IFCI Ltd

(i) Operating Environment and Outlook Global Scenario

The fiscal 2010 began on a positive note. The economies world over witnesseddiscernible improvement, after passing through a financial crisis which erupted in thethird quarter of 2008-09 from the financial sector in western countries, which soonenveloped the entire world in an economic recession. The recovery owes itself mainly tothe interventions which, on the monetary side, consisted in central banks infusing ampleliquidity and the package launched by Governments, on the fiscal side, to boost aggregatedemand.

With the recovery well underway led by emerging economies, the problem now beingencountered is the timing and speed with which to address the mounting public debt. Eurozone has already been hit by waves of insecurity churned up by the region's debt crisisarising from mounting debt burden of Greece and some other countries and consequentdown-gradation of their credit ratings. To check the debt crisis, the European Governmentshave announced a financial package of 750 Billion Euro (almost USD 1 Trillion). However,concerns remain on whether the financial package would be sufficient to address thesituation. The financial markets, owing to their integration, continue to displaynervousness due to the uncertainties in the pace of recovery in the North Atlantic world.

A comparative analysis of the movement of stock exchange indices of three developedeconomies, represented through the Dow Jones (US), Nikkei 225 (Japan) and FTSE 100 (UK),and assuming a base "Index" of '100', representing the closing index of March2009, the closing index at the end of each month till June 2010 have been plotted on agraph. Similarly, the monthly closing data on stock exchange indices in respect ofdeveloping economies represented through Sensex (India), Bovespa (Brazil) and Kospi (SouthKorea) are plotted in another graph, which are as under:

Almost all the countries world over have shown signs of recovery in FY 2009-10. Themovement of the monthly closing indices from April 2009 to June 2010 as reflected in thetwo graphs above depicts the well known fact that the emerging economies had higher growthmomentum as compared to the developed countries. Among the monthly closing indices ofthree developed countries considered above, Dow Jones (US) and FTSE 100 (UK) have movedalmost in tandem while the movement of Nikkei 225 (Japan) varied due to the variousdomestic factors. In respect of the developing countries, among the three monthly closingindices depicted above, all moved up in tandem till the end of April 2009, but thereafterthe recovery of Sensex was fastest, followed by Bovespa (Brazil) and Kospi (South Korea).

The trends of economic growth also get reflected on the crude oil price. As the worldwas coming out of recessionary conditions, with increase in demand and other factors, theaverage crude oil price also registered an increasing trend. The crude oil price, which inthe first week of April 2009 was at a level below USD 52.5 a barrel, gradually increasedwith the revival of global economy, and touched USD 85 a barrel in the last week of April2010. The above movement, represented by 'Brent Spot' is shown below:

The trend of economic data release of the major developed and developing countries andthe state of oil stockpiles have influenced the price movements. With the de-controllingof petrol prices by Government of India on June 25, 2010, any upward movement of theinternational oil prices might have a direct bearing on the inflationary pressure inIndian economy.

The G-20 Summit held at Toronto in the last week-end of June, 2010 has emerged as a'premier forum for discussing international economic issues'. The Hon'ble Prime Ministerof India, on his return from G-20 Summit, had expressed concern with regard to thesituation in the Euro-zone and the situation of the banking system in Europe in view ofthe inadequacy of the recovery that had taken place. On the rebalancing and strengtheningof the global growth, he expressed the need of a calibrated attempt at fiscalconsolidation rather than a one-size-fits-for-all sort of action, and the countries whichwant to go ahead with fiscal consolidation, must do it in a growth-friendly manner.

(Source: Press Information Bureau, GoI).

The International Monetary Fund (IMF) has indicated on July 8, 2010 that the worldeconomy will expand 4.6% in 2010, compared with the projection of 4.2% made in April 2010,'reflecting a stronger-than-expected first half, while warning that the financial marketturmoil has increased the risks to the recovery'. The growth, when compared to decline ofworld economy by 0.6% in 2009, is significant. Growth for 2011, projected at 4.3%, hasremained unchanged from their April 2010 forecast.

Indian Economy

The Indian economy has clocked a growth rate of 7.4% in FY 2009-10 withstanding theripples of imbalances in other parts of the world, as against growth of 6.7% in theprevious year, i.e. FY 2008-09. This was made possible by India's more measured policyactions, strong counter-cyclical regulatory measures, resilient banking system, strongdomestic demand and other positive features of the economy which helped in the earlymitigation of the adverse impact of global financial crisis and recession.

The strongest impetus of recovery came from the manufacturing sector, which registereda double digit growth of 10.4% during FY 2009-10. The Index of Industrial Production (IIP)recorded a growth of 16.7%, 15.1% and 13.5% in January, February and in March 2010respectively. The recovery was also more broad-based with 14 out of 17 industry groupsrecording accelerated growth during FY 2009-10.

