Kotak Mahindra Bank Ltd

To the Members of

KOTAK MAHINDRA BANK LIMITED

The Directors present their Twenty Sixth Annual Report together with the auditedaccounts of your Bank for the year ended 31st March 2011.

FINANCIAL HIGHLIGHTS

(A) Kotak Mahindra Bank Limited – Consolidated financial highlights:

(B) Kotak Mahindra Bank Limited – Standalone financial highlights:

DIVIDEND

Your Directors are pleased to recommend a dividend of Rs 0.50 per equity share of theface value of Rs 5 each (previous year Rs 0.85 per equity share of the face value of Rs10each), entailing a payout of Rs 41.25 crore including dividend distribution tax (previousyear Rs 27.65 crore). The dividend would be paid to all the shareholders, whose namesappear on the Register of Members/Beneficial Holders list on the Book Closure date.

CAPITAL

Pursuant to the approval granted by the Members at an Extraordinary General Meetingheld on 27th July 2010 and receipt of other necessary approvals, in August 2010 your Bankallotted 1,64,00,000 equity shares of face value of Rs10/- each to Sumitomo Mitsui BankingCorporation, a public company registered under the laws of Japan on a preferential basisat a price per equity share of Rs 833/- for a total consideration of Rs 1366.12 crore.

In September 2010, each equity share of your Bank having a face value of Rs 10 wassubdivided into two equity shares of the face value of Rs 5 each.

During the year, your Bank has also allotted 77,88,550 equity shares (adjusted forstock split number) arising out of the exercise of Employee Stock Options granted to theemployees and Executive Directors of the Bank and its subsidiaries.

Post allotment of equity shares and sub-division of equity shares as aforesaid, theissued, subscribed and paid-up Share Capital of the Bank stands at Rs 368.44 crorecomprising of 73,68,71,504 equity shares of Rs 5 each.

The Bank has a Capital Adequacy Ratio (‘CAR’) under Basel II as at 31st March2011 of 19.92% with Tier I being 17.98%. At a consolidated level the CAR was 19.46% underBasel II.

During the year, your Bank has not issued any Capital under Tier II. As on 31st March2011, outstanding Unsecured, Redeemable Non-Convertible, Subordinated Debt Bonds was Rs465.70 crore and outstanding Unsecured, Non-Convertible, Redeemable Debt CapitalInstruments Upper Tier II stood at Rs 336.68 crore.

OPERATIONS

Your Bank worked on a very balanced expansion plan of the network and added 72 branchesand 246 ATMs and ended the year with 321 Branches and 710 ATMs, and thereby increasing thepresence to 183 locations. Your Bank added over half a million new customers this yearacross core banking products of savings and checking account, term deposits, overdraftsand non resident accounts.

The robustness of the network manifested in the healthy growth in demand and timeliabilities. The momentum gained last year in terms of distribution of asset products fromthe network continued in the current year. The initiatives launched last year on higherend segment of customers through a branded programme titled "Privy League"continued to show encouraging results. Your Bank maintained its ambition of becoming abank of choice for the small and mid segment business enterprises and doubled the base ofcustomers engaging in trade and foreign currency transactions. The increased network ofATMs benefitted your Bank by bringing in much higher usage from non customers and growingthe interchange income manifold.

Your Bank continued to put significant focus in reaching out to the NRI community lastyear. Lot of path breaking initiatives were rolled out. Many alliances were signed withleading exchange houses across Gulf countries to provide channels for attracting inwardremittances. Through the strategic partnership with OIFC (Overseas India FacilitationCentre) your Bank participated in 3 global meets in Dubai, London and Birmingham which hasfirmly established your Bank as a key service provider with the NRI community. Thisalliance further helped your Bank to engage another 30 sub-alliances enabling the growthin business thru NRIs. Your Bank also reached out to a larger canvass of NRI customers bylaunching a variant to savings account targeted for the mid-income segment, P.O. Boxfacility in USA & UK. Your Bank launched a new remittance solution under the brandname Click2Remit. This is a multi currency platform and customers can send money intoIndia from anywhere in the world in 8 different currencies. Your Bank also launched acredit card for the NRI customers and started the Home Loan product for NRIs in selectmarkets. To provide higher convenience to the NRI customer your Bank launched a uniqueservice called Click2Call & SMS2Call wherein the Bank calls back the customer within30 minutes of receiving the intimation. Your Bank focussed on the online space includingsocial media engagement through a partner portal called NRIMatters.com; NRI Power Podiumcampaign which got 13000 NRI signups in one month and found its way into India Book ofRecords. The number of hits on the NRI website today stands at 150000 per month, up from2000 per month last year.

