Annual Report - Kotak Mahindra Bank - 2009-2010

KOTAK MAHINDRA BANK LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

To
The Members of
KOTAK MAHINDRA BANK LIMITED

The Directors present their Twenty Fifth Annual Report together with the
audited accounts of your Bank for the year ended 31st March, 2010.



FINANCIAL HIGHLIGHTS

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

31st March 31st March
2010 2009
Rs. crore

Total income 10,053.30 7,218.27

Total expenditure, excluding provisions 7,639.71 5,940.90
and contingencies

Operating Profit 2,413.59 1,277.37

Provisions and contingencies,
excluding provision for tax 510.73 261.16

Profit before tax 1,902.86 1,016.21

Provision for taxes 575.50 363.53

Profit after tax 1,327.36 652.68

Less: Share of minority interest 18.00 3.73

Add: Share in profit of Associates (2.36) 3.44

Consolidated profit for the Group 1,307.00 652.39
Earnings per Equity Share

Basic (Rs.) 37.68 18.90

Diluted (Rs.) 37.28 18.87

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

Total Income 3,883.86 3,338.77

Total expenditure, excluding provisions 2,586.86 2,743.02
and contingencies

Operating Profit 1,297.00 595.75

Provisions and contingencies,
excluding tax provisions 485.89 169.69

Profit before tax 811.11 426.06

Provision for taxes 250.00 149.96

Profit after tax 561.11 276.10

Add: Surplus brought forward 648.94 528.17
from the previous year

Amount available for appropriation 1,210.05 804.27

Appropriations:

Statutory Reserve under Section 17 of the 140.28 69.03
Banking Regulation Act, 1949

General Reserve 28.06 13.81

Transfer to Investment Reserve Account 1.19 41.70

Transfer to Capital Reserve 6.96 2.97

Transfer to Special Reserve 40.00 -

Proposed Dividend 29.66 25.96

Corporate Dividend Tax (2.01) 1.86

Surplus carried to Balance Sheet 965.91 648.94

DIVIDEND

Your Directors are pleased to recommend a dividend of Rs. 0.85 per share
(previous year Rs. 0.75 per share), entailing a payout of Rs. 27.65 crore
including dividend distribution tax (previous year Rs. 27.82 crore). The
dividend would be paid to all the shareholders, whose names appear on the
Register of Members/Beneficial Holders list on the Book Closure date.

CAPITAL

The Bank has a high Capital Adequacy Ratio ('CAR'). The CAR (under Basel
II) as at 31st March 2010 was 18.35% with Tier I being 15.42%. At a
consolidated level the CAR was 19.3% under Basel II.

During the year, your Bank has not issued any Capital under Tier II. As on
31st March 2010, outstanding Unsecured, Redeemable Non-Convertible,
Subordinated Debt Bonds was Rs. 465.70 crore and outstanding Unsecured,
Non-Convertible, Redeemable Debt Capital Instruments Upper Tier II stood at
Rs. 338.05 crore.

SUB-DIVISION OF EQUITY SHARES

In order to facilitate more liquidity of your Bank's Equity Shares in the
stock markets and to make it affordable for the small investors to invest
in the Equity Shares of your Bank, on the occasion of the 25th year of the
organization, the Board of Directors of your Bank at its meeting held on
11th May 2010, has approved sub-division (stock-split) of each Equity Share
having a face value of Rs.10 into two Equity Shares of face value of Rs. 5
each, subject to the approval of the shareholders at the forthcoming Annual
General Meeting of your Bank and approval of all concerned regulatory/
statutory authority(ies).

OPERATIONS

India has bounced back strongly on the backdrop of strong domestic demand
and growth in almost all sectors of the economy. As the clouds of
uncertainty moved away your Bank re-assessed its expansion plans on the
Branch Banking Business and added 32 branches and 105 ATMs and ended the
year with 249 Branches and 492 ATMs. The regulatory changes offering
limited free usage of ATMs to customers across all ATMs of banks has
helped, as your Bank has benefited by higher usage of the network. Your
Bank is now present in 145 locations across the country. Your Bank added
over half a million new customers this year.

The advantage of a growing network was clearly visible in the CASA growth
rates, Asset Distribution, Mutual Fund & other equity products and
Insurance penetration. Your Bank also saw a robust growth in transaction
income which grew by over 100% compared to last financial year.

The strategy of your Bank of leveraging the Bank branches for distribution
of asset products continued to improve quality of earnings by reducing
acquisition costs and improving credit quality. The results in this area
have been very heartening. The growth was spread across all products
ranging from Home Loans, Personal Loans, Commercial Loans, Credit Cards,
loans to small business and referrals for Car Loans.

A holistic proposition on Trade Services coupled with Credit facilities
helped your Bank create a profitable segment of customers. Your Bank also
launched 2 commercial branches aimed at servicing the specific needs of its
trade customers.

In the Retail Institutional business your Bank received empanelment from
some states and was able to add many reputed Trusts, Associations,
Educational Institutions and Societies to its list of clients. The
Corporate Salary Accounts business continued to add to its marquee clients
across the country and has shown a steady growth in deposits.

Your Bank developed and launched customer centric product programs
specifically aimed at HNIs and NRIs. These product programs with its
enhanced and enriched features make its unique offerings in the respective
customer segments. Your Bank has also put in significant investment in
technology to provide world class experience to these specific customer
segments. Your Bank successfully launched best in class, Private Banking
System for its Privy League customers. A new micro site was created for
this segment of customers. It has also successfully re-launched its
upgraded site for Non Resident Indians. This website provides a compendium
of information required by NRIs across banking and investment and loan
products. Non Resident segment continues to be a major thrust area for the
business. There has been a growth of 46% on the NRI deposits. Your Bank was
also selected as a strategic partner to Overseas Indians Facilitation
Centre an initiative of Ministry of Overseas Indian Affairs. Your Bank also
operationalised its Representative Office in Dubai.