Exports, which had remained in the negative territory for almost a year since October2008, entered a growth phase from November 2009. In view of the initial sluggishnessduring FY 2009-10, cumulative exports declined by 4.7% to USD 176.5 billion and importsdeclined by 8.2% to USD 278.7 billion. Consequently, the trade deficit for the year2009-10 was lesser at USD 102 billion as against USD 118 billion for the previous year.

International Rating agencies viz., Standard & Poor's Ratings Services has revisedthe outlook on India to 'stable' from 'negative' in March 2010 and Fitch Rating has raisedoutlook of India's long term local currency to 'stable' from 'negative' in June 2010.Fitch, while revising the outlook on India's local currency, considered a fall in theGovernment debt ratio on the back of strong economic growth and the one-off revenues fromthe 3G license and broad-band spectrum auctions. The agency has raised India's 2010-11growth forecast to 8.5% from 7%, owing to signs of strong growth momentum, includingindustrial production growth of 17.6% in April 2010, year-on-year.

The Government has resolved to attain fiscal consolidation through a calibratedreduction of fiscal deficit, which was budgeted at 5.5% for the FY 2010-11 as againstfiscal deficit of 6.8% in FY 2009-10. In this direction, Government has deregulated Petrolprice on June 25, 2010, which would lead to reduction of the 'under-recoveries'. Decontrolof diesel would be considered in due course and Government is planning a new pricingformula for key auto fuels.

Inflation represented by Wholesale Price Index (WPI), was in the negative zone for 3months in a row till August 2009, but thereafter, accelerated from 0.5% in September 2009to 9.9% in March 2010. It touched 10.2% in May 2010 when two-thirds of WPI inflation wascontributed by non-food items, suggesting demand side pressure. In a bid to tame theinflationary pressures in the backdrop of a steady economic recovery, the Reserve Bank ofIndia, hiked the repo and reverse repo rates by 25 basis points each to 5.5% and 4.0%respectively on July 2, 2010 over and above similar increase in such rates in its AnnualMonitory Policy for FY 2010-11 in April 2010. The Cash Reserve Ratio, which was raised by25 basis points to 6% in April 2010, was not altered.

The driving force for growth in the coming years is expected to come from theinfrastructure sector. While industrial and infrastructural development would play thepivotal role in the growth forecast of Indian economy, on the Agricultural and Ruralfront, apart from the expectation of normal monsoon, a number of measures like improvededucation levels, larger agriculture credit, higher support prices, NREGA payments,repatriations from migrants, etc. would provide a buffer to the rural economy. These wouldenable the country to move up to a higher growth trajectory.

IMF, on July 08, 2010, revised the growth projection for India in 2010 to 9.5%,envisaging that 'Indian growth story during the year would be driven by favourablefinancing conditions and robust corporate profits'.

Initiatives of IFCI

During the fiscal 2010, notwithstanding the challenging economic environment, IFCI hascontinued to exhibit the resilience of its business model and strategy by registering anall round expansion in its business and improvement in its financial performance. Afteralmost a decade, your Company arrested the decline in its Balance Sheet as total disbursalof financial assistance registered an increase of 82.81% over the previous year.

IFCI's approach towards lending was guided by maximization of return on investment,while maintaining the emphasis on due diligence, ensuring security cover as well asputting in place appropriate risk mitigants. High yielding short term lending, backed withstrong and easily enforceable security, formed the key strengths helping your Company toexpand its asset base without any NPAs.

With sectoral focus on services and infrastructure, your Company has already set up aProject Development Group (PDG) with expertise in appraisal of infrastructure projects.The group is part of IFCI's strategy to enter infrastructure projects early in their lifecycle, ensuring IFCI reasonable returns over cost of funds. PDG has expanded its footprintin project development activities for generating better and consistent return on itsinvestments in infrastructure projects like Hydro and Thermal Power, Power Transmission,Roads etc.

In what may be termed as a recognition of IFCI's management and execution competency,IFCI was invited to sign two significant MOUs with Government of Karnataka on June 4,2010, in the presence of Hon'ble Chief Minister of Karnataka. IFCI would extend itsfinancial expertise and resources to the prospective business opportunities contained inthe projects cleared at the 'Global Investors Meet', according to the first MOU. Thesecond MOU envisages development of Financial City on 50 acres near BengaluruInternational Airport allocated by Government of Karnataka. The MOU involves execution ofFinancial City through IFCI's wholly owned subsidiary viz. IFCI Infrastructure DevelopmentLtd. (IIDL).

