IDFC Ltd

Your Directors have pleasure in presenting the Fourteenth Annual Report together withthe audited accounts for the year ended March 31, 2011.

DIRECTORS’ REPORT TO THE SHAREHOLDERS

Your Directors have pleasure in presenting the Fourteenth Annual Report together withthe audited accounts for the year ended March 31, 2011.

* Administrative expenses include staff expenses; travelling & conveyance; postage,telephone & telex; establishment expenses; other expenses and depreciation as reducedby shared service cost recovered from subsidiaries.

** Provision for Tax is net of Deferred Tax.

Income from operations increased by 27.34% from Rs. 3,569.98 crore in FY 10 to Rs.4,545.96 crore in FY 11. Other income reduced by 46.92% from Rs. 27.13 crore in FY 10 toRs. 14.40 crore in FY 11. IDFC’s total income, increased by 26.78% from Rs. 3,597.11crore in FY 10 to Rs. 4,560.36 crore in FY 11.

Profit Before Tax (PBT) increased by 31.38% from Rs. 1,317.14 crore in FY 10 to Rs.1,730.45 crore in FY 11. Profit After Tax (PAT) increased by 26.10% from Rs. 1,012.84crore in FY 10 to Rs. 1,277.15 crore in FY 11.

IDFC’s quality of assets continued to be good with Net NPAs at Rs. 38.91crore ason March 31, 2011.

DIVIDEND

Your Directors are pleased to recommend a dividend of Rs. 2/- per share (i.e. 20%) forthe year ended March 31, 2011 on equity shares.

The Company will pay a dividend @ 6% on Compulsorily Convertible Cumulative PreferenceShares as per the terms of issue.

OPERATIONS REVIEW

The global economy witnessed two speed growths. While the emerging economies grew by 7%in 2010, the advanced economies grew by 3% in 2010. World output, which had fallen by 0.6%in 2009 grew by 5% in 2010. Clearly, the global economy is in recovery mode. With thefinancial turbulence firmly behind it, global financial markets also recovered and capitalflows re-emerged with increase in flows into emerging economies. However, issues withGovernment finances in the Euro area provided vulnerability to the system. Overall, whilethe global financial system is improving from the debacle of 2008, there are still someuncertainties and volatility in the system. The other factor has been growing commodityand oil prices, which is leading to inflation and a higher interest regime. In thisenvironment, IDFC has had to be very proactive in raising capital and managing liquidityfor the operations of its financing business.

While domestic GDP is expected to record an impressive 8.5% growth in FY 11, there weresome issues with the infrastructure sector. Consequently, after a flurry of activity inthe first half, project development opportunities in the market reduced substantially inthe second half. The slowdown was particularly apparent in the road and power sectors.However, the slowdown was primarily due to administrative issues while the intrinsicdemand for infrastructure continues to grow. Leveraging the opportunities provided by agrowing economy, the Company adopted a high growth model focused on significantlyincreasing the project finance operations by growing the balance sheet. Gross approvalsincreased by 40% to Rs. 42,716 crore (Rs. 427 billion) in FY 11. Gross disbursements,increased by 106% to Rs. 26,702 crore (Rs. 267 billion) in FY 11.

• Net loans increased by 50% to Rs. 37,652 crore, while the balance sheet hasgrown by 42% to Rs. 47,367 crore.

• As on March 31, 2011, IDFC’s total exposure to infrastructure projectswas Rs. 58,273 crore of which Energy was the highest 45.8%, followed by Transportation28.7%, Telecommunication & IT 15.8% and Commercial & Industrial sector 9.7% .

While the investment strategy for treasury operations continues to ensure adequatelevels of liquidity to support core business requirements, it has started focusing onoptimising levels of return and functioning as a profit centre investing in fixed incomeassets, while maintaining prudent safety norms. Net interest income from treasuryoperations for IDFC increased by 61% from Rs. 75 crore in FY 10 to Rs. 121 crore in FY 11.

The financial markets were volatile during FY 11. Consequently, there was a fall infee-based non interest income. The investment banking business under IDFC Capital and theinstitutional brokerage business under IDFC Securities witnessed a drop in incomes. Themutual fund business that was acquired in FY 09 and operated by IDFC-AMC also saw areduction in assets under management and management fees. The Policy Advisory Group andCSR activities have been brought under one umbrella with the formation of IDFC Foundationin FY 11. This SBU continued to contribute to IDFC’s mandate of leading privatecapital to infrastructure projects, by providing impetus to rationalisation of policy andregulatory frameworks, promoting PPP models, policy advocacy and direct CSR activities.