On Investment Advisory side, this year saw the market volumes going through
huge gyrations. The uncertainty among customers impacted distribution
volumes for Mutual Fund and Insurance products. In spite of all these
changes in the environment your Bank succeeded in growing its third party
distribution volumes for Mutual Funds and Insurance. Your Bank continues to
offer a best in class bouquet of investment products to its customers.

Several new products, features and services were added during the year. A
lower variant current account product for the micro and small business
enterprise was launched. Priority banking was extended to NRIs. All
branches of your Bank were ASBA (Application Supported by Blocked Account)
enabled. Your Bank was chosen as one of the few banks to accept
applications under the New Pension Schemes. Your Bank now accepts NPS
applications across 150 branches. Customized 'One View page' and customized
Net offers were launched based on each individual customer's relationship
with your Bank. In Phone Banking a new state of the art IP based call
centre solution was installed this has helped in faster response rates to
customer calls and optimizing call centre resources across multiple
locations.

This year saw your Bank embarking on a journey to use 'Service' as a
differentiator in the highly competitive banking space. In line with this
philosophy your Bank took big strides in improving Customer Satisfaction
levels by raising its Service Quality standards. Implementation of world
class CRM platform which began last year was successfully completed during
the year. The benefits from such robust sales and service oriented Customer
Relationship Program enables your Bank to strive for best in class sales
productivity and high service standards. Coupled with this technology
driven platform, your Bank also launched process driven program titled
'SPIRIT' which focuses on quality and consistency for service delivery
across all channels.

Focus on 'transaction security' has always been at the centre while
designing and implementing business solutions which encourages customer to
use alternate channels like Net banking, ATMs, Mobile/SMS banking, Home
banking etc. During the year, several improvements to existing features
like, On line password generation, two factor authentication, improved
features for security of fund transfers, PIN based IVR were introduced. A
very fine balancing act between security and process controls vis-a-vis
customer service is a critical aspect of this business and requires
continuous evaluation of processes and features keeping in mind customer
feedback.

As we move ahead, the primary focus for your Bank would be to ensure
enhanced Customer Profitability by achieving better Cross Sales through
well defined Customer Engagement Programs and Higher Service Quality
Standards. Having emerged as the most critical distributor for the entire
group's products across Liabilities, Assets and Investment products the
business will continue to expand by adding more branches and drive
productivity, efficiency and through put across products, locations,
channels and act as the one stop shop for all customers of the Group.

Your Bank continued it's in depth coverage of large corporate and mid
market corporate clients during the year. Your Bank was able to build
significant franchise with many well known, reputed large corporate groups
during this year while focusing on deepening existing clients through an
array of customized offerings.

The year saw mixed trend in credit demand from the corporate and mid market
business segments both for working capital and term facilities. The last
quarter saw a surge in credit demand as compared to the earlier quarters.
This is in keeping with the economic and corporate investment cycle. Your
Bank was able to tap this opportunity and increase its share of business by
offering a variety of products and services.

Trade Finance volumes grew by over 80% vis-a-vis last year. The fund based
trade assets nearly doubled this year as compared to last year and the non
fund based trade assets grew by around 60%. Your Bank's dedicated team of
trade finance experts strives to provide structured solutions to suit to
the customer's needs. The in-depth understanding of the customer's business
and the superior delivery models has helped in achieving high levels of
customer satisfaction.

Your Bank added 225 new cash management service customers during the year
by offering them technology driven solutions to effectively enhance and
optimize their cash flows and liquidity through an entire suite of CMS
products and services. This has been made possible through constant
innovation and a high degree of customization to cater to the dynamic and
evolving industry scenario.

The Commercial Vehicle and Infrastructure sectors showed remarkable
resilience to get back into the growth mode all through the year, picking
up momentum on the way. This has resulted in higher than budgeted
disbursement numbers and bottom line in the Commercial Vehicle and
Infrastructure divisions. Freight rates and order book size have increased
which has improved realisations consequent to better operator and
contractor margins. GDP numbers and the emphasis on infrastructure as a
policy measure should spur the growth in both these sectors, going forward.
The businesses have been realigned to meet the growth demands both on the
retail and strategic customer segments.

Despite the fear of a bad monsoon and a rising food prices inflation, the
Agri sector continued to show resilience in repayments. In this backdrop,
the Agri business continued to show growth and crossed Rs. 3150 crores this
year, up from Rs. 2365 crores in the last year, in the process crossing the
required 18% of the Net Bank Credit stipulated by Reserve Bank of India for
the first time.

The focus of the Agri business continued in activities like Tractor loans,
crop loans, agriculture project financing, working capital facilities to
agriculture and agro processing facilities where it consolidated its
presence in its existing markets. The Agri business also built up business
volumes in fresh segments like gold loans and microfinance loans in the
rural sector as part of the financial inclusion initiatives of your Bank.

The year started cautiously with declining demand in the Home Finance
business, as the customer adopted a policy of wait and watch. However, post
the stable election results the market received a boost. Your Bank has
taken great strides in achieving robust sales and profit numbers.
Competitive pricing resulted in an upsurge in disbursements as compared to
previous years. There was a major focus on Bank branches as a channel for
sourcing Home Finance business.

In the Personal Finance business, there was an opportunity for lenders to
capitalize on the latent loan demand in the market and focus on high-ticket
products, with most lenders still being wary of the low-ticket unsecured
segments. Collection efficiencies showed an improved trend. Your Bank
continued its stress on quality based underwriting for fresh bookings.