Your Bank implemented several initiatives aimed towards enhancing customer service andwidening the product/ services bouquet. Some of the key ones being:

• Annual Combined Statement on Net Banking - Customers can now view and downloadtheir Annual Combined Statement for Savings and Current account, Investment and Dematholdings for the previous financial year. This will help customers to file Tax Returns,apply for loan etc.

• Card Protection Plan – Your Bank in association with CPP Assistance ServicePvt. Ltd. offers card protection to protect all Kotak customers cards (Credit, Debit, ATMetc) against loss and resultant fraud.

• Multilingual ATMs - Multilingual (English, Hindi and Marathi) on all ATMs inMaharashtra has gone live. Other regional languages will get covered during the course ofnext fiscal year.

• Recharge Services - This enables customers to recharge their pre-paid mobile andDTH services through Kotak Net Banking using Kotak Bill Pay.

• Statement Registration on Net Banking - Customers now have the option toregister for their preferred statement frequency and mode option on Net Banking.

• Your Bank has also taken steps to participate in the eco drive. An E-Statementcampaign was run through the year aiming to convert the customers who have registered formonthly physical statements & quarterly physical statements to register for monthlyE-Statements with the theme of ‘Save Trees, Save the Environment! Say no to PhysicalStatements’.

• Interbank Mobile Payment Service – This feature allows customers totransfer money instantly through mobile phone within own accounts & third partyaccounts within the IMPS member banks.

• Kotak Stock Ace - This is loan (overdraft) against securities product. Underthis product your Bank provides an overdraft to customers against equity shares and mutualfunds.

The last year saw several regulatory changes in the third party investment andinsurance products space. While these regulatory interventions put a significant amount ofrevenue pressure your Bank recognises the opportunity to create a well differentiatedbusiness if it is able to create a more robust platform to advise its customers. Hencesignificant focus was put to creating processes with an objective to bring maximumtransparency in the Bank’s sales process of these products and to bring more internalaccountability to ensure appropriateness of sale as per customer suitability and riskprofile. Your Bank believes that its customers will benefit from such stringent internalstandards and in the long run it will be able to build a sustainable and robust businessmodel around these processes.

Your Bank has always focussed on its employees as the key to building a sustainablefranchise and has in the past won several awards as one of the best employers. Continuingwith this emphasis your Bank launched an E-Learning platform for employees which again wonaccolades in the IBA Technology Awards. This platform enabled your Bank to introducecourses in real time. It also has features of individual learning plans, chat facilitiesto enable trainers and trainees to interact online, video streaming facility, onlinecompletion status tracking, etc. Your Bank believes this will improve the quality oftraining inputs and will result in raising the service standards.

Your Bank took definitive steps towards risk control. These include set up of - N Vigil(Internal Cameras) in all the ATMs. This will ensure that the Bank has images of thecustomers who did the transactions at all times and can also facilitate during fraudinvestigations or customer complaints. A dedicated Risk Containment Unit has been put inplace to do pre-on-boarding checks and transaction level checks to ensure conformity toAML guidelines and fraud prevention etc.

Your Bank continued its in-depth coverage and servicing of large and mid marketcorporate clients during the year. Your Bank was able to build significant franchise withmany well known, reputed large corporate groups during this year while focusing ondeepening existing clients through an array of customized and regular product offerings.

The year saw a strong trend in credit demand from the corporate and mid market businesssegments both for working capital and term facilities. This is in keeping with the strongunderlying economic growth. Your Bank was able to tap this opportunity and increase itsshare of business by offering a variety of products and services.

Your Bank added 160 new cash management service customers during the year by offeringthem technology driven working capital cycle enhancement & efficiency solutions toeffectively enrich and optimize their cash flows and liquidity through an entire suite ofCMS products and services. This has been made possible through constant innovation,continuous feedback sessions and a high degree of customization to cater to the dynamicand evolving industry scenario.

Your Bank’s dedicated team of product solution experts strives to provide systemicstructured solutions to suit to the customer’s needs. The in-depth understanding ofthe customer’s business and the superior delivery models has helped in achieving highlevels of customer satisfaction.

The Commercial Vehicle and Infrastructure sectors continued the growth momentum throughthe year aided by the positive IIP (Index of Industrial Production) and Agriculture growthnumbers. Commercial Vehicle operator margins improved as a result of higher freightrealisations, which offset the increase in diesel cost. The growth in the core sector andfocus on infrastructure led to a healthy growth in the order book position of contractorsin the Infrastructure space. As a result, disbursement numbers touched record levels asdid the bottom line. The year also saw good growth in bank lines in both the sectors.

