IDFC - 2008-2009 - Annual Report

INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

TO THE SHAREHOLDERS

Your Directors have pleasure in presenting the Twelfth Annual Report
together with the audited accounts for the year ended March 31, 2009.

FINANCIAL RESULTS

FIGURES IN RS. CRORE
PARTICULARS FY 2008-09 FY 2007-08

Operating Income 3,313.25 2,523.66
Other Income 9.45 11.76
Total Income 3,322.70 2,535.42
Less: Administrative Expenses* 128.79 113.3
Less: Provision for Assets and Losses 149.45 68.82
Profit Before Interest and Taxes 3,044.46 2,353.30
Less: Interest and Other Charges 2,079.54 1,480.25
Profit Before Tax 964.92 873.05
Less: Provision for Tax** 229.00 203.88
Profit After Tax 735.92 669.17

*Administrative expenses include staff expenses; travelling & conveyance;
postage telephone & telex; establishment expenses; other expenses and
depreciation. '' Provision for Tax is net of Deferred Tax

DIVIDEND

Your Directors are pleased to recommend a dividend of Re.1.20 per share
(i.e. 12%) for the year ended March 31,2009.

OPERATIONS REVIEW

While early signs were visible in 2007-08,the global financial system went
into a tailspin in August 2008. There was severe liquidity crunch in the
second half of 2008 and most global financial institutions were left to
deal with the challenge of dealing with large amounts of write-downs. This
meant that the focus was on deleveraging. Consequently, there was a capital
flight to safety, where global institutions pulled out money from emerging
markets like India and also stopped most credit lines. Negative sentiments
and signs of slowdown in the realty sector of the Indian economy also
reduced infrastructure investments. This was more so in the private sector.

Consequently, IDFC had to operate in a scenario of liquidity crunch and
much lower opportunities to finance or provide services to infrastructure,
there was considerable slowdown in the business activities of the Company
in 2008-09. Also, by design, in an environment of higher risks, IDFC
decided to focus on higher quality assets, which could have been at the
cost of balance sheet growth as well.

In this environment, there was a drop in lending activities. Gross
approvals decreased by 49 % from Rs.20,309 crore in 2007-08 to Rs.10,317
crore in 2008-09, while net approvals decreased by 69% from Rs.16,080 crore
in 2007-08 to Rs.4,983 crore in 2008-09. Gross disbursements decreased by
33% cent from Rs.12,006 crore in 2007-08 to Rs.8,085 crore in 2008-09,
while net disbursements decreased by 105 % from Rs.7,755 crore in 2007-08
to net negative of Rs.380 crore in 2008-09.

As on March 31, 2009, IDFC's total exposure to infrastructure projects was
Rs.30,764 crore of which Energy was the highest (40.6%), followed by
Transportation (23.8%) and Commercial and Industrial sector, including
Tourism (16.4%). The share of Telecommunication & IT was 10.9%.

While the investment strategy for treasury operations continues to ensure
adequate levels of liquidity to support core business requirements, it has
started focusing on optimizing levels of return and functioning as a profit
centre investing in fixed income assets, while maintaining prudent safety
norms. Net interest income from treasury operations increased by 27% from
Rs.129 crore in 2007-08 to Rs.164 crore in 2008-09.

The investment banking and institutional brokerage business under the IDFC-
SSKI platform was severely affected by the market down turn and its
income decreased by 49% from Rs.225 crore in 2007-08 to Rs.115 crore in
2008-09. The mutual fund business that was acquired in 2008-09 has been
rechristened IDFC-AMC. The business is going through a phase of structured
stabilization.

The Policy Advisory Group continued to contribute to IDFC's mandate of
leading private capital to infrastructure projects, by providing impetus to
rationalisation of policy and regulatory frameworks.

Private equity, received commitment of US$ 700 million in IDFC Private
Equity Fund III while on the project equity front, it closed out the first
tranche for the landmark India Infrastructure Fund set up by IDFC alongwith
Citigroup and IIFCL. This was worth around US$925 million.

During the year fee income from managing third party assets increased
substantially by 314% from Rs.49 crore in 2007-08 to Rs.203 crore in 2008-
09.

Detailed analysis of the performance of the Company and its businesses,
including initiatives in the area of Information Technology, has been
presented in the section on Management Discussion and Analysis of this
Annual Report.

SUBSIDIARY COMPANIES

IDFC has ten direct subsidiary companies- IDFC Private Equity Company
Limited, IDFC Trustee Company Limited, IDFC Investment Advisors Limited,
IDFC-SSKI Securities Limited, IDFC Project Equity Company Limited, IDFC PPP
Trusteeship Company Limited, IDFC Capital Company Limited, IDFC Finance
Limited (formerly, Feedback First Urban Infrastructure Development Company
Limited), IDFC Asset Management Company Limited (earlier known as Standard
Chartered Asset Management Company Private Limited) and IDFC AMC Trustee
Company Private Limited (earlier known as Standard Chartered Trustee
Company Private Limited). In addition IDFC-SSKI Securities Limited has two
wholly owned subsidiary companies namely, IDFC-SSKI Limited and IDFC -SSKI
Stock Broking Limited. IDFC Finance Limited has a subsidiary called IDFC
Projects Limited, which is a stand-alone infrastructure developer. IDFC-
SSKI Limited has further floated a subsidiary called IDFC Capital
(Singapore) Pte Limited.

A statement of particulars of IDFC's subsidiaries is annexed to this
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
section on Management Discussion and Analysis of this Annual Report.

As approved by the Central Government vide letter dated March 13, 2009
under Section 212(8) of the Companies Act, 1956, copies of Balance Sheet,
Profit And Loss Account, Reports of the Board of Directors and Auditors of
each of the subsidiary companies have not been attached to the accounts of
the Company for F.Y 2008-09. The Company will make available these
documents/ details upon request by any member of the Company. These
documents/details will be available on the Company's website www.idfc.com
and will also be available for inspection by any member of the Company at
its Registered and Corporate Offices and also at the Registered Office of
the concerned subsidiaries. In accordance with the requirements of
Accounting Standard 21 (Consolidated Financial Statements), Accounting
Standard 23 (Accounting for Investment in Associates in Consolidated
Financial Statements) and Accounting Standard 27 (Financial Reporting of
Interests 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 are annexed to this Report.

JOINT VENTURES & ASSOCIATES

IDFC has three joint ventures-Infrastructure Development Corporation
(Karnataka) Limited (iDeCK) in the State of Karnataka, Uttaranchal
Infrastructure Development Company Limited (UDeC) in the State of
Uttaranchal, Delhi Integrated Multi-Modal Transit System Limited (DIMTS) in
Delhi. IDFC also has two associates- Feedback Ventures Private Limited and
Athena Power Projects Limited. iDeCK and UDeC are engaged in advisory and
project development work in the area of infrastructure at respective State
Levels. DIMTS has been set up as a special purpose vehicle to tackle the
problem of ineffective public transport delivery and provide expert
services in the field of urban transport. Feedback Ventures Private Limited
provides consulting, transaction advisory, project development, planning 8
engineering, and project management services to companies, governments,
financial institutions, and developmental agencies in India and overseas.
Athena Power Projects Limited is a consortium between Power Trading
Corporation and IDFC to set up a 1,200 MW power plant in Visakhapatnam in
Andhra Pradesh.

