prior to the sub-division.

There has been no variation in the terms of the options granted.

The Corporation had granted the stock options at the market price and hence theintrinsic value of the option was nil. Consequently, the compensation cost was nil. As nooptions were granted during the year, the compensation cost under the fair value methodwas also nil.

The diluted EPS is Rs 23.66 against a basic EPS of Rs 24.18.

Unclaimed Dividend

As at March 31, 2011, dividend amounting to Rs 8.60 crores has not been claimed byshareholders of the Corporation. The Corporation has been periodically intimating theconcerned shareholders requesting them to encash their dividend before it becomes due fortransfer to the IEPF. The Corporation continues to take various initiatives to reduce thequantum of unclaimed dividend. These inter alia include periodic reminders to shareholdersrequesting them to claim their dividend, including final reminders to those shareholderswho have not claimed their dividend before the same is due for transfer to the IEPF. TheCorporation also provides direct credit of unclaimed dividend to the shareholders having abank account with HDFC Bank or whose 9 digit MICR code is made available to theCorporation by the Depositories and dispatches duplicate dividend warrants directly to theconcerned banks wherever the details are made available by the Depositories.

As per the provisions of Section 205C of the Companies Act, 1956, unclaimed dividendamounting to Rs 33.96 lakhs for the financial year 2002-03 was transferred to the IEPF onSeptember 8, 2010. Further, the unclaimed dividend amounting to Rs 47.84 lakhs in respectof the financial year 2003-04 must be claimed by August 24, 2011, failing which it isrequired to be transferred to the IEPF within a period of 30 days from the said date. Interms of said section, no claim would lie against the Corporation or the IEPF after thetransfer.

Unclaimed Shares

Pursuant to an amendment to Clause 5A of the Listing Agreements, the Corporation hasidentified share certificates issued by it in physical form to its shareholders which arelying unclaimed.

The Corporation has sent reminders to the concerned shareholders requesting them tocontact the Investor Services Department of the Corporation to claim their shares, subjectto submission and verification of requisite documents and compliance with procedures asprescribed in the said clause.

Particulars Regarding Conservation of Energy, Technology Absorption and ForeignExchange Earnings and Outgo

The particulars regarding foreign exchange earnings and expenditure appear as Item No.13 in the Notes to the Accounts. Since HDFC does not own any manufacturing facility theother particulars relating to conservation of energy and technology absorption asstipulated in the Companies (Disclosure of Particulars in the Report of the Board ofDirectors) Rules, 1988 are not applicable.

Directors

Mr. D. M. Satwalekar resigned as a director of the Corporation with effect fromNovember 13, 2010. Mr. Satwalekar had joined the Corporation in 1979. He was the ManagingDirector of the Corporation from 1993 up to 2000. He was thereafter appointed as theManaging Director & Chief Executive Officer of HDFC Standard Life Insurance CompanyLimited (HDFC Life) and was appointed as a non-executive director of the Corporation in2000.

The Board of Directors wish to place on record its sincere appreciation and gratitudefor the dedicated service and invaluable contribution made by Mr. Satwalekar during histenure with the Corporation and HDFC Life.

The Board of Directors, at its meeting held on October 18, 2010, re-appointed Mr. KekiM. Mistry as the Managing Director of the Corporation (designated as the ‘ViceChairman & Chief Executive Officer’) for a period of 5 years, with effect fromNovember 14, 2010, subject to the approval of the members at the ensuing AGM.

In accordance with the provisions of the Companies Act, 1956 and the Articles ofAssociation of the Corporation, Mr. D. N. Ghosh, Dr. Ram S. Tarneja and Dr. Bimal Jalanare liable to retire by rotation at the ensuing AGM. They are eligible for re-appointment.

Necessary resolutions for the re-appointment of the aforesaid directors have beenincluded in the notice convening the ensuing AGM.

All the directors of the Corporation have confirmed that they are not disqualified frombeing appointed as directors in terms of Section 274(1)(g) of the Companies Act, 1956.

Auditors

Messrs Deloitte Haskins & Sells, Chartered Accountants, having registration number117366W, statutory auditors of the Corporation and branch auditors to audit the accountsat the Corporation’s branches in India and offices in London and Singapore holdoffice until the conclusion of the ensuing AGM and are eligible for re-appointment.

The Corporation has received a confirmation from Messrs Deloitte Haskins & Sells tothe effect that their appointment, if made, would be within the limits prescribed underSection 224(1B) of the Companies Act, 1956.

Messrs PKF, Chartered Accountants, having registration number 10 issued by the Ministryof Economy, U.A.E. was appointed as the branch auditors to audit the accounts of theCorporation’s branch office in Dubai. Their term expires at the end of the ensuingAGM and they are eligible for re-appointment.

Directors’ Responsibility Statement

In accordance with the provisions of Section 217(2AA) of the Companies Act, 1956 andbased on the information provided by the management, your directors state that:

i. In the preparation of annual accounts, the applicable accounting standards have beenfollowed;

ii. Accounting policies selected were applied consistently. Reasonable and prudentjudgements and estimates were made so as to give a true and fair view of the state ofaffairs of the Corporation as at the end of March 31, 2011 and of the profit of theCorporation for the year ended on that date;

iii. Proper and sufficient care has been taken for the maintenance of adequateaccounting records in accordance with the provisions of the Companies Act, 1956 forsafeguarding the assets of the Corporation and for preventing and detecting frauds andother irregularities;

iv. The annual accounts of the Corporation have been prepared on a going concern basis.

Management Discussion and Analysis Report and Report of the Directors on CorporateGovernance

In accordance with Clause 49 of the listing agreements, the Management Discussion andAnalysis Report and the Report of the Directors on Corporate Governance form part of thisreport.

Corporate Governance – Voluntary Guidelines

The Board of Directors have taken cognisance of the ‘Corporate GovernanceVoluntary Guidelines 2009’ issued by the Ministry of Corporate Affairs (MCA) inDecember 2009. While the guidelines are recommendatory in nature, the board recognises theimportance and need to constantly assess governance practices thereby ensuring asustainable business environment that generates long-term value to all key stakeholders.The board has adopted several provisions of the said guidelines.

Acknowledgements

The Corporation would like to acknowledge the role of all its stakeholders -shareholders, borrowers, depositors, key partners and lenders for their continuing supportto the Corporation.

The directors appreciate the guidance received from various regulatory authoritiesincluding NHB, RBI, SEBI, MCA, Registrar of Companies, Financial Intelligence Unit(India), Foreign Investment Promotion Board, the Stock Exchanges and the Depositories.

Your directors value the professionalism of all the employees of the Corporation whohave relentlessly worked in a challenging environment and whose efforts have stood theCorporation in good stead.