The monsoon has been more than adequate this year. However the impact of the growingeconomy and increasing purchasing power of the rural population has meant a steep rise inprices of all agro commodities. Riding this boom the Agri Business of your Bank has showna robust growth with the total portfolio slated to cross Rs 4300 crore this year, up fromlast year’s portfolio of Rs 3200 crore. This is a growth of 35% year-on-year. YourBank also ensured to reach the targeted norms for lending to the Agri sector as laid outby the regulator for the second year running.

The Agri business rode on an impressive growth in the tractor loans, commodity fundingwhich doubled in portfolio size and an impressive growth in the working capital facilitiesto agro-processing sector. Delinquency levels in this portfolio have also been at all timelows and are even better than some of the other urban oriented advances indicating thefinancial strength of clients associated with agriculture who are riding the commodityprice boom.

The Agri business has also become the corner stone for your Bank’s targets formeeting financial inclusion and lending to the weaker sections of the society such assmall and marginal farmers, village artisans and other socially deprived sectorsidentified by the government. These advances now have crossed a level of 8% of yourBank’s total advances. Your Bank is in the process of identifying more targetsegments in this sector to reach out to.

In the Home Finance business while there was strong growth in the first half of theyear, the second half of the year saw stabilisation and slight drop in demand fromcustomers. Your Bank introduced innovative new products during the year such as parttenure fixed home loans and loan against property. Your Bank branches continued to play animportant part and evolved into a stable contributor month on month. There was anincreased focus on existing Bank customers and their contribution among the secured assetproducts went up.

The Personal Finance business saw good growth and established your Bank as one of theleading lenders of unsecured loans in the market. High-ticket products continued to be thefocus and were the biggest contributor to the overall volumes. The Personal Financebusiness also added new products to their existing bouquet of financial services forbusinessmen. Working capital products in Rs 50 lacs to Rs 1.5 crore range (both fund basedas well as non-fund based) were some of the new offerings.

Your Bank resolved several NPA accounts pertaining to stressed assets acquisition.Supreme Court upheld the NPA assignment between banks and other financial institutions.This landmark judgment will further help in resolving several NPA accounts, which werelitigated in several courts for the past few years. The NPA portfolio sale by bankscontinued to be sluggish and the serious pricing mismatch between the buyers and sellerscontinued, this year as well.

Your Bank continued to invest in large single asset transactions, with good prospectsof turnaround in stressed companies. Further, your Bank has diversified in buying largeretail NPA loans from other banks.

During the year, your Bank saw a robust growth in its overall advances portfolio. Thiswas primarily driven by the overall growth of the corporate sector, spurred by strongdomestic consumption demand for their products post the recessionary period. A robust NPAmanagement practice and strong internal controls, aided by a strong economic growth, hasled to a reduction in your Bank’s gross/net NPAs.

On Treasury side, your Bank has an active proprietary desk trading in all products suchas Fixed Income, Money Markets, Derivatives, Foreign Exchange and Bullion. The Treasuryplays an important role in balance sheet management and implementation of Funds TransferPrice between various business units. In the area of Debt Capital Markets (DCM) your Bankoffered the following products: syndication of loans, bonds, mezzanine financing, promoterfunding and acquisition financing and securitisation. During the year, your Bank’sTreasury started Correspondent Banking Division to build and leverage on relationshipswith offshore banks for improving quality and international reach for its customers.

Your Bank’s credit card business has issued 1.5 lac cards and is in its third yearof operations. The card design and product benefits have received overwhelming responsefrom customers. The customer spends across all variants of cards have been amongst the topthree in industry. The premium range of our products – VISA Platinum and VISASignature have driven the spends growth in the portfolio and it contributes to 34% of thespends while accounting for 12% of customer base. This has reaffirmed the customeracceptability of the product. Credit card business clocked Rs 600 crore of total spends inthe year with a book size of Rs 300 crore. Industry credit cards spends has shown sign ofgrowth after last year’s recessionary economic conditions.

Your Bank entered into a strategic arrangement with PVR Cinemas, one of the elite namein entertainment industry, to distribute credit card products aimed at upmarket customers.This partnership opens up the opportunity to tap new customer segment hitherto untapped byyour Bank.

Your Bank’s technology team concentrated on innovation to provide new products andconveniences to the customers. This ranged from mobile to mobile payments (IMPs) toproviding ATMs at remote locations on an "air card".