PARTICULARS OF EMPLOYEES

IDFC had 194 employees as on March 31, 2009. Particulars of employees as
required to be furnished pursuant to Section 217(2A) of the Companies Act,
1956, read with the rules thereunder, forms part of this Report. However,
as per the provision of Section 219(1)(b)(iv) of the Companies Act,
1956,the reports and accounts are being sent to all the shareholders of the
Company excluding the statement of particulars of employees. Any
shareholder interested in obtaining a copy may write to the Company
Secretary.

EMPLOYEES STOCK OPTION SCHEME

Pursuant to the resolution passed by the members at the Annual General
Meeting held on August 2, 2006, IDFC has introduced Employee Stock Option
Scheme 2007 (referred to as 'the Scheme') to enable the employees of IDFC
and its subsidiaries to participate in the future growth and financial
success of the Company.

Out of the 6,276,139 options outstanding at the beginning of the year,
605,335 options lapsed on account of resignations and 977,098 options were
exercised during the year.

Additionally, during 2008-09,17,073,250 options were granted to eligible
employees under the Scheme. Accordingly, 21,766,956 options remain
outstanding as of March 31, 2009.

All options vest in graded manner and that are to be exercised within a
specific period. The Company has used the in trinsic value method to
account for the compensation cost of option to employees of the Company.
Intrinsic value is the amount by which the quoted market price of the
underlying share on the date prior to the date of the grant exceeds the
exercise price on the option.

Disclosures as required by clause 12 of the SEBI Employees Stock Option
Scheme and Employee Stock Purchase Scheme Guidelines, 1999 are annexed to
this Report.

CORPORATE GOVERNANCE

Separate detailed chapters on Corporate Governance, Additional Shareholder
Information and Management Discussion and Analysis are attached herewith
and forms part of this Annual Report.

PUBLIC DEPOSITS

During 2008-09, your Company has not accepted any deposits from the public
within the meaning of the provisions of the Non-Banking Financial Companies
(Reserve Bank) Directions, 1998.

FOREIGN EXCHANGE

The particulars regarding foreign exchange expenditure and earnings are
furnished at Item Nos. 13 & 14 in the Notes to the Accounts. Since the
Company does not own any manufacturing facility, the other particulars in
the Companies (Disclosure of Particulars as required under the Report of
the Board of Directors) Rules, 1998 are not applicable.

LISTING OF SHARES

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

DIRECTORS

Dr. Rajiv B. Lallwas appointed as the Managing Director & CEO of the
Company for a period of five years with effect from January 10,2005. The
term of office of Dr. Lall as Managing Director & CEO will expire on
January 9, 2010. The Board of Directors on the recommendation of the
Nomination Committee, at its meeting held on April 28, 2009,approved
reappointment of Dr. Lall for a further period of 3 (three) years effective
January 10, 2010. The shareholders are requested to consider the
reappointment of Dr. Lall at the ensuing AGM.

The Board at its meeting held on September 15, 2008, appointed Mr. Vikram
Limaye as Additional Director and designated him as Whole-time Director.
Approval of the members is being sought at the ensuing AGM.

In accord ance with the Articles of Association of the Company and
provisions of the Companies Act, 1956, Mr. Deepak S. Parekh, Mr. S.S.Kohli,
Mr. S.H.Khanand Mr. Donald Peck are retiring by rotation and being
eligible, offer themselves for reappointment at the AGM.

INTERNAL CONTROL SYSTEMS

The Company has in place adequate systems of Internal Control to ensure
compliance with policies and procedures. Internal Audits of all the units
of the Company are regularly carried out to review the Internal Control
systems. The Internal Audit Reports along with implementation and
recommendations contained therein are constantly reviewed by the Audit
Committee of the Board.

AUDITORS

Messrs. Deloitte Haskins & Sells, Chartered Accountants, will retire as the
Statutory Auditors of the Company at the ensuing AGM. The Board, at its
meeting held on April 28, 2009 has proposed their reappointment as Auditors
to audit the accounts of the Company for the financial year ending March
31, 2010.

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

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that: the applicable accounting standards have been
followed in the preparation of the annual accounts and that there are no
material departures; they have selected such accounting policies and
applied them consistently and made judgements and estimates that are
reasonable and prudent, so as to give a true and fair view of the state of
affairs of the Company at the end of the financial year and of the profits
of the Company for the year; they have taken proper and sufficient care for
the maintenance of adequate accounting records in accordance with the
provisions of the Companies Act, 1956,for safeguarding the assets of the
Company and for preventing and detecting fraud and other irregularities;
and they have prepared the annual accounts on a going concern basis.

ACKNOWLEDGEMENTS

IDFC has developed close relationships with the Ministry of Finance (MoF),
Banking Division, Ministry of Surface Transport, National Highways
Authority of India, Ministry of Power, Department of Telecommunications,
Ministry of Petroleum and other Ministries of the Government of India
involved with infrastructure development, Reserve Bank of India, Securities
& Exchange Board of India and regulatory bodies, TRAI, the Central
Electricity Regulatory Commission and State Electricity Regulatory
Commissions; the Planning Commission; IIT (Kanpur); IIM (Ahmedabad); the
State Governments and all IDFC's Shareholders. The Board of Directors
wishes to gratefully acknowledge the assistance and guidance received from
all of them. IDFC could make the progress it has in these years due to the
dedication and creativity of its staff at all levels. The Board of
Directors wishes to place on record their warm appreciation for these
efforts.

For and on behalf of the Board

Deepak S. Parekh
Chairman

MUMBAI,
JUNE 4, 2009

ANNEXURE DISCLOSURE IN THE DIRECTORS' REPORT AS PER SEBI GUIDELINES:

PARTICULARS 2008-2009

1. Options outstanding as at the beginning of the year 6,276,139

2. Options granted during the year 17,073,250

Options maybe granted
at a price not less
3. Pricing Formula than the face value
per share. Options have
been granted at Rs.17.48
to Rs.138.80
4. Options Vested- 4,153,401

5. Options Exercised during the year 977,098

6. Total no. of shares arising as result
of exercise of Options 977,098

7. Options lapsed** 605,335

8. Variation in terms of Options None

9. Money realised by exerise of Options(Rs.) 17,079,674

10. Total number of options in force 21,766,956

** The number of options have been reported as on 31.03.2009

* Lapsed Options includes options cancelled/lapsed.

11. Diluted Earnings Per Share pursuant to issue of shares on exercise of
option calculated in accordance with AS-20'Earnings Per Share' (Rs.)