Your Company will continue to explore possibilities for new business for short andmedium term with the aim of establishing a niche market for itself in financial productslike loans against liquid securities, Take-out Finance and Debt Swapping, etc. IFCI hasalso embarked upon participating in QIPs & Private Equity and IPO funding.

Your Company has also strengthened the activities in areas of 'Corporate AdvisoryServices'. IFCI is the nodal agency for channelizing the Sugar Development Loans ofGovernment. Your company now provides basket of services in the areas of appraisal,disinvestment and monitoring, in addition to valuation and bid assignment.

Your Company, based on its proven efficiency and skills in managing its own NPAs, hasbeen employing this expertise to the resolution of NPAs in the banking sector by acquiringNPAs (from Banks and other Lenders) and helping in the resolution of these assets so thatthey are freed and put to a more optimum use.

Your Company has been continuously posting profits. After paying dividend @ 8% for theyear 2008-09, the Board of Directors is now recommending to pay dividend @ 10% for theyear 2009-10, subject to your approval. The capital adequacy ratio of your Company as onMarch 31, 2010 at 17.9% is adequate. Your Company has met with enthusiasm from all classesof investors in its bid to raise resources to ensure accelerated growth in the years tocome.

The Headquarter of your Company, the 'IFCI Tower' has been up-graded and is now one ofthe best office buildings in Delhi NCR. The workspace meant for the staff of your Companyhas been revamped both at IFCI Tower and other Regional Offices, to create a conducivework environment.

As per the study carried out by 'The Economic Times and Great Places To WorkInstitute', your Company has been ranked as India's 3rd Best Company to work for in 2010in the Banking and Credit Services category.

Following subsidiary companies have synergized their operations with IFCI:

• IFCI Infrastructure Development Ltd (IIDL), a wholly owned subsidiary of IFCI,promoted to leverage its expertise in the infrastructure sector. IIDL has played aninstrumental role in quick and profitable resolution of IFCI's NPAs by taking some ofthese NPAs on its books. IIDL has launched '21st Milestone Residency', an affordablehousing project complying with green building features, at Raj Nagar, Ghaziabad, on one ofthe properties acquired through NPA route. IIDL has shown growth during the year 2009-10and earned a net profit of Rs.4.01 crore and its asset base has reached Rs.344.04 crore ason March 31, 2010.

• IFCI Venture Capital Funds Ltd (IVCF) is promoting entrepreneurship by providinginstitutional support to the first generation technocrats and entrepreneurs for setting uptheir own ventures in the medium sector. It has, since inception, financed over 400projects and supported commercialization of more than 50 new technologies. In keeping withIFCI's strategy to grow the business of subsidiaries, IVCF has launched three privateequity/ venture capital funds, from which investments aggregating Rs.210.45 crore havebeen sanctioned. IVCF is also providing advisory services and short term loans. IVCF madea profit (after tax) of Rs.4.94 crore in 2009-10.

• IFCI Financial Services Ltd (IFIN) is engaged in Stock Broking, InvestmentBanking, Mutual Fund Distribution & Advisory Services, Depository Participant Servicesand Insurance Products. IFIN has increased its footprint and established a pan-Indiapresence. It is backed by well experienced, committed and qualified professionals invarious facets of the financial landscape to provide unmatched services to its diverseclientele. IFIN has improved its income from operation during the FY 2009-10 to Rs.26.11crore from Rs.5.55 crore in the FY 2008-09.

• IFCI Factors Ltd (IFL) is the first member of Factors Chain International fromIndia. It has pioneered the export factoring business in India and is also providingdomestic factoring services, through which it is steadily replacing the hithertoconventional modes of working capital finance in the banking space. FY 2009-10 has been asignificant year for IFL as it achieved factoring turnover of Rs.1,163.69 crore, Funds inuse of Rs.302.74 crore and Net Profit of Rs.10.59 crore registering a growth of 189% infactoring turnover, 171% in Funds in Use and 281% in Net Profit.

• MPCON Ltd, a Technical Consultancy Organization (TCO), is engaged in providingconsultancy services in the states of Madhya Pradesh, Rajasthan and Chhattisgarh. Thecompany is specialized in small business, training and skill development. With a view toincrease its operations in the emerging key sectors of economy like infrastructure,e-governance and energy, MPCON has raised its share capital from Rs.0.20 crore to Rs.1.00crore. MPCON provided training and rendered services worth Rs.4.14 crore to variousGovernment departments and agencies, state level institutions, commercial banks andothers, in addition to project consultancy business of Rs. 1.30 crore during the year2009-10.