It has been a roller coaster year for the Asset Reconstruction business.
The first half of the financial year was challenging one in terms of
resolution. However in the second half, with markets easing and several of
the assets having been sold, substantial amount of recoveries were made. If
the buoyancy in the market continues, your Bank hopes to recover
substantial amount in the coming financial year, as well. Acquisition of
new portfolio continued to be lukewarm, but the same is expected to improve
in the coming financial year.

On Treasury side, your Bank has an active proprietary desk trading in all
products such as Fixed Income, Money Markets, Derivatives, Foreign Exchange
and Bullion. The Treasury plays an important role in balance sheet
management and implementation of Funds Transfer Price between various
business units. In the area of Debt Capital Markets (DCM) your Bank offered
the following products: syndication of loans, bonds, mezzanine financing,
promoter funding and acquisition financing and securitisation.

Your Bank launched credit card business and reached the milestone of 1 lac
cards in the first year of operations. The card design and product benefits
have received overwhelming response from customers. The customer spends
across all variants of cards have been amongst the top three in industry.
This has reaffirmed the customer acceptability of the product. Credit Card
business clocked Rs. 511 crore of total spends in the year with a book size
of Rs. 281 crore. Industry credit cards spends growth rate has witnessed
slowdown owing to current market conditions.

Your Bank entered into a Strategic arrangement with Bharti Group for their
foray into the retail business along with Walmart to distribute Credit Card
products in their retail outlets, targeting both individual and business
users. This partnership opens up the opportunity to tap new markets and new
customer segment hitherto untapped by your Bank. The card aimed at business
users offers one of its kind 14-day credit free cycle that starts afresh on
every purchase.

After consolidation of the data centers last year, the primary focus this
year has been on facilitating 'green energy' initiatives. As a part of this
strategy a transformational project of 'virtualizing' a majority of the
servers in the data center, was executed. Thereby saving on power
consumption and enabling redeployment of the existing servers for future
expansion. There was continued focus on enhancement of customer experience
across all channels. Interactions with Corporate customer applications were
also enhanced. Innovative technology solutions were introduced to support
new product offerings. As in the previous years, your Bank's technology
continued to be recognized for its excellence. Your Bank received awards
for storage virtualization and e-Governance.

SUBSIDIARIES

Your Bank along with its subsidiaries offers complete financial solutions
to its customers. The key business segments where the subsidiaries operate
include investment banking, stock broking, car finance, asset management
and life insurance.

Due to improved business environment, the lending businesses have reported
good profits compared to last year. The life insurance subsidiary, Kotak
Mahindra Old Mutual Life Insurance Limited has continued to report profit.
Kotak Mahindra Capital Company Limited, Kotak Mahindra Asset Management
Company Limited, Kotak Securities Limited and the international
subsidiaries posted higher profits due to strong capital markets and the
good domestic economic growth.

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

In terms of the approval granted by the Central Government vide their
letter dated 16th February 2010 under Section 212(8) of the Companies Act,
1956, abridged Annual Report which consists of the financial statements of
your Bank on standalone basis as well as consolidated financial statements
of the group for the year ended 31st March 2010, have been sent to all the
members of the Bank. It does not contain Annual Reports of the Bank's
subsidiary companies. The Bank will make available full Annual Report
(including the Annual Reports of all subsidiaries) upon request by any
member of the Bank. These Annual Reports will be available on the Bank's
website and will also be available for inspection by any member at the
Registered Office of the Bank.

EMPLOYEE STOCK OPTION SCHEME

The stock options granted to the employees currently operate under two
schemes, namely Kotak Mahindra Equity Option Scheme 2005 ('Scheme 2005')
and Kotak Mahindra Equity Option Scheme 2007 ('Scheme 2007'). The
disclosures below are in respect of the year ended 31st March, 2010.

Options granted during the year:

Scheme 2005 - Nil
Scheme 2007 - 1,53,020 options

Pricing Formula:

ESOP Scheme 2005 & 2007 -

The Exercise Price shall be a price, as may be determined by the
Board/ESOP/Compensation Committee, equivalent to or discounted up to 50% of
the 'Average Market Price'. The 'Average Market Price' for this purpose
would mean the average of the closing price of Equity Shares of the Bank,
during two weeks period prior to the date of the meeting of
Board/ESOP/Compensation Committee at which 'Plan Series' under the Scheme
is approved, on the Stock Exchange, where there was highest trading volume
during the said two week period, on which the Equity Shares of the Bank are
listed.

'Plan Series' means a documented plan framed by Board/ESOP/Compensation
Committee for each tranche of grant of Options, to all Eligible Employees,
at a specific Exercise Price (which is determined by the Board/ ESOP/
Compensation Committee for the purpose of that particular Plan Series) and
other terms and conditions as mentioned in that Plan Series.

The Board/ESOP/Compensation Committee under special circumstances decides
that the Exercise Price shall be Rs. 10/- per share. In such cases, the
immediately succeeding Directors Report/Corporate Governance Report shall
carry details of the same.

Options in force at the beginning of the year:

Scheme 2005 - 33,79,670 options
Scheme 2007 - 84,77,297 options

Options Vested during the year:

Scheme 2005 - 5,77,320 options
Scheme 2007 - 20,66,136 options

Options exercised during the year:

Scheme 2005 - 7,19,750 options
Scheme 2007 - 17,52,868 options

Total number of shares arising as a result of exercise of options:

Scheme 2005 - 7,19,750 equity shares of Rs. 10/- each
Scheme 2007 - 17,52,868 equity shares of Rs. 10/- each

Options lapsed:

Scheme 2005 - 1,65,620 options
Scheme 2007 - 4,70,324 options

Variation of terms of options:

No variations made in the terms of the options granted except in respect of
Scheme 2005 with respect to recovery from the relevant eligible employees,
the Fringe Benefit Tax on exercise of options as permitted by regulations.