12. PRO FORMA ADJUSTED NET INCOME AND EARNINGS PER SHARE

PARTICULARS RUPEES

Net Income 7,359,185,034
As Reported -
Add: Intrinsic Value Compensation Cost 123,132,742
Less: Fair Value Compensation Cost 252,531,217
Adjusted Pro Forma Net Income 7,229,786,559
Earning Per Share: Basic -
As Reported (Rs.) 5.68
Adjusted Pro Forma (Rs.) 5.58
Earning Per Share: Diluted -
As Reported (Rs.) 5.67
Adjusted Pro Forma (Rs.) 5.57

13. Weighted average exercise price of Options granted during the year
whose.

(a) Exercise price equals market price 49.87
(b) Exercise price is greater than market price NA
(c) Exercise price is less than market price 120.41

14. Weighted average fair value of Options granted during the year whose:

(a) Exercise price equals market price 21.30
(b) Exercise price is greater than market price NA
(c) Exercise price is less than market price 72.97

15. Description of method and significant assumptions used to estimate the
fair value of options:

The fair value of the options granted has been estimated using the Black-
Scholes option pricing Model. Each tranche of vesting have been considered
as a separate grant for the purpose of valuation. The assumptions used in
the estimation of the same has been detailed below:

VARIABLES WEIGHTED AVERAGE VALUES
FOR ALL GRANTS MADE DURING THE YEAR

Stock Price (Rs.) 73.20
Volatility 57.66%
Riskfree Rate 6.52%
Exercise Price (Rs.) 64.41%
Time To Maturity 2.63
Dividend yield 1.05%
Weighted Average Value (Rs.) 31.96

Stock Price: Closing price on NSE as on the date of grant has been
considered for valuing the grants.

Volatility: The historical volatility from the date of listing till the
date of grant has been considered to calculate the fair value.

Risk-free rate of return: The risk-free interest rate being considered for
the calculation is the interest rate applicable for a maturity equal to the
expected life of the options based on the zero-coupon yield curve for
Government Securities.

Exercise Price: Price of each specific grant have been considered.

Time to Maturity: Time to Maturity/ Expected Life of options is the period
for which the Company expects the options to be live. The minimum life of a
stock option is the minimum period before which the options cannot be
exercised and the maximum life is the period after which the options cannot
be exercised.

Expected divided yield: Expected dividend yield has been calculated as an
average of dividend yields for three financial years preceding the date of
the grant.


MANAGEMENT DISCUSSION AND ANALYSIS

Infrastructure Development Finance Company Limited ('IDFC' or 'the Company)
was set up in 1997 to act as a financier and catalyst for the development
of private sector sponsored infrastructure projects in India. Over the last
12 years, and more so since the Initial Public Offering (IPO) in July 2005,
IDFC has pursued a focused growth strategy to evolve rapidly into a 'one-
stop-shop 'for infrastructure finance in India, capable of meeting the
increasingly complex and ambitious requirements of an expanding client
base.

Infrastructure typically involves projects with longgestation periods,with
each project going through different phases of implementation. Broadly
speaking, it begins with conceptualising a project. Then the full project
plan is developed,followed by financial closure. Next comes the execution
phase,where the underlying physical infrastructure is actually created.
Finally, the project moves to revenue generation, when the underlying asset
starts getting utilised and generates actual income streams. Each of the
phases has different risk return profiles.

IDFC's expertise lies in a deep understanding of the risks and
opportunities associated with the different phases of a project's life-
cycle, and appropriately packaging differentiated financial solutions that
best meet the requirements of investors and clients at the different stages
by progressively expanding the range of its skills, products and services
beyond the traditional project lending to investment banking as well as
different types of asset management. This diversified range of product and
service capability has strengthened IDFC's core business model and has
propelled the Company into one of India's premier financial services
platform leveraging knowledge and talent to span the areas of
infrastructure project finance, asset management and investment banking.

Much of IDFC's business is about mobilising international as well as
domestic capital. Naturally, like other businesses, it has to deal with
demand and supply side issues. While the demand side issues are domestic in
nature and relate largely to the appetite for private investment especially
in the Infrastructure sector, the supply side issues are more global. These
include factors like cost of capital, liquidity and investor confidence
that are intrinsic to international capital flows.

On both fronts there were significant developments in the macro-economic
environment and overall market conditions, which played a key role in
defining the Company's strategy and progress during 2008-09. In this
context, it is important to first analyse the structural changes that took
place in the macroeconomic environment to appreciate the challenges that
IDFC had to face and overcome during 2008-09.

THE BUSINESS ENVIRONMENT AND IDFC

As was reported in last year's Annual Report, the fall in housing prices in
the US had sparked off the sub-prime lending crisis in the middle of 2007.
Credit downgrading by rating agencies and increased default risk of various
housing backed paper, particularly collateralised debt obligations (CDOs)
that were sliced, diced and far removed from the original assets, rapidly
spread throughout the US, and then to the European and Asian financial
systems.

In a matter of months, what had started as a US housing problem became a
major crisis that affected the entire global financial system. Several
large international financial institutions were left to grapple with the
consequences of large asset write-downs. Soon this led to an unprecedented
contraction of credit in the system-especially in the last three and a half
months of 2008, after the collapse of Lehman Brothers on 14th September.

Thanks to massive financial, monetary and fiscal interventions by the US as
well as major European nations, the acute financial crisis passed by
January 2009. But it scarred the real economy everywhere in the world.
Starting with the US in the third quarter of 2008, every major developed
country went into a recession-which continues till today. At the time of
writing this Management Discussion and Analysis, the global situation
remains grim. Indeed, this is the worst economic downturn that the world
has seen since the Great Depression of the 1930s.

The US has already suffered from three successive quarters of negative GDP
growth, with possibly more to follow. Although it is believed by some that
the US economy will bottom out by the end of the third quarter of 2009, the
estimated GDP growth for 2009 will be -2.9%. In April 2009, unemployment
was at 8.9%, and rising-the worst since the early 1980s.

The Euro area is also in a deep recession, and structurally much worse off
than the US. GDP growth for 2009 is estimated at-3.7%.

Japan is heading for yet another period of longterm de-growth. Industrial
output has been falling by more than 30% every month compared to a year
earlier; and GDP growth for 2009 is being estimated at-6.4%.

With an estimated 11% to 12% fall in the real value of world trade in 2009,
China's growth is expected to reduce to high single digits.

India's growth is down from the 9% plus range of the last three years to
6.7% in 2008-09, with the chances of it being similar in 2009-10.

THE GLOBAL FINANCIAL SYSTEM:

A SHORT HISTORY

While financial markets in the US and Europe were feeling the pressure in
the second half of 2007-08, other capital markets, especially in emerging
economies, did not seem to think that the sub-prime problem would play out
into a full blown crisis of financial confidence. That changed by the first
half of 2008-09, when everyone began to see a clearer picture of the extent
of write-downs undertaken by the major international financial houses on
account of their non-performing assets. Even without accounting for under-
reporting, the numbers were staggering.

Reported write-downs reached US$760 billion by end-September 2008, of which
US$580 billion were incurred by global banks. As expected, losses were
mostly mortgage related, and primarily related to the US and European
banks. Non-bank institutions had to shoulder at least US$180 billion of the
losses. Around US$100 billion of credit-related losses were reported by
insurance companies, of which US$20 billion was on account of mono-line
insurance underwriting. Write-downs taken by Government Supported
Enterprises (GSEs) were about US$20 billion. Hedge funds and other market
participants were estimated to have incurred US$60 billion in losses. This
was the beginning, and ittriggered massive deleveraging as financial
institutions were forced to deal with ever bloating non-performing assets
on their books.