(ii) Industry Structure & Development

The industrial sectors in which your Company has major exposures include PowerGeneration, Telecom and other Infrastructure have performed satisfactorily. The prospectsof other sectors in which your Company has considerable exposures, viz., Iron and Steel,Petroleum Refining, Construction & Real Estate etc., have improved with the upswing ineconomic activities.

IFCI has also accelerated its pace in undertaking project development activities in theInfrastructure Projects and state-of-the-art technology oriented projects as co-promoterin order to improve overall long term yield on funds deployed with satisfactory 'AssetBase'.

IFCI, being categorized as an NBFC-ND-SI (Non-Banking Financial Company-Non Deposittaking Systemically Important) by RBI, has to compete, in the area of project finance,with Banks and Financial/Investment Institutions. Your Company, having embarked uponsubstantial asset creation in FY 2008-09, after a gap of 10 years, has been able tore-establish business relationships with several major industrial houses in the country byextending financial assistance. Your Company has endeavored to maximize returns, with thein-house experience in infrastructure projects, by investing by way of loans with a mix ofequity, mezzanine and senior debt.

During FY 2009-10, looking to maturity profile of its existing liabilities, IFCI hassanctioned term loans for one to three years duration mainly to meet the short term fundrequirements of companies with excellent track record, for general corporate purposes,investment in subsidiary company/(s), acquisition, subscription to rights issue, purchaseof warrants, refinancing of high cost debt; pre-operative expenses for projectimplementation, etc. against adequate security.

Your Company, during the year, also ensured improvement in various other operationalareas like Treasury and Investments and posted substantially higher level of revenue andprofits.

The details of various developments are given hereunder:

(a) Approvals and Disbursements

During the FY 2009-10, the total fund based approvals were Rs.6,765.56 crore as againstRs.4,014.88 crore in the previous year registering a rise of 68.51%. Out of the aboveapprovals, an amount of Rs.2,620 crore (38.73%) was by way of short & medium termloans, Rs.1,826 crore (26.99%) by way of corporate loans and Rs.1,023.40 crore (15.13%) byway of rupee term loans. The amount approved towards equity and other investments wasRs.1,296.16 crore (19.16%).

Total Disbursements during FY 2009-10 amounted to Rs.6,053.82 crore compared toRs.3,311.45 crore in the previous year registering a rise of 82.81%. Out of the saiddisbursement, Rs.2,339.57 crore (38.65%) was by way of short & medium term loans,Rs.1,575.21 crore (26.02%) by way of corporate loans, Rs.1,082.13 crore (17.88%) by way ofrupee term loans and Rs.1,056.91 crore (17.46%) was disbursed against investmentcommitments mainly in the Infrastructure sector.

(b) Treasury and Investment Operations

During the FY 2009-10, your Company earned income of Rs.118 crore from Treasury(excluding equity) operations mainly through investment in short term paper of top ratedcorporates including Navaratna PSUs, mutual funds, fixed deposits with PSU Banks and primeprivate sector banks. Safety and liquidity were the prime criterias for all investmentdecisions. During the year, your Company pursued the strategy of diversification intocorporate bonds, CP's and CDs and earned profit of Rs.51 crore from the same. The returnson money market/bond investments were higher than the market returns from top ratedinstruments of 1 year maturity.

The most notable success of the treasury operations during the year was the tremendousresponse IFCI was able to generate among all classes of eligible investors. Even thoughIFCI was raising funds from the market after more than ten years, your Company raisedRs.5,000 crore from the market/banks. This demonstrates the confidence being enjoyed byyour Company and above all, places our growth strategy on a sustainable course.

With respect to foreign currency operations, your Company managed its exposure inforeign exchange reasonably well by taking appropriate forward covers. The foreignexchange position was nearly hedged throughout the year. Your Company did not have anyexotic derivatives exposure in equity/debt or foreign exchange market.

On the equity front, the profit earned during FY 2009-10 was Rs.381 crore, whichincluded Rs.363 crore on account of disinvestment and Rs.18 crore through tradingoperations. During the year, all-out efforts were made to exit from slow moving/illiquidstocks and strengthening the portfolio through frontline stocks. Net investment portfolioof your Company (excluding debentures which are in the nature of advance) as on March 31,2010 stood at Rs.4,880.51 crore which is substantially higher than the net investmentamount of Rs.2,934.88 crore as on March 31, 2009.