Money realized by exercise of options:

Exercise amount received:

Scheme 2005 - Rs. 13,20,87,500/-
Scheme 2007 - Rs. 60,66,21,265/-

Total number of options in force:

Scheme 2005- Outstanding options - 24,94,300
Scheme 2007- Outstanding options- 64,07,125

Details of options granted during the year to:
(i) Senior management personnel

Nil

(ii) Any other employee who receives a grant in any one year of options
amounting to 5% or more of options granted during that year:

Nil

(iii) Identified employees who were granted option, during any one year,
equal to or exceeding 1 of the issued capital (excluding outstanding
warrants and conversions) of the Company at the time of grant:

Nil

Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of
options calculated in accordance with AS-20 Earnings Per Share:

*The diluted Earnings Per Share (EPS) pursuant to issue of shares on
exercise of options calculated in accordance with AS 20 is Rs. 37.28
(Consolidated) and Rs. 16.00 (Standalone).

Where the company has calculated the employee compensation cost using the
intrinsic value of stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that shall
have been recognized if it had used the fair value of the options, shall be
disclosed. The impact of this difference on profits and on EPS of the
Company shall also be disclosed:

*Had the Bank (Consolidated) followed the fair value method for accounting
the stock option compensation expense would have been higher by Rs. 43.41
crore with consequent lower Consolidated profits. On account of the same
the diluted EPS of the Bank (Consolidated) would have been less by Rs. 0.82
per share.

Weighted-average exercise prices and weighted-average fair values of
options shall be disclosed separately for options whose exercise price
either equals or exceeds or is less than the market price of the stock.

*The weighted average price of the stock options exercised is Rs. 298.75
and the weighted average fair value is Rs. 262.29.

*Note: Above figures are derived by considering the options granted and
exercised by employees of the Bank and its subsidiaries.

A description of the method and significant assumptions used during the
year to estimate the fair values of options, including the following
weighted-average information:

A. Stock price

It is the closing market price on the National Stock Exchange of India
Limited prior to the meeting of the Board in which the options are granted.

B. Volatility

Volatility is a measure of the amount by which a price has fluctuated or is
expected to fluctuate during a period. The measure of volatility used in
the Black-Scholes option-pricing model is the annualized standard deviation
of the continuously compounded rates of return on the stock over a period
of time.

Accordingly, daily volatility of the Bank's stock price on the NSE for the
period corresponding to the respective expected live of the different
vests, prior to the grant date has been considered.

C. Risk free interest rate

The risk-free interest rate being considered for the calculation is the
interest rate applicable for maturity equal to the expected life of the
options based on the zero-coupon yield curve for Government Securities as
on the date of the respective grant.

D. Time to Maturity/Expected Life of options

The minimum life of a stock option is the vesting period and the maximum
life is vesting period plus the exercise period. The Expected life of the
options has been calculated as the average of the two extremes-the minimum
life and the maximum life. Since each vest has been considered as a
separate grant, the expected life has been calculated for each vest
separately.

E. Dividend yield

The dividend yield for each grant has been derived by dividing the dividend
per share by the market price per share.

Weighted average information in respect of above assumptions has been
provided in note 12 of Schedule 17 of the notes to accounts to the
consolidated financial statement of the Bank.

CORPORATE GOVERNANCE

Pursuant to Clause 49 of the Listing Agreement with the Stock Exchanges, a
separate section entitled 'Corporate Governance' has been included in this
Annual Report. The Bank has implemented number of recommendations given in
the 'Corporate Governance Voluntary Guidelines 2009' by the Ministry of
Corporate Affairs and is examining the possibility of implementing the
remaining recommendations.

DIRECTORS

Mr. Shishir Bajaj resigned as a Director of the Bank with effect from 26th
October 2009. Your Directors place on record their appreciation for the
valuable advice and guidance rendered by Mr. Bajaj during his tenure as a
Director of the Bank.

Mr. Anand Mahindra and Mr. Cyril Shroff, Directors of the Bank retire by
rotation at the Twenty Fifth Annual General Meeting and are eligible for
re-appointment.

Dr. Sudip to Mundle was appointed as an Additional Director of the Bank
with effect from 27th October 2009 and, pursuant to the proviso to Section
260 of the Companies Act, 1956, holds office as a Director up to the date
of this Annual General Meeting but is eligible to be appointed as a
Director. In terms of Section 257 of the Companies Act, 1956 the Bank has
received notice in writing from a member along with a requisite deposit of
Rs.500/proposing the candidature of Dr. Sudipto Mundle for his appointment
as a Director.

Dr. Sudipto Mundle, a Ph. D in Economics was a Director in the Strategy &
Policy Department, Asian Development Bank. He is an Emeritus Professor
(Hon.) at National Institute of Public Finance and Policy, a Member of the
National Statistical Commission, and President of PREETI Foundation. In his
earlier career, Dr. Mundle was Reserve Bank of India Chair Professor at the
National Institute of Public Finance and Policy, New Delhi and served in
other academic institutions including the Indian Institute of Management,
Ahmedabad and Centre for Development Studies, Trivandrum. He was also an
Economic Adviser in the Ministry of Finance. Dr. Mundle has extensive
experience in economic work and provision of development assistance,
including projects and policy loans for agriculture, infrastructure,
including irrigation, finance, education and health, technical assistance,
and regional cooperation assistance in many countries in Asia.

AUDITORS

Messrs S.R. Batliboi & Co., Chartered Accountants, auditors of your Bank,
retire on the conclusion of Twenty Fifth Annual General Meeting and are
eligible for re-appointment. You are requested to appoint auditors for the
current financial year and to fix their remuneration.

STATUTORY INFORMATION

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

EMPLOYEES

The employee strength of your Bank along with its subsidiaries as of 31st
March 2010 was around 20,000 as compared to around 18,000 employees a year
ago.