Unfortunately, as the deleveraging process began, the financial world was
hit by the multiple tsunamis of September 2008. Box 1 highlights each key
hit in the course of that terrible month.

After this, what began as coordinated deleveraging rapidly turned into a
free-for-all rout. By October 2008, banks lost all confidence in each other
and their clients; nobody was willing to do any counter-party deals; it
became impossible to seek credit; and liquidity disappeared from the
system.

According to the IMF, the world will have spent some US$ 4.1 trillion
during 2007-2010 on account of this crisis. It has taken coordinated
monetary and fiscal intervention of such magnitude get some semblance of
order and confidence back in the financial system. Even this may not be
enough. The world is poised at a stage where one or two seriously bad news
flows from any global financial send the system into a tailspin. Chart A
shows the scale of this financial crisis compared to some earlier ones.

Fortunately, Indian financial institutions have not exhibited similar
levels of fragility. Except for the month of October 2008, inter-bank
confidence has been relatively normal and money markets have continued to
function. Moreover, the Reserve Bank of India (RBI) has repeatedly
intervened to reduce policy rates, increase liquidity and ease constraints
in interbank lending. Nevertheless, it would be incorrect to say that the
global financial turmoil left India unaffected. There was a significant
capital flight especially by foreign institutional investors; lower capital
inflows;sharp depreciation of the Indian rupee against most major
currencies, but especially the US dollar; and huge fall in equity values on
account of reverse capital flows. Moreover, virtually all overseas lines of
credit for banks and Indian companies dried up. The months of September,
October and November were particularly bad as the financial system
witnessed significant pressures on the liquidity front. These months saw
the mutual fund industry facing unprecedented redemption pressure; the
credit environment tightening such that AAA credits were able to raise
funds only at historically high premiums; credit being denied to small and
medium enterprises; and the real estate industry being brought to a stand
still on account of a very severe liquidity squeeze.

Being a wholesale funded lndian financial intermediary, IDFC had to
confront the challenges of raising capital and maintaining liquidity during
2008-09. IDFC's balance sheet is pre-dominantly funded in rupees from
domestic banks and insurance companies. Even through the most challenging
period towards the later part of 2008, IDFC was always in a position to
raise resources, albeit at a price, and was able to effectively negotiate
the liquidity crunch. In addition in 2008, IDFC managed to mobilise US$ 1.6
billion dollars of fresh capital (substantially from overseas) for its
India Infrastructure Fund and the third fund of IDFC Private Equity, not
with standing a very difficult international environment for fund raising.
IDFC AMC weathered the strong redemption pressure that struck the mutual
fund industry to emerge stronger, with significantly larger assets under
management and with a higher market share than at the beginning of the
fiscal year.

THE REAL ECONOMY

Chart B shows the decline in global output growth from5.2% in 2007to3.2% in
2008 and an estimated -1.3% in 2009. Much of the slowdown has been in
advanced economies of the USA and the EU. US growth reduced to 1.1 in 2008
and is estimated to be -2.9 % in 2009. EU growth was a mere 0.9% in 2008.
In 2009, it is expected to be-3.7%. Japan has got into yet another crisis,
with 2009 growth forecasted at -6.4%. Thanks to such acute de-growth in the
real sectors of developed economies, global trade is predicted to shrink by
11% in 2009-the worst since the Great Depression.

India,too, has been affected. After growing by over 9% for three successive
years -200506, 2006-07 and 2007-08 - India's growth for 2008-09 fell to
6.7%, particularly because of poor performance in the second half of the
fiscal year. To be sure, it is better than all developed and most emerging
markets. Nevertheless, a 230 basis points compression in growth has
affected demand and order books. Chart C plots the Indian growth data.

With this slow down, India has seen a contraction of growth in
infrastructure spend.

Joint Venture Company formed by The Tata Power Company Limited (TPCL) and
Tata Steel Limited (TSL). IEL proposes to setup 2 power projects of 120 MW
each with an aggregate project cost of Rs.11.10 billion. The projects will
serve as captive power plants to TSL and surplus power will be supplied to
Adityapur Industrial Area, near the Jamshedpur plant of TSL. One of the
power projects will utilise waste gases generated by blast furnace, coke
oven and LD converter of TSL and provide 'green power'.

Chart D shows how core infrastructure growth in the April-February period
reduced from 5.8% in 2007-08 to 3% in 2008-09.

The drop in infrastructure growth as a whole was bad enough. The fall in
private sector infrastructure development was even worse. Negative global
sentiments and the liquidity squeeze exacerbated negative sentiments among
project sponsors and developers. Consequently, funding opportunities in
2008-09 were adversely impacted compared to a year earlier.

2008-09 PERFORMANCE HIGHLIGHTS

Given these difficult times, both in the financial sector and the real
economy, IDFC's performance in 2008-09 has been creditable. The Company's
consolidated performance is given in Box 2.

2008-09 was a challenging year for IDFC where most of its businesses faced
significant head winds, liquidity was a concern, and capitala constraint in
the face of the exceptionally harsh stance taken by a rating agency with
respect to the minimum amount of capital cushion deemed necessaryto
maintain the Company's.

AAA rating. IDFC reoriented its priorities in line with the changing
landscape deliberately eschewing balance sheet growth in favour of a focus
on liquidity, capital conservation, asset quality and profitability. During
the course of 2008-09, IDFC demonstrated its nimbleness in confronting a
rapidly changing business environment and managed never the less to deliver
a decent performance.

The Company's stress on quality of assets is borne out by the fact that as
of 31 March 2009, despite rapidly deteoriorating business conditions, IDFC
had only 0.21% net non-performing assets (NPA) and only 0.37% gross NPAs.
In 2008-09, IDFC made provisions for standard assets of Rs.151 crore,
bringing its cumulative provisions to Rs.371 crore, or the equivalent of
1.8% of its loan book by March 31, 2009. With such a loan loss cover in
place, IDFC management can comfortably focus on exploiting business
opportunties without having to be distracted unduly by asset quality
concerns.

IDFC's focus on capital conservation is evident from its capital adequacy
ratio which stood at 23.75% as of 31 March 2009. This gives the Company
enormous balance sheet strength which can be leveraged for further growth.
At the end of the fiscal year 2008-09, IDFC stood extremely well positioned
to take quick advantage of any revival in economic activity.