IDFC Private Equity and IDFC Project Equity continue to be committed to the developmentof infrastructure in the country. IDFC Private Equity manages three funds – IndiaDevelopment Fund, IDFC Private Equity Fund II and IDFC Private Equity Fund III having atotal capital commitment of Rs. 5,735 crore or Rs. 57.3 billion and IDFC Project Equitymanages the Rs. 3,837 crore India Infrastructure fund. The focus on asset management wason maintenance of the funds.

During the year, fee income from managing third party asset decreased by 14% from Rs.290 crore in FY 10 to Rs. 249 crore in FY 11.

Detailed analysis of the performance of the Company and its businesses, includinginitiatives in the area of Information Technology, has been presented in the section onManagement Discussion & Analysis of this Annual Report.

SUBSIDIARY COMPANIES

IDFC has eleven direct wholly owned subsidiary companies – IDFC Private EquityCompany Limited, IDFC Trustee Company Limited, IDFC Project Equity Company Limited, IDFCFinance Limited, IDFC Securities Limited, IDFC PPP Trusteeship Company Limited, IDFCProjects Limited, IDFC Asset Management Company Limited, IDFC AMC Trustee Company Limited,IDFC Foundation (a Section 25 Company) and Uniquest Infra Ventures Private Limited. Inaddition IDFC Securities Limited has three wholly owned subsidiary companies namely, IDFCCapital Limited (earlier known as IDFC-SSKI Limited), IDFC Distribution Company Limited(earlier known as IDFC-SSKI Stock Broking Limited) and IDFC Capital USA Inc. IDFC CapitalLimited has three wholly owned subsidiaries called IDFC Capital (Singapore) Pte. Limited,IDFC Fund of Funds Limited and IDFC General Partners Limited.

During the year, Jetpur Somnath Highway Limited (earlier known as IDFC Capital CompanyLimited and a direct subsidiary of IDFC) has become a subsidiary of IDFC Projects Limited.A company under the name of Jetpur Somnath Tollways Limited, has been incorporated as aSubsidiary of IDFC Projects Limited. IDFC Projects, alongwith the other companies, hasfurther floated Dheeru Powergen Limited, which was converted from Private Limited Companyto a Public Limited Company.

IDFC Asset Management Company Limited has further floated IDFC Pension Fund ManagementLimited, one of the Pension Fund Managers appointed by the Pension Fund Regulatory andDevelopment Authority (PFRDA) to manage retirement funds under the New Pension Scheme(NPS) open to individuals in the private sector, and IDFC Investment Advisors Ltd. Acompany under the name of IDFC Investment Managers (Mauritius) Limited, has beenincorporated as a Subsidiary of IDFC Asset Management Company Limited. During the year,IDFC Foundation (a Non-Profit Organisation) was incorporated under Section 25 of theCompanies Act, 1956, as a wholly owned subsidiary company of IDFC. Further, the shares ofthe three Joint ventures namely, Infrastructure Development Corporation (Karnataka)Limited (iDeCK), Uttarakhand Infrastructure Development Company Limited (UDeC) and DelhiIntegrated Multi-Modal Transit System Limited (DIMTS), which were initially held by IDFC,have been transferred to IDFC Foundation and similarly, the units of the Trust, namelyIndia Infrastructure Initiative Trust & India PPP Capacity Building Trust which wereinitially held by IDFC have also been transferred to IDFC Foundation. Further during theyear, Uniquest Infra Ventures Private Limited was incorporated as a direct subsidiary ofthe Company and IDFC Capital USA Inc. was also incorporated as a subsidiary company ofIDFC Securities Limited. A statement of particulars of IDFC’s subsidiaries is annexedto this Annual Report. Detailed analysis of the performance of IDFC and its businesses— financing and advisory, including initiatives in the area of Human Resources,Information Technology, and Risk Management has been presented in the

Leveraging the opportunities provided by a growing economy, the Company adopted a highgrowth model focused on significantly increasing the project finance operations by growingthe balance sheet. section on Management Discussion & Analysis of this Annual Report.