The Bank standalone had around 8,800 employees as of 31st March 2010. 224
employees employed throughout the year and 36 employees employed for part
of the year were in receipt of remuneration of Rs. 24 lacs or more per
annum.

Your Bank has in place policies relating to employee service conditions,
welfare and training which are reviewed on an ongoing basis by your Bank's
Management Committee.

Your Bank continues to focus on training its employees on a continuing
basis by deputation to reputed training institutions by holding workshops
on various areas including Regulatory Compliance, Risk Management, Customer
Care and Communication, Trade Finance, Foreign Exchange Rules and Treasury.

In accordance with the provisions of Section 217(2A) of the Companies Act,
1956 and the rules framed thereunder, the names and other particulars of
employees are set out in the annexure to the Directors' Report. In terms of
the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, the
Directors' Report is being sent to all the shareholders of the Bank
excluding the aforesaid annexure. The annexure is available for inspection
at the Registered Office of the Bank. Any shareholder interested in
obtaining a copy of the said annexure may write to the Company Secretary at
the Registered Office of the Bank.

DIRECTORS' RESPONSIBILITY STATEMENT

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

(i) your Bank has, in the preparation of the annual accounts for the year
ended 31st March 2010, followed the applicable accounting standards along
with proper explanations relating to material departures, if any;

(ii) 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
Bank as at 31st March 2010 and of the profit of your Bank for the financial
year ended 31st March 2010;

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

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

ACKNOWLEDGEMENTS

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

For and on behalf of the Board of Directors

Dr. Shankar Acharya
Chairman
Place: Mumbai,
Date : 11th May 2010

MANAGEMENT DISCUSSION AND ANALYSIS

Macro-Economic And Industry Developments

INDIAN ECONOMY BACK ON TRACK IN 2009-10

The onset of the global financial crisis had interrupted India's growth
momentum. After clocking an annual average growth of 8.9% over 2003-2008,
India headed into a cyclical downturn in 2008-09.

The recovery of the Indian economy started in the 1st quarter of 2009-10
when the GDP growth bounced back to around 6.1% from the previous quarter's
5.8%. The recovery strengthened significantly especially from the 2nd
quarter of 2009-10, driven by a strong momentum in the industrial output
and a better performance of the service sector. The monsoon was erratic
with June-September 09 period showing a significant shortfall, but despite

the widespread drought and relatively poor agriculture production in 2009-
10, the Indian economy is expected to grow at 7.2% in 2009-10 as per the
advance estimates released by the Central Statistical Organization.

The recovery story of the Indian economy is also evident from the side of
the Index of Industrial Production (IIP), which was led by the
manufacturing sector with the average growth at 10.5% in April 2009 to
February 2010 compared to 3.1% in the similar period last year. A sharp
recovery in the capital goods segment is also indicative of rising
investment demand.

Headline WPI inflation remained significantly volatile in 2009-10, and
closer to the end of the FY 10, the pace of increase in the prices became a
concern. Rising food prices, increase in the prices of domestic petrol and
diesel and also a waning of the base effect of the last year accounted for
the sharp rise in the Headline WPI inflation. While prices of most of non-
food commodities moved in line with the international commodity prices,
domestic food prices exhibited contrarian movement in relation to the
respective international prices.

As per the latest monthly data available on WPI, Headline WPI inflation was
at 9.9% in March 2010. There are signs that the high food prices are
getting transmitted to other non-food items, thereby creating concerns over
a more generalized inflation in the months ahead. Consumer price inflation
had also been on the rise through 2009-10. In April 2009 CPI-Industrial
workers was at 8.70% but this gradually increased to 14.86% in February
2010 after peaking at 16.22% in January 2010.

In 2008-09 the monetary policy was prioritized towards arresting moderation
in growth and by the end-March 2009, RBI had reduced the CRR and the Repo
Rate by 400 bps each (to 5.00% for both) from its peak levels while the
Reverse Repo rate was reduced from 6.00% to 3.25%, a drop of 275 bps. In
the course of 2009-10 the stance of monetary policy was geared towards
supporting early recovery of the growth momentum while facilitating the
large borrowing programme of the Government. RBI has been continuously
monitoring the inflation and has taken steps during the year to address
these. In October 2009, the mandatory SLR requirement was restored back to
its earlier level of 25% of NDTL. The CRR requirement was raised by 75 bps
on January 29th to end FY10 at 5.75%. On the other hand, the Repo as also
the Reverse Repo rates was increased by 25 bps each on 19th March 2010.
While the Reverse Repo rate at the end of the FY was at 3.50%, the Repo
rate ended the FY at 5.00%.

Liquidity conditions remained hugely in surplus in 2009-10 and thus the
money market conditions remained largely orderly. The collateralized
segment remained the predominant segment of the money market and accounted
for more than 80% of its total volume. About 75% of the lending in the
collateralized segment was contributed by mutual funds.

10-year G-Sec yields movements can be categorized into 3 distinct phases.
In the first phase (April 2009), 10-year G-Sec yield dropped sharply from
7.01% to 6.23%, in the 2nd phase (May-August 2009), benchmark 10-year yield
started to increase as the size of primary auctions were higher (from
Rs.12,000 crore to Rs. 15,000 crore) By end-September the 10-year yield
rose to 7.17%. In the 3rd phase G-sec yields witnessed ranged trades before
exhibiting a hardening bias on the back of lack of OMO purchase auctions in
the second half of the FY; consequently the 10-year G-sec yield was at
7.72% by mid-January 2010 and also increased to above 8.0% in early March,
2010. 10-year yield softened to close the FY10 at around 7.85% The weighted
average yield of dated securities in H1 of 2009-10 was at 7.18% which
increased to 7.72% in H2, bringing the average for the year at 7.36%. The
higher weighted average yield in H2 was due to the lengthening of the
borrowing maturity in H2 to 11.70 years compared to 10.93 years in H1. For
the full year 2009-10 the weighted average maturity was at 11.16 years.