1. Return on Assets Tree:

% OF AVERAGE TOTAL ASSETS
2008-09 2007-08

Infrastructure 2.56 2.37
Treasury 0.55 0.54
Net Interest Income 3.11 2.91
Principal Investments 0.62 0.91
Asset Management 0.69 0.21
Investment Banking for Broking 0.39 0.95
Loan related & Other Fees 0.37 0.54
Non-interest Income 2.07 2.59
Misc Fees 0.07 0.05
Operating Income 5.25 5.56
Operating Expense 1.24 1.07
Pre-provisioning Profits 4.01 4.49
Provisions& Loans 0.52 0.29
PBT 3.49 4.20
Tax Minority Interest 0.96 1.08


OUR BUSINESS PLATFORMS

IDFC's particular strength is its ability to leverage its intellectual
capital and experience to offer a suite of products and services to its
customers especially at various stages of the infrastructure sector life
cycle. Its goal is to offer a compelling value proposition to its clients
while also delivering the benefits of diversified revenue stream to
shareholders through a combination of balance sheet intensive and non-
intensive businesses. Accordingly, IDFC has organised its business on four
broad platforms as follows:

* Project Finance: This is the core financing business of IDFC. It
comprises the capital intensive balance sheet business that includes the
loan book. This business is expected to generate reasonable returns, that
creates the Company's base income stream.

* Principal Investments and Treasury: Principal investments are
substantially infrastructure focused (listed and unlisted both) but also
include a significant component of investments in non-strategic financial
entities and venture capital units (which comprise IDFC'sown investments in
the various third party funds that it has launched and that it manages).
Treasury has a dual responsibility of providing liquidity to the various
businesses that need capital and also generating returns on the proprietary
book that it manages. Both, the liquidity book and the proprietary book,
are focused entirely on debt instruments and the investing algorithm
governing treasury encapsulates safety, liquidity and returns. Contribution
from principal investments to operating income in 2008-09 was relatively
impressive and treasury recorded its highest ever net interest income
contribution in 2008-09.

* Investment Banking and Institutional Brokerage: This business is driven
through IDFC-SSKI. Although returns in this business are high, there is
substantial volatility based on the state of the capital markets and the
consequent demand for investment banking and institutional brokerage
services. 0 Asset Management: This is one of IDFC's noncapital intensive
businesses. Here the Company raises third party funds of different kinds
and manages them. IDFC's suite of alternative third party funds includes
private equity (focused on capital appreciation), project equity (more
focused on long terms yield than on capital appreciation), and fund of
funds. In addition, it includes IDFC Asset Management Company, a large
mutual fund platform which was acquired from Standard Chartered Bank in May
2008. IDFC generates a relatively steady flow of income from management
fees from all its third party funds, but it also has scope for generating
high, albeit more volatile, returns from the 'carry' of the alternative
asset classes.

The revenue contribution of the various businesses is captured in the
RoA tree (table 1). Amongst the four businesses, Principal Investments &
Treasury and Investment Banking & Institutional Brokerage are market facing
and hence, are subjected to the vagaries and volatility of the market.
Project Finance is relatively more stable but is contingent upon loan
growth, asset quality and spreads. The business that imparts stability to
the overall operating income is Asset Management and the contribution of
this business in 2008-09 was impressive (highest among the non-interest
income businesses). The fees from asset management quadrupled during the
year and the AUMs were closing in on the overall balance sheet size (AUMs
of Rs.240 billion and balance sheet of Rs.298 billion).

Net interest income contributed 3.1% of average total assets. Of that,
contribution from infrastructure increased from 2.4% in 2007-08 to 2.6 % in
2008-09 while contribution from treasury was stable. The contribution from
non interest income decreased from 2.6% in 2007-08 to 2.1% in 2008-09
largely on account of the decline in contributions from principal
investments and investment banking. Their contributions were0.6% and 0.4%
respectively in 2008-09 as against 0.9% and 0.9% in 2007-08. Contribution
to RoA from asset management increased substantially from 0.2% in 2007-08
to 0.7% in 2008-09. Miscellaneous income contributed 0.1% in 2008-09.

The total operating income decreased from 5.6% in 2007-08 to 5.2% in 2008-
09. Operating expenses increased marginally to 1.2%. Provisions increased
from 0.3% in 2007-08 to 0.5% in 2008-09. Tax and minority interest were at
1.0% in 2008-09. PAT, therefore, captured in the return on assets decreased
from 3.1% in 2007-08 to 2.5% in 2008-09.

The relatively high ratio of non-interest income to net interest income
reflects IDFC's efforts to reduce its dependence on just the loan book for
revenue growth. However, this ratio has tended to oscillate in line with
the buoyancy in capital market conditions. When capital market conditions
are favourable, the relative contribution of non-interest revenue streams
grows rapidly. The opposite tends to be the case when capital markets are
flagging. Thus, in 2006-07, the ratio of non interest income to net
interest income was 40:60 and this moved to roughly 50:50 in 2007-08, an
exceptionally strong year for capital markets. 2008-09 saw the ratio revert
back close to 40:60 reflecting the challenging conditions for capital
market related businesses. Nevertheless, overall volatility in earnings was
significantly mitigated in 2008-09 because of the of the quadrupling of the
asset management related revenues during the year. This is an indication of
the growing effectiveness of the Company's deliberate strategy of further
diversifying its revenue streams while delivering a wider range of products
to serve the increasingly complex requirements of its client base.

PROJECT FINANCE

The Company provides different financial instruments to its clients. These
include corporate loans, project loans, and loans against shares, sub debt,
mezzanine finance and equity. IDFC's consolidated exposure using all these
instruments was Rs.30,764 crore (Rs.308 billion in 2008-09). The total
exposure has reduced in 2008-09 by 10% over 2007-08. This was essentially
due to reorientation of the Company's strategy to focus on conserving
capital, asset quality and profitability and hence, consciously targeting a
much lower growth in 2008-09 and also due to the significantly lower
financing opportunities in private sector infrastructure development in
India. The reorientation of the Company's strategy led to it becoming even
more selective with projects during 2008-09. This, and the macroeconomic
environment led to slowing down the project finance business in 2008-09.
Although the loan book grew by 2% to Rs.20,963 crore (Rs.210 billion) in
2008-09,gross approvals and disbursements reduced significantly during the
course of the year. However, net interest income from infrastructure rose
by 34% to Rs.758 crore (Rs.7.6 billion) in 2008-09.

Annual gross approvals, including equity and non-funded assistance,
decreased by 49% to Rs.10,317 crore (Rs.103 billion) in 2008-09, while net
approvals decreased by 69% to Rs.4,983 crore (Rs.50 billion)

Annual gross disbursements, including equity, decreased by 33% to Rs.8,085
crore (Rs.81 billion) in 2008-09, while net disbursements was net negative
at Rs.380 crore (Rs.3.8 billion) in 2008-09

* Net interest income from lending activities increased by 34% from Rs.565
crore (Rs.5.7 billion) in 2007-08 to Rs.758 crore (Rs.7.6 billion) in 2008-
09, while net disbursements was net negative at Rs.380 crore (Rs.3.8
billion) in 2008-09

Net interest income from lending activities increased by 34% from Rs.565
crore (Rs.5.7 billion) in 2007-08 to Rs.758 crore (Rs.7.6 billion) in 2008-
09

As on March 31, 2009, IDFC's cumulative net approvals stood at Rs.51,861
crore (Rs.519 billion). Of this, Rs.44,260 crore (Rs.443 billion) has been
disbursed leaving Rs.7,601 crore (Rs.76 billion) as undisbursed approvals.
Of the cumulative gross disbursements, Rs.21,150 crore (Rs.212 billion) has
been repaid, leaving a cumulative outstanding disbursement of Rs.23,110
crore (Rs.231 billion).