In view of the General Circular no. 2/2011 dated February 8, 2011 issued by theMinistry of Corporate Affairs, granting a general exemption under Section 212(8) of theCompanies Act, 1956, copies of Balance Sheet, Profit and Loss Account, Reports of theBoard of Directors and Auditors of each of the subsidiary companies have not been attachedto the accounts of the Company for the FY 11. The Company undertakes to make availablethese documents/details upon request by any member of the Company at any point of time.These documents/details will be available on the Company’s website www.idfc.com andwill also be available for inspection by any of the members of the Company at itsRegistered and Corporate Offices and also at the Registered Office of the concernedsubsidiaries. In accordance with the requirements of Accounting Standard 21 (ConsolidatedFinancial Statements), Accounting Standard 23 (Accounting for Investment in Associates inConsolidated Financial Statements) and Accounting Standard 27 [Financial Reporting ofInterests in Joint Ventures notified by the Companies (Accounting Standards)] Rules, 2006,the Consolidated Accounts of IDFC and its subsidiaries have been prepared and the same areannexed to this Annual Report.

PARTICULARS OF EMPLOYEES

IDFC had 586 employees as on March 31, 2011. Particulars of Employees as required to befurnished pursuant to Section 217(2A) of the Companies Act, 1956, read with the rulesthereunder, forms part of this Report. However, as per the provision of Section219(1)(b)(iv) of the Companies Act, 1956, the reports and accounts are being sent to allthe shareholders of the Company excluding the statement of particulars of employees. Anyshareholder interested in obtaining a copy of the same may write to the Company Secretaryof the Company.

EMPLOYEE STOCK OPTION SCHEME(ESOS)

Pursuant to the resolution passed by the members at the Annual General Meeting held onAugust 2, 2006, IDFC has introduced Employee Stock Option Scheme 2007 (referred to as"the Scheme") to enable the employees of IDFC and its subsidiaries toparticipate in the future growth and financial success of the Company. Out of the16,548,268 options outstanding at the beginning of the year, 673,790 options lapsed onaccount of resignations and 2,583,065 options were exercised during the year.

Additionally, during the year, 7,459,308 options were granted to eligible employeesunder the Scheme. Accordingly, 20,750,721 options remain outstanding as of March 31, 2011.

All options vest in graded manner and are required to be exercised within a specificperiod. The Company has used the intrinsic value method to account for the compensationcost of stock to employees of the Company. Intrinsic value is the amount by which thequoted market price of the underlying share on the date prior to the date of the grantexceeds the exercise price on the option.

Disclosures as required by Clause 12 of the Securities & Exchange Board of India(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 areannexed to this Report.

CORPORATE GOVERNANCE

Separate detailed chapters on Corporate Governance, Additional Shareholder Informationand Management Discussion & Analysis are attached herewith and form part of thisAnnual Report.

While the investment strategy for treasury operations continues to ensure adequatelevels of liquidity to support core business requirements, it has started focusing onoptimising levels of return and functioning as a profit centre investing in fixed incomeassets, while maintaining prudent safety norms.

PUBLIC DEPOSITS

During the year FY 11, your Company has not accepted any deposits from the publicwithin the meaning of the provisions of the Non-Banking Financial Companies (Reserve Bank)Directions, 1998.

FOREIGN EXCHANGE

The particulars regarding foreign exchange earnings and expenditure are furnished atItem Nos. 24 & 25 in the Notes to the Accounts. Since the Company does not own anymanufacturing facility, the other particulars in the Companies (Disclosure of Particularsin the Report of the Board of Directors) Rules, 1998 are not applicable.

FUNDRAISING

During the year, the Company had issued and allotted 157,752,090 equity shares of Rs.10/- each to Qualified Institutional Buyers (QIBs) under Chapter VIII of the Securities& Exchange Board of India (Issue of Capital & Disclosure Requirements)Regulations, 2009 at a premium of Rs. 158.25 per equity share aggregating to Rs. 2,654.18crore.

During the year, the Company had issued 84,000,000 Compulsorily Convertible CumulativePreference Shares (CCCPS) having face value of Rs. 100 each of the Company on preferentialbasis in terms of Chapter VII of the Securities & Exchange Board of India (Issue ofCapital and Disclosure Requirements) Regulations, 2009 aggregating to Rs. 840 crore.