System upgrades for continuous improvement in customer experience were a focus. Theexcellence of the CRM and Call Center which were rolled out across the Kotak Group, wererecognized by awards from the Indian Banking Association and Asian Banker’sTechnology Summit respectively.

In preparation of the planned Core Banking upgrade, the technology foundation has beenenhanced. Service Oriented Architecture was introduced with the use of a world classproduct for system integration. Standard frameworks for digitization and internaldevelopment expedite deployment of new systems.

SUBSIDIARIES

Your Bank’s subsidiaries are established players in the different areas offinancial services, viz. car finance, investment banking, stock broking, asset managementand life insurance.

While the Indian economy continued its growth path the businesses in which thesubsidiaries operate had its own share of challenges on account of market fragmentation,change in market mix, dramatic regulatory changes and the like.

Kotak Mahindra Prime Limited, the car finance company continues to have robust growthin lending coupled with fall in delinquencies. Kotak Securities Limited, the stock brokingcompany continued to face adverse effects of changes in mix in market volumes shifting tothe low-yield equity derivative segment. The company also continues to face competition inthe market place due to continuous entry of new players. Kotak Mahindra Capital CompanyLimited had a relatively better year, thanks to handling primary issues. But nevertheless,the investment banking industry continues to face pressure. Kotak Mahindra AssetManagement Company Limited faced an outflow of a large portion of liquid funds. Coupledwith changes in regulations in the mutual fund industry it had to tweak its businessstrategy. Kotak Mahindra Old Mutual Life Insurance Limited had to deal with regulatorychanges that changed the direction of the industry. Business strategy, product mix andmanagement of costs had to be continuously worked upon to stay on course. Due to rangebound secondary equity markets and net outflows in many India dedicated Internationalfunds, the International subsidiaries reported drop in profits.

The various activities of the subsidiaries are outlined in the Management Discussionand Analysis section appended to this Report.

In terms of the general exemption granted by the Central Government vide their GeneralCircular No.2/2011 dated 8th February 2011 under Section 212(8) of the Companies Act,1956, abridged Annual Report which consists of the financial statements of your Bank onstandalone basis as well as consolidated financial statements of the group for the yearended 31st March 2011, have been sent to all the members of the Bank. It does not containAnnual Reports of the Bank’s subsidiary companies. The Bank will make available fullAnnual Report (including the Annual Reports of all subsidiaries) upon request by anymember of the Bank. These Annual Reports will be available on the Bank’s website viz.URL : http://ir.kotak.com/annual-reports and will also be available for inspection by anymember at the Registered Office of the Bank.

EMPLOYEE STOCK OPTION SCHEME

The stock options granted to the employees currently operate under two schemes, namelyKotak Mahindra Equity Option Scheme 2005 ("Scheme 2005") and Kotak MahindraEquity Option Scheme 2007 ("Scheme 2007"). The disclosures below are in respectof the year ended 31st March 2011.

Notes:

1) *Above figures are derived by considering the options granted and exercised byemployees of the Bank and its subsidiaries.

2) The number of options specified hereinabove have been adjusted for all corporateactions since the date of grant including subdivision of the face value of equity sharesof the Bank from Rs 10 to Rs 5 during the year.

CORPORATE GOVERNANCE

Pursuant to Clause 49 of the Listing Agreement with the Stock Exchanges, a separatesection entitled ‘Corporate Governance’ has been included in this Annual Report.The Bank has implemented number of recommendations given in the "Corporate GovernanceVoluntary Guidelines 2009" by the Ministry of Corporate Affairs and is examining thepossibility of implementing the remaining recommendations.

DIRECTORS

Mr. Asim Ghosh retires by rotation at the Twenty Sixth Annual General Meeting and iseligible for re-appointment.

Mr. Prakash Apte and Mr. Amit Desai were appointed with effect from 18th March 2011 andMr. N.P. Sarda with effect from 1st April 2011 as Additional Directors of the Bank.Pursuant to the proviso to Section 260 of the Companies Act, 1956, they hold office asDirectors up to the date of this Annual General Meeting but are eligible to be appointedas Directors. In terms of Section 257 of the Companies Act, 1956 the Bank has receivednotice in writing from members along with a requisite deposit of Rs 500/- each proposingthe candidature of Mr. Prakash Apte, Mr. Amit Desai and Mr. N. P. Sarda for theirappointment as Directors.

Mr. Prakash Apte is presently the Non-Executive Chairman of Syngenta India Limited withconsiderable experience in agricultural sector. Mr. Amit Desai is an eminent professionalwith 30 years experience. Mr. N.P. Sarda is a Chartered Accountant for more than 40 yearsand past President of ICAI.