IDFC's project finance business is focused primarily on four infrastructure
sectors energy, transportation, telecom and IT, and industrial and
commercial. As Chart E shows, energy was the largest exposure, and its
share increased from 36.9% in 2007-08 to 40.6% in 2008-09. This is followed
by transportation, whose share remained stable at 23%.The share of
industrial and commercial declined marginally from 11.2% in 2007-08 to 11%
in 2008-09. The share of telecom and IT reduced from 15.8% in 2007-08 to
10.9% in 2008-09.

The extent of slowdown in IDFC's project financing activity during the year
is reflected in quarterly movements in the Company's gross disbursements
and approvals during 2008-09. As Chart F shows, April-June 2008 was
healthy. Levels fell in July-September 2008, which was the time when the
Company decided to reorient its strategy for 2008-09. These fell further in
October-December 2008, but began to improve in January-March 2009.

PRINCIPAL INVESTMENTS AND TREASURY PRINCIPAL INVESTMENTS

Principal investments are made directly from the Company's own balance
sheet, which form part of proprietary investments. There are broadly three
types of investments in this portfolio:

Infrastructure investments, are generally made to build longer term
relationships with sponsors by supplementing project finance with some
direct equity stake in projects and companies and supporting them by
sharing risks. Here, the Company has a clear exit route based on
appreciation of the equity value. The depressed share markets in India
meant that there was limited scope for such exits

Financial investments, includes investments in NSE, STCI and ARCIL to
generate returns.

Investment in venture capital units, for funds which are launched and
managed by IDFC.

As on March 31, 2009, total exposure to IDFC's equity investments,
excluding strategic investments, was Rs.2,266 crore (Rs.23 billion)

The equity book decreased by 1 % from Rs.1,376 crore (Rs.13.8 billion) on
31 March 2008 to Rs.1,357 crore (Rs.13.6 billion) on 31 March 2009. Of
this, Rs.355 crore (Rs.3.6 billion) was financial investments, while Rs.681
crore (Rs.6.8 billion) was infrastructure investments and Rs.320 crore
(Rs.3.2 billion) was in units of venture capital funds

Income from the Company's principal investments, which includes dividends
and capital gains, decreased by 15% from Rs.216 crore (Rs.2.2 billion) in
2007-08 to Rs.184 crore (Rs.1.8 billion) in 2008-09

TREASURY

Given the global environment, liquidity was at a premium. Even so, IDFC
managed to raise and deploy sufficient funds in its liquidity book to
support lending activities, while judiciously dealing with fixed income
security investments in the proprietary book to generate profits. These
profits were generated without exposing the Company to excessive risks.

Durations were almost matched on assets and liabilities. As on 31 March
2009, the duration of assets was 1.65 years while duration of liabilities
was 1.56 years. IDFC's approach is to stay duration matched on assets and
liabilities. The asset side duration is taken as a given and efforts are
made to ensure that the duration of liabilities is matched as closely as
possible to that of assets.

Treasury assets increased by 4% from Rs.5,408 crore (Rs.54.1 billion) on 31
March 2008 to Rs.5,637 crore (Rs.56.4 billion) on 31 March 2009

Net interest in come from treasury operations increased by 27 from Rs.129
crore (Rs.l.3 billion) in 2007-08 to Rs.164 crore (Rs.l.6 billion) in 2008-
09

ASSET MANAGEMENT

The Company expects to benefit in various ways through asset management.
First, it can generate a steady stream of income as fees by managing its
third party fund business. There is also the opportunity to receive' carry;
or share of gains, from such investments. Second, by supporting sponsors
with equity infusions, the Company improves the risk profile of projects
and makes them more attractive. Third, IDFC also benefits from investments
it makes in various funds that it sponsors and manages. Fourth, IDFC can
also utilise its balance sheet to co-invest in projects/ companies
along with the funds.

This business has the potential to provide substantial growth opportunities
to the Company. The total assets under IDFC's management on 31 March 2009
were US$ 4.7 billion (Rs.240 billion). The asset management fees thus
accrued increased four times from infrastructure companies. This business
is undertaken through its wholly-owned subsidiary, IDFC Private Equity
Company Limited ('IDFC Private Equity') which acts as investment manager
for funds dedicated to private equity investments in the infrastructure
space.

In June 2008, IDFC Private Equity closed its third fund which mobilised
U5$700 million from high quality offshore investors. This fund added to
IDFC's existing U5$190 million India Development Fund whose original corpus
has been paid back to institutional investors and the U5$440 million IDFC
Private Equity Fund II, which has been fully committed.

As of 31 March 2009, total assets under IDFC Private Equity's management
were around U5$1.2 billion or Rs.5,992 crore (U5$1= Rs.50.74).

PROJECT EQUITY

IDFC's project equity is focused on investing in operating assets of mid-
size projects. Many of these investments are in the post-construction
stage, and hence have lower risk-return profiles compared to pure private
equity investments.

IDFC has been raising the India Infrastructure Fund for such investments,
along with Citi group. Both IDFC and Citi had initially committed U5$100
million each in this fund. The first close of the fund was around U5$ 500
million was announced in June 2008. As on March 31, 2009, the fund had
received commitments of U5$ 875 million.

IDFC AMC

IDFC acquired Standard Chartered's Mutual Fund business, India, in May 2008
and the company has been rebranded as IDFC AMC. This is IDFC's foray into
the mutual fund business.

At the time of acquisition of the AMC, the assets under management were
around Rs.14,000 crore, with a mix heavily skewed towards debt. The fund
was ranked 14th at the time of acquisition. Although IDFC AMC coped with
the crisis confronting the mutual fund industry in the later part of 2008
well, it saw its AUMs decline sharply to below Rs.9,000 crore. However,
this crisis helped IDFC AMC emerge stronger and led to a substantial
increase in its AUMs and market share while the industry as a whole shrank.
Concerted efforts at leveraging the IDFC brand, investing in sales and
distribution and focusing on disciplined growth led to IDFC AMC's position
improving to 12th in the market.

This franchise is in the growth phase and hence, investments will be made
to expand its presence across key locations in the country. The endeavour
will be to ensure that the pace of expansion is self-sustaining to the
maximum extent possible.

Today, the integration of people and processes of this franchise into the I
DFC system is in the process of being completed. With a strong team in
place, IDFC AMC is focusing on growing the number of branches and also
launching new products and services.

IDFC GLOBAL ALTERNATIVES

IDFC Global Alternatives (IDFCGA), based in Singapore, is an emerging
markets private equityfund-of-funds business. IDFC GA will focus mainly on

Asia and the Commonwealth of Independent States (CIS),with a smallerglobal
allocation. The current economic down turn has slowed down the activities
of this fund. IDFC GA will be in fund raising mode sometime in the year
2009-10.

INVESTMENT BANKING: IDFC SSKI

The IDFC SSKI platform drives the Company's investment banking and
institutional stock broking business. In addition, it utilises the in-house
expertise and brand positioning to provide a gamut of services across
different areas like equity capital raising, debt syndication, structured
finance, corporate debt and advisory. inspite of facing challenging times
in 2008-09, the performance of IDFC SSKI was creditable.