During the financial year, the Company also made a fresh issue aggregating to Rs.1,451.76 crore by way of issuance of long-term infrastructure bonds of face value of Rs.5,000 each, in the nature of secured, redeemable, non-convertible debentures, havingbenefits under Section 80 CCF of the Income-tax Act, 1961, under the applicable SEBIGuidelines.

LISTING OF SHARES

The Company’s shares are listed on National Stock Exchange of India Limited (NSE)and Bombay Stock Exchange Limited (BSE).

DIRECTORS

Ministry of Finance, Government of India, nominated Mr. Bimal Julka, Director General,Currency, Department of Economic Affairs, Ministry of Finance and Additional Secretary toGovernment of India, Ministry of Finance, as a Nominee Director on the Board of IDFC inplace of Mr. G. C. Chaturvedi, Additional Secretary, Department of Financial Services.Accordingly, Mr. G. C. Chaturvedi ceased to be Director with effect from November 07,2010. The Board placed on record its appreciation of the invaluable guidance provided byMr. G. C. Chaturvedi to the Company.

The Board, at its meeting held on November 08, 2010, appointed Mr. Bimal Julka, as aDirector with effect from November 08, 2010 and he holds office up to the date of theensuing Annual General Meeting (AGM). The Company has received notice from a Member of theCompany under Section 257 of the Companies Act, 1956 proposing the candidature of Mr.Bimal Julka as a Director.

In accordance with the Articles of

Association of the Company and provisions of the Companies Act, 1956, Dr. OmkarGoswami, Mr. Shardul Shroff and Mr. S. H. Khan would retire by rotation and beingeligible, offer themselves for re-appointment at the AGM.

The Board of Directors recommends appointment/re-appointment of all the above Directorsat the ensuing AGM.

INTERNAL CONTROL SYSTEMS

The Company has in place adequate systems of Internal Control to ensure compliance withpolicies and procedures. Internal Audits of all the units of the Company are regularlycarried out to review the internal control systems. The Internal Audit Reports alongwithimplementation and recommendations contained therein are constantly reviewed by the AuditCommittee of the Board.

AUDITORS

Messrs Deloitte Haskins & Sells, Chartered Accountants, will retire as thestatutory auditors of the Company at the ensuing AGM. The Board at its meeting held onApril 29, 2011, has proposed their re-appointment as Auditors to audit the accounts of theCompany for the financial year ending March 31, 2012.

Messrs Deloitte Haskins & Sells, the retiring auditors, have confirmed that theirreappointment, if made, would be in conformity with the provisions of Sections 224 and 226of the Companies Act, 1956, and also indicated their willingness to be re-appointed.

DIRECTORS’RESPONSIBILITY STATEMENT

The Directors confirm that:

• in the preparation of the annual accounts, the applicable accountingstandards have been followed;

• they have selected such accounting policies and applied them consistentlyand made judgements and estimates that are reasonable and prudent, so as to give a trueand fair view of the state of affairs of the Company at the end of the financial year andof the profits of the Company for the year;

• they have taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of the Companies Act, 1956, forsafeguarding the assets of the Company and for preventing and detecting fraud and otherirregularities; and

• they have prepared the annual accounts on a going concern basis.

ACKNOWLEDGEMENTS

IDFC has developed close relationships with the Ministry of Finance (MoF), BankingDivision, Ministry of Surface Transport, National Highways Authority of India, Ministry ofPower, Department of Telecommunications,

Ministry of Petroleum and other Ministries of the Government of India involved withinfrastructure development; Reserve Bank of India, Securities & Exchange Board ofIndia and regulatory bodies, TRAI, the Central Electricity Regulatory Commission and StateElectricity Regulatory Commissions; the Planning Commission; IIT (Kanpur); IIM(Ahmedabad); the State Governments and all IDFC’s shareholders. The Board ofDirectors wishes to gratefully acknowledge the assistance and guidance received from allof them. IDFC could make the progress it has in these years due to the dedication andcreativity of its staff at all levels. The Board of Directors wishes to place on recordtheir warm appreciation for these efforts.

For and on behalf of the Board

DEEPAK S. PAREKH

Chairman

Mumbai, June 13, 2011