In 2008-09, the adverse impact of the global financial market turmoil was
felt in the form of a reversal of Flls inflows and decline in long-term and
short-term debt flows. As the global financial markets stabilized, flows
into the Indian economy through FII, FDI and most of the debt categories
improved. Further, the outcome of the general elections created positive
market sentiments on reforms and disinvestments, leading to a sharp move up
in the equity markets. These led to an appreciation for the rupee against
USD, from around Rs. 51 per USD in end-March 2009, ending the FY10 at
around Rs. 44.92 per USD.

Consolidated Financial Performance

The improvement in the economic environment in India was more rapid than
the developed world. This improvement led to an upturn in the financial
services sector and capital markets in India. The Bank and its subsidiaries
continue to grow and are progressing well in adding customers, products and
reach.

Consolidated profit after tax grew 100% to Rs. 1,307 crore. This is the
highest yearly profit for the group. As on March 31, 2010, the Group has a
distribution network of branches, franchisees, representative offices and
satellite offices across 473 cities and towns in India and offices in New
York, London, San Francisco, Dubai, Mauritius and Singapore. The group
services around 7 mn customer accounts.

During the year the Bank won the following awards:

* Adjudged amongst the Top 25 'Best Employers in India 2009' by Hewitt
Associates

* IDRBT'S Special award for IT Governance & Value Delivery

* Awarded 'Best Companies to Work For in 2009' by Great Places to Work
Institute India.

* IDG India's CIO 100 'Ingenious 100' award and the CIO 100 'Storage
Virtualization' award.

* Ranked No. 2 in India and among top 30 globally for 'Best Corporate
Governance Practices' by IR Global Rankings 2010.

* Awarded 'Best Local Cash Management Bank' by Asiamoney 2009.

As at March 31, 2010 the Bank has built a network of 249 full fledged
branches spread across 145 locations and 492 ATMs. The Bank proposes to
double its branch network over the next three years.

Kotak Mahindra Capital Company and Kotak Securities reported good financial
performance on the back of strong capital markets and improved economic
environment.

The life insurance subsidiary, Kotak Mahindra Old Mutual Life Insurance
(KLI) continued its growth momentum and posted significant growth in
profits.

Assets under management (AUM) as at 31st March 2010 was over Rs. 45,224
crore (approximately USD 10 bn) comprising assets managed and advised by
the Group. Of this, equity assets managed/advised by the Group were around
Rs. 21,612 crore. The AUM with Kotak Mahindra Mutual Fund (Kotak Mutual)
was over Rs. 24,000 crore.

Consolidated Financials
Rs. crore
Income and Profit 2009-10 2008-09

Total lncome* 9,985.90 7,180.54
Operating profit 2,413.60 1,277.36
Consolidated Profit after tax (PAT) 1,307.00 652.39

* Income is net of sub-brokerage.
Rs. crore
Particulars 2009-10 2008-09

Net Worth After minority Interest 7,910.94 6,522.54
Earnings per share (diluted) (Rs.) 37.28 18.87
Book Value per share (Rs.) 228.09 188.70
Net Interest Margins (NIM's)% 6.3% 6.1
Return on Average Networth % 18.2% 10.5%
Net NPA% excl Stressed assets portfolio 1.14% 1.18%
Consol Capital Adequacy ratio% 19.3% 22.5%

The consolidated total income was Rs. 9,985.90 crore during FY 09-10 and
Rs. 7,180.54 crore in FY 08-09. Other income was Rs. 5,384.74 in FY 09-10
and Rs. 2,813.98 crore in FY 08-09. Consolidated 'other income' had three
main components: Commission, fees, exchange & brokerage, profit-on-sale of
investments and premium on life insurance business. Commission, fees,
exchange & brokerage net of sub brokerage increased to Rs. 1,283.67 crore
in FY10 from Rs. 1,034.07 crore in FY09, with key drivers being fee income
from stock broking business, asset management/advisory fees, core fees from
the Bank and investment banking. Premium income from life insurance
business grew by over 24% to Rs. 2,849.34 crore.

BANK AND ITS KEY SUBSIDIARIES: FINANCIAL AND OPERATING PERFORMANCE

The Bank along with its subsidiaries, offers wide range of financial
products and services to its customers. The key businesses are commercial
banking, investment banking, stock broking, car finance, asset management
and life insurance.

The Bank is the central platform for customer relationships across the
Group.

The banking business model is directed towards maximising revenue
generation from customers by offering a wide range of products and services
to address all their banking needs. The Bank has four broad business
segments:

* Lending
* Retail liabilities and branch banking
* Corporate banking (including small and medium enterprises -SME)
* Treasury and investments

The profit before tax of the Bank for FY 09-10 was Rs. 811.10 crore and
Rs.426.06 crore in FY 08-09. The profit after tax of the Bank was Rs.561.11
crore in FY. 09-10 and Rs. 276.10 crore in FY 08-09. The break up of
segmental results is as follows:

Rs. crore
Segment 31-Mar-10 31-Mar-09

Treasury and BMU 367.46 129.29
Corporate/Wholesale Banking 385.46 225.34
Retail Banking 61.05 71.28
Sub-total 813.98 425.91
Unallocated Income/(expense) (2.87) 0.15
Profit before tax 811.10 426.06

As per BASEL II Capital adequacy ratio of the Bank as at 31st March 2010
was 18.35% (31st March 2009-20.01%). Tier I ratio was 15.42%. The advances
of the Bank as at 31st March 2010, stood at Rs. 20,775.05 crore
(Rs.16,625.34 crore as at 31st March 2009), showing a growth of 25%. As at
31st March 2010, the net NPAs of the Bank excluding the acquired stressed
assets portfolio were at 1.25% of net advances (1.26% as at 31st March
2009). The Net NPAs of the Bank including stressed assets portfolio were at
1.73% of net advances as at 31st March 2010 (2.39% as at 31st March 2009).