2. Abridged Consolidated Profit And Loss Account:

2008-09 2007-08

Total Operating Income 1556 1324
of which
Infrastructure Income 758 565
Treasury 164 129
Total Net Interest Income 922 694
Principal Investments 184 216
Asset Management 203 49
Investment Banking 115 225
Infrastructure loans related fees 111 127
Total Non Interest Income 613 617
Other Misc. income 20 12
Total Operating Expenses 367 254
Pre-Provisioning Profits 1189 1070
Provisions and Losses 153 70
PBT 1036 1000
Tax 278 248
PAT 758 752
Associated Company Profits 1 5
Minority Interest & Pre-acquisition Profits 9 15
Consolidated PAT after minority interest 750 742

IDFC SSKI's primary business of investment banking involves taking
companies public and advising on corporate capital raising and structuring
deals. The primary equity or IPO market completely collapsed in 2008-09,
with the number of IPOs during the year reducing to single digit levels. In
this environment, it was creditable that IDFC SSKI was present in over 50%
of the deals. On the institutional brokerage front too, there was a sharp
drop in market volumes (declined by over 50%) resulting in an significant
decline in brokerage fees.

Thus, income from investment banking and broking decreased by 49% from
Rs.225 crore (Rs.2.2 billion) in 2007-08 to Rs.119 crore (Rs.1.2 billion)
in 2008-09.

FINANCIAL REVIEW

The abridged consolidated profit and loss account of IDFC for 2008-09 are
presented in Table 2. Highlights of the performance are:

Total operating income increased by 17.5 to Rs.1,556 crore (Rs.15.5
billion) in 2008-09. This was driven primarily by a 33% increase in net
interest income from Rs.694 crore (Rs.6.9 billion) in 2007-08 to Rs.922
crore (Rs.9.2 billion) in 2008-09.

Pre-provisioning profits increased by 11.1 to Rs.1,189 crore (Rs.11.8
billion) in 2008-09.

Due to a 118.6% increase in provisioning and losses, Profit Before Tax
increased by 3.6% to Rs.1,036 crore (Rs.10.3 billion) in 2008-09.

Profits After Tax (PAT), after accounting for minority interests and
profits of associated companies remained stable at Rs.750 crore (Rs.7.5
billion) in 2008-09.

HUMAN CAPITAL

Talent and knowledge base are key to IDFC's competitive advantage in the
financial services landscape. Acquiring, nurturing, engaging and
retaining talent is critical to meeting the Company's objectives.

A key challenge for the Company is binding its more than 500 employees
spread across its four main businesses of project finance, principal
investments &treasury, investment banking & institutional brokerage and
asset management into a common values framework. Although the details of
such a framework are being debated, they will encapsulate three core
elements: the importance of teamwork across the organization, a disciplined
focus on long-term value creation for all stake holders, enbvodying the
spirit of 'stewardship in managing the company' and a determination to
contribute to the wider objective of nation building.

Aside from ensuring that the Company is anchored in a common framework of
shared values, the design of compensation systems needs to constantly
evolve to keep pace with the growing complexity and scope of the Company's
businesses. Our measurement and reward system have to make sure that the
interests of all professionals remain aligned and that clients are able to
benefit from the seamless delivery of products and services. A significant
overhaul of incentive structures was achieved during 2008-09, relying
partly on the pool of ESOS approved at the last Annual General Meeting.

Training and leadership development will be a focus area going forward. To
nurture and groom critical talent and develop leadership internally, IDFC
is working with the Oxford University's Said Business School and ISB,
Hyderabad on a programme for leadership.

RISK MANAGEMENT

IDFC has well-established systems and procedures for risk management which
function under the close oversight of an in-house expert committee called
the Risk Group. This group is actively engaged in areas of loan portfolio
assessment, asset-liability management, and loan pricing. In addition, it
focuses on developing various market risk modules.

Regarding portfolio review, the Risk Group comprehensively examines the
entire portfolio of project assets and equity investments of the Company on
a semi-annual basis. Each credit is analysed individually and then
integrated at the portfolio level. The overall portfolio risk report is
regularly presented to an independent committee of the Board of Directors.

The Risk Group also closely focuses on asset liability management (ALM). To
further enhance the effectiveness of the current process of regular
monitoring of liquidity and interest rate risks, IDFC has sourced a
sophisticated software based ALM system. This will enable the Company to
capture data from various disparate platforms, and allow for more detailed
and comprehensive analysis.

Given the rising volatility of interest rates as well as introduction of
new products in the treasury portfolio, IDFC has also increased the level
of monitoring of market risk. This involves measuring interest rate risk on
a regular basis as well as testing newer models for analysis.

With the regulatory framework for banks and financial institutions
currently in transition to a Basel II environment, the risk measurement and
monitoring framework is being accordingly enhanced. IDFC has initiated
efforts to align the capital allocation to different asset categories along
the Basel II framework suggested under emerging regulatory guidelines. In
addition, IDFC is working towards establishing a frame work for enterprise
risk management.

INTERNAL CONTROLS AND THEIR ADEQUACY

The Company has a proper and adequate system of internal controls to ensure
that all assets are safeguarded and protected against loss from
unauthorised use or disposition, and that the transactions are authorised,
recorded and reported correctly.

Internal controls are supplemented by an extensive programme of internal
audits, review by management and documented policies, guidelines and
procedures. These controls are designed to ensure that financial and other
records are reliable for preparing financial information and other reports,
and for maintaining regular accountability of the Company's assets.

INFORMATION TECHNOLOGY (IT)

IDFC has always focused on leveraging IT to help streamline internal
processes and facilitate its rapid expansion across its businesses and
activities. Consequently, the Company has always invested in IT tools and
systems to support its expansion.

A significant achievement during 2008-09 was the complete restructuring and
up-grading of the internal business applications software, the IBS. The new
application was developed internally over a span of one year by an in-house
team supported by 20 software developers. A newtool called I-Smart will be
the backbone of the Company and trace all data pertaining to sanctions and
disbursements against any product type. The software went live in February
2009.

IDFC, the parent Company has been on the Oracle Financials platform for a
couple of years. It is implementing a project to extend this platform to
all the subsidiaries, which will significantly ease the consolidation of
financial accounts.

There were several back-end network related executions that had to be done
due to the physical shifting of business teams into different offices. The
acquired AMC had to be delinked from its legacy systems and networks
connected to the Standard Chartered Bank system and had to be integrated
into IDFC's network. There were also several office changes including
significant shift of the Company's primary functions into the new corporate
office at Bandra Kurla Complex.

An off-site data centre is being created at Chennai. A disaster recovery
site has also been created and significant up-grading has been done to the
entire network system. The backend has been made robust with 8 GB of
network pipes.

IDFC's IT systems are ISO 27001 compliant. This is the third consecutive
year that the systems were audited and approved. IDFC intends to extend
this systems audit and certification to the subsidiaries and associate
companies.