(c) Management of Non-Performing Assets

Your Company continued to excel in NPA resolution and management activities during FY2009-10. This is evidenced by NPA recovery of more than Rs.570 crore, which far exceededthe recovery budget. The techniques and methods deployed for this purpose were timely,innovative and effective. During FY 2009-10, one time settlements (OTS) were entered intoin 30 cases yielding recovery of Rs.179.56 crore. Assignment of NPAs in 20 cases wereassigned involving recovery of Rs.108.16 crore. NPA Resolution under DRT mechanism alsoyielded satisfactory outcome. During the FY 2009-10, 12 recovery certificates were issuedin favour of your Company amounting to Rs.217.57 crore and the NPA recovery through thisroute was Rs.38.39 crore. Total number of pending suit filed applications as on March 31,2010 was 643 with a claim amount of Rs.9,468.67 crore. The NPA recovery throughliquidation process under the Companies Act amounted to Rs.30.88 crore during the yearunder report.

One mode of effective and speedy recovery of NPAs is through The Securitization andReconstruction of Financial Assets and Enforcement of Security Interest (SRFA & ESI)Act, 2002. IFCI ensured its exemplary competence by recovering a sum of Rs.132.72 crorefrom 24 cases during FY 2009-10 as against Rs.99.02 crore from 12 cases during FY 2008-09.

Your Company, building on its efficient management of NPAs, is acquiring NPAs (frombanks and other lenders). During the FY 2009-10, the gross realisation from this activitywas Rs.16.87 crore against the cost of acquisition of Rs.6.39 crore in 13 cases with anaverage holding period of less than 1.5 year. Your Company intends to explore opportunityin this segment during the years to come.

(iii) Financial Performance

Your Company's profit before tax (PBT) of Rs.1,115 crore in the current year is higherby 10% as compared to Rs.1,010 crore in the previous year mainly on the strength ofcreation of fresh assets in the previous year and current year. The second most importantcomponent contributing to the increase in income has been by way of unlocking values ininvestment portfolio. Profit before provisions for the FY 2009-10 was Rs.667 crore, whichshowed a growth of 12% over previous year's profit before provision of Rs.596 crore,signifying improvement in operations due to creation of fresh assets. Profit after tax(PAT) of Rs.671 crore for the year has shown a growth of 2% over previous year profitafter tax of Rs.657 crore due to adjustments of earlier years on account of amendment toSection 115-JB by Finance (No.2) Act, 2009 with retrospective effect from 2001 andincrease in MAT rate from 11.33% to 16.99%. The increase, in both PBT & PAT, viewedagainst the backdrop of embargo on fresh assets creation and borrowings gives your Companythe confidence of being able to resume growth and expansion, than what seemed possibleeven until a year ago.

Loans to borrowers of Rs.11,152 crore as on March 31, 2010 showed a growth of 35% overloans of Rs. 8,253 crore as on March 31, 2009. Total assets increased by 32% to Rs.19,589crore as on March 31, 2010 from Rs.14,883 crore as on March 31, 2009 primarily due tocreation of fresh assets.

Key financial ratios viz. interest margin, capital adequacy ratio, debt-equity ratio,debt service coverage ratio, return of assets and return on net worth, etc. continue toexude resilience and hope for the operations of your Company.

Basic EPS increased to Rs.9.1 per share for the current year vis--vis Rs.8.6 pershare for the previous year. Book Value (excluding Revaluation Reserve) also increased toRs.42.7 per share as at March 31, 2010 from Rs.37.1 per share as at March 31, 2009 (FVRs.10/-).

Your Company's quality of assets continued to be excellent. the Ratio of Net NPAs toNet Advances was as low as 0.5% as at March 31, 2010 vis--vis 0.9% (excluding a publicsector power project) as at March 31, 2009.

(iv) Segment-wise/Product-wise Performance

Your Company operates in India and hence it is considered to operate only in domesticsegment. More than 90% of revenue for the Company comes from a single segment offinancing. Accordingly, segment reporting as required under Accounting Standard-17, issuedby The Institute of Chartered Accountants of India is not applicable.

(v) Industry-wise Classification of Portfolio

Industry-wise net Outstanding as at March 31, 2010 is given in the table hereunder:

(Rs. crore)

(vi) Opportunities, Threats and future Outlook

Your Company is well poised to expand and diversify its operations and performance inaccordance with its business strategy. Your Company will continue to explore possibilitiesfor new business for short term and medium term with an aim of establishing a niche marketfor itself in the products like short & medium term loans against liquid securities,Take-out Finance and Debt Swapping, etc. In addition to the normal lending activities,your Company continues to concentrate on private equity participation, project developmentactivities, non-fund based income from advisory services, acquisition of NPAs from otherlenders and thrust on the activities of subsidiaries/associate companies.

IFCI as NBFC-ND-SI, is funding niche products, where financing by commercial banks arerestricted. The emphasis would be continued to take exposure in debt, equity with suitableexit options wherever available, liquid listed shares, mezzanine instruments like CCDs,sub-debts etc. of short to medium term.