As at 31st March 2010, the deposits of the Bank were Rs. 23,886.47 crore
(Rs. 15,644 crore as at 31st March 2009), showing a growth of 53%. As at
31st March 2010, total deposits comprised of Rs. 4992.13 crore of current
account deposits (Rs. 3417.22 crore as at 31st March 2009), Rs. 2,471.00
crore of savings deposits (Rs. 1,700.91 crore as at 31st March 2009) and
Rs. 16,423.33 crore of term deposits (Rs. 10,525.86 crore as at 31st March
2008).

Advances

The break up of the advances of the Bank is given below:

Rs. Crore
Segment 31-Mar-10 31-Mar-09

A. Lending
Commercial Vehicles & construction equipment 3,693.47 3,334.54
Mortgage Loans 4,711.63 3,300.17
Agriculture Finance 3,088.62 2,365.02
Personal Loans 1,314.98 22261.60
B. Corporate Banking 6,476.13 3,697.11
C. Others 1,490.22 1,666.90
Total Advances 20,775.05 6,625.34

Retail Assets

Commercial Lending

Commercial lending during the year showed impressive growth on the back of
robust growth in the sales of commercial vehicles (CV), construction
equipments (CE) and tractors. Commercial lending, specifically CV and CE
typically follow a lead and lag effect with GDP growth figures. CV industry
for instance, started showing signs of growth in Q3 of 08-09 and continued
to gain momentum with better than expected GDP numbers. As a result of
these growth trends, disbursements gained momentum. Operator margins
improved through growth in freight rates and contractor order books showed
growth. The strain on collections witnessed through last year, has
gradually eased as a consequence and is expected to improve further. The
tractor industry has also shown impressive growth with total tractor sales
expected to touch 4 lacs vehicles for the year 2009-10 as against 3.03 lacs
last year. The primary driver has been the increased disposable income of
the farmers arising out of the revision in minimum support price of
commodities, overall food inflation and better yield despite the delayed
monsoon.

Construction Equipment

Infrastructure development has been given a boost in the current year. With
the overall project investments increased during this period by over 26%
while project implementation improved to 44% from 41%. This has improved
sentiments in the Construction Equipment sales. During the last quarter of
the year, most of the construction equipment majors have improved their
sales across segments. Despite improved sentiments, the payment cycle
continued to be long and based on this most of the retail and mid-size
operators faced financial crunch. The delinquency in the industry is still
continuing as the operators are facing difficulties in bridging the Gap
created during the recession period although they are paying their current
EMIs.

Personal Finance and Mortgage Business

For Personal finance and Mortgage business, the year started cautiously,
with focus on leveraging the existing base and cross sell opportunities.
The mortgage business started seeing growth because of an upsurge in
demand. Lower cost of borrowing has helped in pricing competitively as
compared to previous years. Further, the existing liability branch network
was also used as an active channel with the contribution from the channel
has grown to about 30% of overall disbursements. For personal finance
business, there was an opportunity for lenders to capitalise on the latent
loan demand in the market, with most lenders still being wary of the low-
ticket unsecured segments. In addition, lenders have strengthened and
revamped their underwriting norms so that they align with the credit bureau
-CIBIL. The collection efficiencies in personal finance business have shown
an improvement across all loan bands. With the improvement in portfolio
quality indicators, the Bank focused on products in the high ticket range.
The mortgage business continues to see a great opportunity and the personal
finance business will continue to see some consolidation with a focus on
high-ticket products.

Agriculture Finance

Despite the fear of a bad monsoon and rising food prices, the agriculture
sector continued to show resilience in repayments. In this backdrop, the
agricultural financing continued to show growth and in the process crossed
the required 18% of the Net Bank Credit stipulated by RBI. The focus of the
Agriculture business continued in activities like Tractor loans, crop
loans, agriculture project financing, working capital facilities to
agriculture and agro processing facilities where it consolidated its
presence in its existing markets. This segment also built up business
volumes in fresh segments in the rural sector as part of the financial
inclusion initiatives of the bank.

Corporate Banking

Corporate Banking reflects Kotak Bank's strengths in providing corporate
clients, a wide array of commercial, transactional and electronic banking
products. This was achieved through innovative product development, an
integrated approach to relationship management and offers a complete suite
of services. The product suite comprise of the traditional bank products
such as term loan & working capital and value add services like trade
finance, channel finance, foreign exchange, cash management and
distribution of third party products. To augment & suit the dynamic &
varied needs of customers across segments, the entire range of Debt Capital
Market products (syndication, fixed income and structured products) are
offered through a team of experienced & highly qualified professionals.
During the year, continued focus and a dedicated approach towards the
segment has resulted in addition of over 250 clients. So also the bank has
been able to increase its product penetration with its existing customers.
This has resulted in a significant build up of both, funded and non-funded
advances in this segment.

Branch Banking

The bank added 32 branches, 77 off site and 28 onsite ATMS this financial
year taking the total number of branches to 249, 252 off-site ATMs and 240
on site ATMs. The bank had a debit card base of 829,876 as at March 31,
2010. Total number of deposit accounts as at March 31, 2010 are 11,89,000.
As the economy started showing signs of recovery, the business saw
increased level of transactions. The advantage of wider network was clearly
visible in the CASA growth rates, asset distribution, Mutual Fund & other
equity products and insurance penetration. The key initiatives that the
Branch Banking business undertook this year can be summarized as under:

Customer Service

* Launched a nation wide project titled 'SPIRIT' aimed at improving the
overall service levels cutting across all delivery channels-branch, net,
contact centre, mobile and ATM.