IDFC FOUNDATION

IDFC's varied initiatives under Corporate Social Responsibility, PPP
Capacity Building and Policy Advocacy & Thought Leadership are being
grouped under the aegis of the IDFC Foundation.

IDFC has always been a socially responsible company. Since inception, it
has had a specialized department to assess the environmental and social
impacts of projects that it assists. It has also regularly contributed
probonoto policy formulation and debate at the national as well as state
levels through its Policy Group. IDFC also undertakes capacity building
initiatives for government in infrastructure development through public
private partnerships by regularly conducting training programs for central
and state government officials through its India PPP Capacity Building
Trust.

CORPORATE SOCIAL RESPONSIBILITY

Key CSR initiatives included an internal environment policy; efforts
towards becoming a carbon neutral organisation; supporting socially and
strategically relevant programs; and Shramdaan by IDFC employees.

An Internal Environment Policy was finalised by IDFC with a view to
monitoring and minimizing its environmental footprint through resource
efficiency and conservation. IDFC is in the process of reviewing its
environmental impact assessment process with a view to making it more
effective and retaining its 'best-in-class' status amongst Indian financial
institutions.

IDFC continued to contribute to the Carbon Disclosure Project
(www.cdproject.net), a global, independent, not-for-profit organization
which holds the largest database of corporate climate change information in
the world, by responding to its annual information request on the climate
change aspects of IDFC's business.

IDFC also renewed its membership in the United Nations Global Compact, a
strategic policy initiative for businesses that are committed to aligning
their operations and strategies with ten universally accepted principles in
the areas of human rights, labour, environment and anti-corruption.

IDFC continued to support through philanthropy, socially relevant programs
such as Project Nan hi Kali (www.nanhikalI.org), a joint partnership
between the Keshub Mahindra Education Trust & Naandi Foundation.

IDFC encouraged its employees to undertake various volunteering activities
with a view to increasing their social consciousness. IDFC employees gave
high-level mentorings upport in the areas of legal compliance, HR,
accounting and communication strategy to SNEHA (Society for Nutrition,
Education and Health Action, www.snehamumbai.org), a Mumbai based NGO
working with women and children in urban under privileged communities. They
also volunteered their time to Project GreenHands
(www.projectgreenhands.org), an initiative aimed at increasing the green
cover of Tamilnadu by 10% by planting over 100 million saplings over the
next 5-10 years.

IDFC PPP

IDFC undertakes capacity building initiatives for government in
infrastructure development through public private partnerships by regularly
conducting training programs for central and state government officials
through its India PPP Capacity Building Trust. Programs conducted in 2008-
09:

Public Private Partnerships (PPP) in Infrastructure Development (April 25-
26, 2008 -New Delhi)

Capacity Building Programme for Development of Infrastructure Projects
through Public Private Partnerships (July 4-5, 2008 Port Blair)

National Workshop on Capacity Building for promoting Public Private
Partnerships (PPP) in Urban Infrastructure (August 20-21, 2008 Hyderabad)

Capacity Building for Development of Urban Infrastructure Projects through
PPPs (September 22-23, 2008 - Patna)

Capacity Building for Development of Urban Infrastructure Projects through
PPPs (November 24-25, 2008 - Kolkata)

Capacity Building Programme for Engineers: Development & Management of
Infrastructure Projects implemented as PPPs (December 1-2, 2008-Kathmandu)

Capacity Building Programme for Banks and FIs: Financing and Management of
Infrastructure Projects implemented as PPPs (December 3-4, 2008-Kathmandu)

Capacity Building Programme on PPPs (Basic Level) for Urban Local Bodies in
Patiala Region (January 22, 2009 - Patiala)

Capacity Building Programme on Public Private Partnerships (PPP) In Urban
Infrastructure and Service Delivery (February 20-21,2009-
Thiruvananthapuram)

Public Private Partnerships (PPP) in Urban Infrastructure and Service
Delivery (March 1618, 2009 - Hyderabad)

POLICY ADVOCACY AND THOUGHT LEADERSHIP

IDFC launched a quarterly publication, with the objective of assessing on-
the-ground initiatives that address particular infrastructure challenges
and disseminating lessons from their experiences. The Quarterly has focused
on experiences with the Bus Rapid Transit System (BRTS) in Delhi, the Pune
Model providing a local solution to mitigate load shedding, and initiatives
in Municipal Solid Waste to Energy to provide a sustainable solution to
waste management. The Quarterly also commented on important developments in
the infrastructure sector such as the National Action Plan on Climate
Change and the Indo-US civil nuclear deal.

In its thought leadership role, IDFC has undertaken activities in three
broad areas. First, it has authored several papers, some of which were
presented at important seminars and conferences. Second, it has organized
and participated in several for a with the object of stimulating innovative
thinking on policy issues in various infrastructure sectors. IDFC organized
two events during the year- (i) a workshop for the World Development Report
2009, whose theme is 'Reshaping Economic Geography' and (ii) an Interactive
Session with Central Electricity Regulatory Commission (CERC) on its Tariff
Regulations for 2009-14, which provided an opportunity to power utilities,
Independent Power Producers, financial institutions and analysts to discuss
their observations on these regulations and seek clarifications from CERC.

In terms of representations at different fora, IDFC was invited to
participate in a closed door workshop on 'Generatingand Implementing
Visionary Railway Strategies'organized jointly by the Planning Commission,
Indian Railways and World Bank, where it presented its views more
specifically on ways to finance rail infrastructure in India. IDFC also
played an advisory role with the Reserve Bank of India, the Planning
Commission, Ministry of Finance, Central Electricity Regulatory Commission,
and CUTS Centre for Competition Investment & Economic Regulation.

The Policy Group of IDFC acted as the secretariat to the Power Sector
Advisory Group, set up with the objective of conducting an independent
review of developments in the power sector, identifying critical
impediments and providing pragmatic solutions. The outcomes of several
deliberations were subsequently taken up with the concerned government
departments and agencies in the form of recommendatory papers or petitions.
IDFC has initiated the setting up of similar advisory boards in the
transport and urban development sectors.

At the 31 network which includes IDFC, the Indian Institute of Technology
(IIT), Kanpur and the Indian Institute of Management (IIM), Ahmedabad, IDFC
took charge of the network's flagship annual publication the India
Infrastructure Report. The theme for the 2009 report is Land - A Critical
Resource for Infrastructure.

CONCLUSION

IDFC is clearly positioned to be a premier knowledge based financial
services company focused on nation building and creating long term value
for various stake holders by contributing meaning fully to the development
of infrastructure. Project finance, asset management, investment banking&
institutional brokerage and principal investments & treasury will continue
to be the key drivers of the Company.

CAUTIONARY STATEMENT

Statements in this Management Discussion and Analysis describing the
Company's objectives, projections, estimates and expectations may be
'forward looking statements' within the meaning of applicable laws and
regulations. Actual results might differ substantially or materially from
those expressed or implied. Important developments that could affect the
Company's operations include unavailability of finance at competitive rates
-global or domestic or both, reduction in number of viable infrastructure
projects, significant changes in political and economic environment in
India or key markets abroad, tax laws, litigation, exchange rate
fluctuations, interest and other costs.