Although the overall economic scenario in the country is gradually improving, but dueto slow pace of growth in initial period of the year under report, there had been pressureon the credit off-take and also on yields and margins. However, the Union Budget for2010-11 has provided various stimuli for industrial growth in the country, particularly inthe Infrastructure & Services Sector. Various measures announced are expected toprovide positive environment on Industrial Sectors like Oil & Gas, Roads and Bridges,Power Generation & Transmission and Telecommunications apart from Core IndustrialSectors and the overall situation is expected to provide opportunities for robust growthand business potential for your Company.

IFCI shall continue to aggressively pursue project development activities in theinfrastructure projects by way of participating in equity as promoter/co-promoter. Thisendeavour is expected to result in ample opportunities in future where IFCI can involveitself in appraisal, underwriting, syndication of debt/sub-debt, equity etc. besidesacting as the lenders' agent. The said areas would improve the overall return by way ofnon-fund based income such as underwriting, syndication fee etc. IFCI would continue itsendeavour to establish/ re-establish relationship with Corporate Houses of repute andstanding so as to exploit emerging business opportunities during the days to come.

Your Company, having exhibited appreciable efficiency in NPA Management and Resolution,will continue to carry on the said business area which will substantially add to itsbottom-line.

IFCI, with its present Business Model does not envisage any major challenge in short aswell as medium term perspective.

(vii) Risk Management

Risk is an inherent part of IFCI's business. Your Company recognizes this and continuesits endeavor to strengthen the risk management systems and practices. Sound riskmanagement supported by a balanced risk-reward tradeoff is critical to achieving yourCompany's business strategy for business and revenue growth. The Risk Management Committeeof Directors oversees the Credit, Market and Operational Risks and any other risks, as maybe deemed necessary. At the executive level, a Risk Management Committee of Executives hasbeen constituted to facilitate focused oversight of various risks and guide the RiskManagement Department in identification, assessment, monitoring and control of the risks.The Risk Management Department drives risk management centrally and is primarilyresponsible for implementing the risk strategy/ policies approved by the Board, developingprocedures and systems for managing risk, carrying out an independent assessment of creditand market risk and ensuring portfolio composition and quality. The Risk Managementfunction is clearly demarcated and independent from the business operations of yourCompany.

Being primarily a Lending Institution, Credit Risk is the most important for IFCI andtherefore, your Company has put in place a comprehensive credit risk managementarchitecture. With the augmentation of credit portfolio during the year under report, thesystems and controls, in place, to mitigate credit risks including exposure limits forborrowers, borrower groups, industrial sectors, multi-tier credit appraisal system,risk-based monitoring system, committee system for considering proposals and detailed riskassessment of new proposals, have been further strengthened commensurate with the volumeof business activities. The loan policy and risk management policy of your Company isreviewed periodically keeping in view the changing economic and business environment.

Developments in key industrial sectors are reviewed from time to time to evaluate andcapitalize on business opportunities in these sectors. As a part of risk-based AssetReview Framework, Credit Audit of select standard cases with exposure of Rs.25 crore andabove, was taken up during the year under report. Review of large borrower accounts andrelated industries/sectors is also undertaken on regular basis with the objective ofmonitoring and managing the risk in the portfolio. Credit exposures are managed throughtarget market identification, appropriate credit approval processes, post-disbursementmonitoring and remedial management procedures.

The market risk is managed by the Asset Liability Committee (ALCO) through analysis ofstructural liquidity gaps and interest rate sensitivity positions and deployment ofsurplus funds by treasury besides approved limits and triggers for various types ofdeployment. The investment policy of your Company is reviewed periodically in light ofprevalent market scenario. The forex currency risk is being managed by hedging, primarily,through forward cover. To manage the operational risks, there are adequate internalcontrols and systems in place aided and assisted by internal audit, remote back-up ofdata, disaster management policy and appropriate insurance.

With a view to managing risks at institutional level, your Company is implementing theEnterprise-wide Risk Management System (ERMS) with the assistance of a consulting agencyof repute.

The ERMS broadly comprises:

(i) formulation of a framework for risk assessment, measurement and effectivemitigation including risk policy, risk assessment and management methodologies, riskorganization structure and Management Information System (MIS) for assessment andmanagement of credit, market and operational risks at IFCI and

(ii) adoption of internal risk rating models for measuring credit risk in new businessproposals and the existing loan portfolio to facilitate the decision making process andeffectively manage portfolio risk. These initiatives cover enhancement of your Company'srisk management architecture, capabilities, processes, systems and technology.

Going forward, with the growth of business and augmentation of loan portfolio, riskmanagement at IFCI would assume a larger and more complex role. The steps taken wouldstreamline the mechanism for effective overall institutional risk management at IFCI.