Mr. Anand Mahindra, Mr. Cyril Shroff and Mr. Shivaji Dam have retired as Directors ofthe Bank effective 21st March 2011 due to completion of their eight years tenure pursuantto the provisions of Section 10A(2A)(i) of the Banking Regulation Act, 1949. YourDirectors place on record their appreciation for the valuable advice and guidance renderedby each one of them during their tenure as Directors of the Bank.

The Board of Directors of the Bank, at its meeting held on 5th May 2011, hasre-appointed Mr. Uday Kotak as Whole-time Director of the Bank designated as ExecutiveVice-Chairman and Managing Director for a period from 22nd March 2012 to 31st December2014, subject to the approval of the shareholders and of the Reserve Bank of India. Mr.Dipak Gupta and Mr. C. Jayaram have been re-appointed as Whole-time Directors of the Bankdesignated as Joint Managing Directors for a period from 1st January 2012 to 31st December2014, subject to the approval of the shareholders and of the Reserve Bank of India. Theapproval of the shareholders in this regard is being sought at the ensuing Annual GeneralMeeting of the Bank.

AUDITORS

Messrs S. R. Batliboi & Co., Chartered Accountants, auditors of your Bank, retireon the conclusion of Twenty Sixth Annual General Meeting.

Pursuant to the guidelines issued by the Reserve Bank of India, an audit firm isallowed to continue as the Statutory Central Auditor of a bank for a continuous period offour years only. Accordingly, it is proposed to appoint, subject to regulatory approvals,Messrs S. B. Billimoria & Co., Chartered Accountants as the statutory auditors of theBank for the current financial year in place of Messrs S. R. Batliboi & Co. who havecompleted four years as the statutory auditors. The approval of the shareholders in thisregard is being sought at the ensuing Annual General Meeting of the Bank.

STATUTORY INFORMATION

The Companies (Disclosure of Particulars in the Report of Board of Directors) Rules,1998, are not applicable to your Bank.

EMPLOYEES

The employee strength of your Bank along with its subsidiaries as of 31st March 2011was around 20,500 as compared to around 20,000 employees a year ago.

The Bank standalone had around 11,000 employees as of 31st March 2011. 102 employeesemployed throughout the year and 23 employees employed for part of the year were inreceipt of remuneration of Rs 60 lacs or more per annum.

Your Bank was adjudged amongst Top 25 in India’s Best Companies to Work For in2010 by The Great Places to Work Institute and continues to be amongst Top 25 BestEmployers in India consistently from 2007 till date as adjudged by the AON Hewitt BestEmployers Survey.

While your Bank and its subsidiaries continued to focus on various initiatives toprovide the best employment experience to the employees, new and innovative products andprocesses were introduced to further enhance both quality and productivity of our humancapital. Substantial investments were made in training and developing employees acrosslevels to improve productivity, service quality, personal effectiveness and supervisorycapability. Structured leadership development programs and customized courses inassociation with leading academic institutions were also rolled out to groom futureleaders and build a talent pool that has depth in knowledge and competence.

The best in class Talent Management practices and HR processes have enabled theorganization to build a cadre of highly committed and engaged employees who consistentlyexcel in delivering our customer value proposition.

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 theannexure 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 Bank excluding the aforesaid annexure. The annexure is available forinspection at the Registered Office of the Bank. Any shareholder interested in obtaining acopy of the said annexure may write to the Company Secretary at the Registered Office ofthe Bank.

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors, based on the representations received from the operational management,confirm in pursuance of Section 217 (2AA) of the Companies Act, 1956 that:

(i) your Bank has, in the preparation of the annual accounts for the year ended 31stMarch 2011, followed the applicable accounting standards along with proper explanationsrelating to material departures, if any;

(ii) they have selected such accounting policies and applied them consistently and madejudgements and estimates that are reasonable and prudent so as to give a true and fairview of the state of affairs of the Bank as at 31st March 2011 and of the profit of yourBank for the financial year ended 31st March 2011;

(iii) they have taken proper and sufficient care to the best of their knowledge andability, for the maintenance of adequate accounting records in accordance with theprovisions of the Act for safeguarding the assets of the Bank and for preventing anddetecting fraud and other irregularities; and

(iv) the annual accounts have been prepared on a going concern basis.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their gratitude for the valuable guidanceand support received from the Reserve Bank of India, Securities and Exchange Board ofIndia, Insurance Regulatory and Development Authority and other Government and Regulatoryagencies. Your Directors acknowledge the support of the shareholders and also wish toplace on record their appreciation of employees for their commendable efforts, teamworkand professionalism.