(viii) Nominee Directors

Your Company appoints Nominee Directors on the Boards of assisted companies as well asother companies in which your Company has significant stake to safeguard the interests ofyour Company. The Nominee Directors appointed by your Company have played a proactive rolein the development of professional management and formulation of proper corporate policiesand strategies to improve the performance and corporate governance of the assistedcompanies. The feedback reports received from Nominee Directors act as a useful tool forcredit monitoring. The system of nominee directors is functioning effectively in yourCompany.

(ix) Resources

Your Company took up resource mobilization in a big way in the year 2009-10 andmobilized about Rs.5,000 crore as term loans from banks and private placement of bonds atcompetitive rates. The total borrowings of your Company stood at Rs.13,562.46 crore as atMarch 31, 2010, which comprised of rupee and foreign currency borrowings of Rs.13,028.27crore and Rs.534.19 crore respectively.

The investor-wise and instrument-wise break-up of the borrowings as at March 31, 2010are indicated below:

Investor service continued to be of utmost importance for your Company. Investors, whohad not surrendered their bonds for redemption, even after maturity, are being advisedthrough letters or periodical advertisements in newspapers to lodge their claims.Investors' grievances, received in physical form or through web-based query submissionsystem, are taken up promptly and redressed.

(x) Public Deposits

Your Company did not raise any public deposit during the year. There was no publicdeposit outstanding as at the beginning or at the end of the year under report.

(xi) Internal Control Systems & their Adequacy

Your Company has in place adequate systems of Internal Control and the Internal Auditsare being carried out, based on the scope approved by the Audit Committee of the Board ofDirectors (ACD). During the period under review, IT security & software audit was alsocarried out to ensure the security of the entire IT system and to assess the adequacy ofthe IT infrastructure. A 'Risk based Internal Audit' system has been introduced to makeInternal Audit more focused and effective. The Internal Audit Reports are constantlyreviewed by ACD.

(i) Project Development Group

Adequate Infrastructure viz. ports, power, roads, airports, railways, etc. are thepre-requisite and integral part for the growth of Indian Economy.

According to the Central Electricity Authority (CEA), India's peak power demand willreach 1,52,746 MW by the year 2011-12, and 218,209 MW by the year 2016-17 which translatesinto a vast potential for growth and resulting opportunities for investment in the PowerSector. Similarly, recognizing that a modern highway network across the country is acrucial requirement for a rapidly growing economy, Road Transport & Highway Ministryhas set an ambitious target which translates into investment of approximately USD 60billion in the next five years in the Roads Sector.

As a part of its strategy and to leverage on policy decisions taken by the Governmentfor promoting Infrastructure Sector, your Company, with the induction of severalexperienced professionals and post-graduates from India's premier Institutions, hasexpanded its footprint in Project Development activities and continues to invest invarious infrastructure sectors like Roads, Power (Generation and Transmission) etc. It isactively taking part in project development activities right from inception tocommissioning of the projects through bidding and joint venture routes with the objectiveof establishing long term consistent income sources and creating a niche for itself in acompetitive market place.

(ii) Corporate Advisory Services

In the area of providing customized corporate advisory services, your Company, despitestiff competition during the year, has not only been able to retain its existing clientsbut has also been able to secure some prestigious new assignments relating todisinvestment of public sector enterprises on competitive bidding basis, managementconsultancy assignments with respect to bid advisory, due diligence, business valuation,business re-engineering, corporate financial restructuring, besides new assignments withrespect to financial/investment appraisal and bid process management from variousprivate/public sector entities and Central/State Government(s). During the year, yourCompany has also been empanelled with many prestigious clients for various consultancyassignments.

(iii) Sugar Development Fund

IFCI has been acting as an Agent of Government of India (GoI) since inception of SugarDevelopment Fund (SDF) for the purpose of disbursement, follow up and recovery of SDFloans. Cumulative approvals and disbursements under SDF upto March 31, 2010 stood atRs.3,804 crore and Rs.2,808 crore respectively. The agency commission accrued during theyear 2008-09 was of the order of Rs.7.40 crore, which is likely to be Rs.10.25 crore forthe year 2009-10.

During the year 2009-10, the Government launched two schemes of short term loans, forwhich, IFCI received a total of 162 applications for aggregate assistance of Rs. 298.07crore and after appraisal, 130 applications with aggregate amount of Rs. 251.18 crore wererecommended for sanction. IFCI would get Rs.8.00 crore as agency commission for thisassignment over a period of next 4 years.

IFCI has also carried out merchant appraisals for SDF loans, which fetched a fee ofRs.1.24 crore during the year 2009-10 as against a sum of Rs.1.06 crore earned during theprevious year (2008-09).

(iv) Human Resources

Renewed focus on employee performance, improvement in HR systems, creation of competenttalent pool, but above all, development of a public spirited culture and result orientedethos provide a strong platform for accelerated growth of your Company.

The manpower strength of your Company as on March 31, 2010 was 252 including 248executives and professionals as compared to a total strength of 223 as on March 31, 2009.

Your Company has covered considerable ground in establishing itself as a preferredemployer in the Indian Financial Sector. During the year, your Company managed to attracttalent from leading banks, multinational organizations and leading business schools. Astudy conducted jointly by The Economic Times & 'Great Place to Work Institute'recognizing India's best companies to work for in 2010 rated your Company the 3rd BestCompany in the 'Banking and Credit Services' category.

Your Company has taken effective steps towards the career management of its employeesand the identified talent is being exposed to challenging assignments to create a newstream of leadership. HR interventions like new Performance Management System,Compensation Restructuring and Competency Framework Design implemented last year havetaken deep roots in the organization and are helping create a culture of excellence.

Your Company continued its efforts to continuously upgrade the knowledge and enhancethe skill set of its employees. Apart from in-house functional and behavioralinterventions at regular intervals, your Company also organized outbound training programschristened 'The Spirit Within' to improve team effectiveness in the organization. Further,the employees are also nominated to leading institutes in India and abroad for ExecutiveEducation Programs to keep them abreast with the latest developments in the financial aswell as other sectors.

IFCI has always been committed to the twin goals of econimic development andinstitution building.

(v) Information Technology and Communications

Information Technology department has set up 'Central Integrated Information System(CIIS)' which is an umbrella providing solutions to almost all areas of activities ofIFCI. During the year 2009-10, apart from upgrading the existing software applicationswith enhanced/added features to meet the current and emerging business needs, certain newapplication systems were implemented. The new systems developed and implemented include asystem of on-line monitoring of loan assets. The Asset-liability system was upgraded tofacilitate auto-generation of gap report on daily basis for major assets and liabilities.System for projecting and analyzing future cash inflows and outflows under variousfinancial, market and business scenarios has been developed which also facilitates gapanalysis.

IT infrastructure platform like VPN (Virtual Private Network), routers, switches andfirewalls were upgraded to enhance the performance and security of the network. Thee-mailing facility was upgraded with an efficient and improved solution.

With an objective to strengthen and facilitate technological support in theorganization, IT hardware and software infrastructure is being upgraded.

Compliance

Timely submission of various returns and data/information to RBI, SEBI and otherregulatory bodies and the Government of India has been ensured through the ComplianceDivision of your Company at the Head Office.

Corporate Governance

A detailed report on Corporate Governance as stipulated under Clause 49 of the ListingAgreement, are attached to this Report.

Certificate from the Statutory Auditors of the Company regarding compliance with theconditions of Corporate Governance as stipulated in Clause 49 of the Listing Agreement hasbeen obtained and is annexed at the end of Corporate Governance Report.

Conservation of Energy, Technology Absorption, Foreign Exchange Earnings and Outgo

As the Company's operations do not involve any manufacturing or processing activities,the particulars as per the Companies (Disclosures of particulars in the Report of theBoard of Directors) Rules, 1998 regarding conservation of energy and technologyabsorption, are not applicable. The particulars regarding expenditure and earning in theforeign exchange are given in item Nos. 10 and 11 in the Notes to the Accounts.

Particulars of Employees

In terms of provisions of Section 217(2A) of the Companies Act, 1956 read with theCompanies (Particulars of Employees) Rules, 1975 as amended, the names and otherparticulars of the employees are required to be set out in the Annexure to the Directors'Report. However, as per the provisions of Section 219(1)(b)(iv) of the said Act, theAnnual Report excluding the aforesaid information is being sent to the Members and othersentitled thereto. The Annexure is available for inspection by Members at the RegisteredOffice of the Company during business hours on working days upto the date of the ensuingAnnual General Meeting.

Appreciation

The Board of Directors of your Company wish to express gratitude for the cooperation,guidance and support received from the Ministry of Finance, various other Ministries andDepartments of the Government of India, Securities & Exchange Board of India, theReserve Bank of India, other regulatory bodies and State Governments. The Board ofDirectors also acknowledge the continued cooperation received from all overseascorrespondent banks and other members of the banking fraternity.

The Board of Directors would like to sincerely thank the various Banks, FinancialInstitutions and other investors and shareholders for their continued support.

The Directors of your Company place on record their appreciation for the dedicated andsincere services rendered by the officers and staff at all levels.