* Successfully launched best in class CRM package covering all Service and
Sales roles across entire branch network and Contact Centre.

* Launched two commercial branches in Mumbai on a pilot basis to handle
trade transactions. This move is aimed at driving substantial increase in
the throughput of the system with reduced times and improved customer
service.

Product Distribution

* Launched Privy Program aimed at HNI customers of the bank. This program
has several enhanced and enriched features which makes it one of the unique
product offering in the market.

* A comprehensive Private Banking System was launched which shall enable us
to offer comprehensive financial planning and advisory services to
customers which balances customer's financial goals with their risk
profile.

* Revised RBI guidelines on ATM usage provided with an opportunity of
increasing acquiring income. Capitalizing on this opportunity bank adopted
a strategy of almost doubling its off site ATM network. This change also
benefited us in improving overall utilization of our ATM network.

Significant Alliances

* Kotak Bank was appointed as a sole Financial Advisor by Overseas Indian
Facilitation Centre (OIFC). This provided us an opportunity to partner the
Government of India and CII in presenting its product bouquet to NRI/PIOs
community across the globe.

* Succeeded in empanelling itself with Government of Goa, Gujarat and
Karnataka for sourcing government business.

* Succeeded in getting ourselves empanelled with some of the best known
names in the country for providing Corporate Salary Product to their
employees.

Productivity & Control

* Enhanced 2 factor authentication, using SIMS/Email, for net banking
access significantly increased the customer confidence in using net banking
platform offered by the bank on net.

* Launched bank wide initiative 'EUREKA' seeking suggestions from employees
aimed at improving productivity, enhancing customer experience, Saving Cost
and improved control (HR section).

* Availability of the Comprehensive Data warehousing and analytic tool
(RELIABILITY) across all field roles ensured timely availability of
information for decision making.

Treasury

The treasury operated in the following monetary policy environment. The LAF
liquidity was comfortable and averaged at above Rs. 1,00,000 crore in 2009-
10. In April 2009, RBI reduced the Reverse Repo and the Repo rate by 25 bps
each to 3.25% and 4.75% respectively. However, the stance of monetary
policy changed as Headline WPI inflation started to emerge as a problem in
the 2nd half of the year. In October 2009, the mandatory SLR requirement
was restored back to its earlier level of 25% of NDTL while other sector-
specific liquidity measures were withdrawn. In January 2010 CRR was raised
from 5.00% to 5.75% while RBI hiked Reverse Repo and the Repo rates by 25
bps each to 3.50% and 5.00% respectively in mid-March, 2010. The Central
government's gross borrowing programme was large at Rs. 4,51,000 crore that
exerted some pressure on bond yields. The G-sec yield curve steepened with
the 10-1 spread rising to 343 bps intra-year from around 190 bps at the
beginning of the year.

Given this environment, treasury adopted carry strategy to take advantage
of the steep yield curve while capturing intermittent trading opportunity
in the fixed income market. The modified duration of the banking book was
marginally increased from 1.41 in early April 2009 to 1.51 by end-March
2010, whereby banking book started to produce positive returns. The Primary
Dealership desk was able to satisfactorily meet all its bidding and success
commitments made to the Reserve Bank of India. Shrinking of spreads of
corporate bonds over underlying G-secs coupled with increased I'll activity
presented numerous opportunities in the corporate bond market which the
treasury was able to successfully capitalize. The Balance Sheet Management
unit (BMU) of treasury was able to maintain all regulatory obligations like
CRR and SLR and successfully managed residual liquidity. The efficient
management of residual liquidity resulted in significant reduction in the
cost of liabilities and helped in enhancing the spreads.

Given the volatility in the currency markets, reinstatement of foreign
exchange trading limits was measured and calibrated and the desk was able
to produce decent trading revenues. The focus of the treasury continued to
be on foreign exchange flow business. There was a healthy increase in the
number of transactions and volumes in the foreign exchange merchant
business.

The treasury also increased its focus on bond and loan syndication markets
as part of its Debt Capital Markets (DCM) business.

The participation of the treasury in the bullion market was muted due to
the high gold prices resulting in lower import of gold into the country.

The bank did not participate in the derivative market both on proprietary
account and client account as it awaits further clarity on legal,
regulatory, accounting and taxation fronts.

The treasury and ALCO continued their heightened vigil on liquidity,
counterparty and sovereign risks. During the year, the focus of the
treasury was also on up-gradation of technology platform and re-engineering
of various treasury operating processes.

KOTAK MAHINDRA PRIME LIMITED (Car finance, other lending)

Kotak Mahindra Prime Limited (KMP) is primarily into car finance, engaged
in financing of retail customers of passenger cars and multi-utility
vehicles and inventory and term funding to car dealers. In addition to car
finance, KMP also carries out other lending activities. Other lending
activities include financing against securities, securitization/assignment
transactions, purchase of non-performing assets and other loans/services.

There was a upsurge in the automobile industry and it registered a healthy
growth of 24.89% during FY 09-10 as compared to a decline of 1.7% for FY
08-09. Total unit sales of cars and MUV's were around 18.6 lac units in FY
09-10 versus 14.9 lac units during FY 08-09.

KMP's advances grew 49% to Rs. 8,379 crs in FY 09-10 from around Rs. 5,615
crs in FY 08-09.

KMP continued to focus on maintaining margins in the retail car finance
business, fee based income, controlling costs and credit losses, while
improving its positioning in the car finance market by scaling up business.
KMP has been a part of the car finance industry since more than 19 years.
Over this period, it has carved out a niche for itself and is considered a
leader in the industry. It has strong relationship with key stake holders
in the industry viz. manufacturers, dealers and customers has helped its
growth.

Financial Highlights

The financial position of KMP for the current and previous financial year
is given below:

Rs. crore
Particulars 2009-10 2008-09

Gross Income 992.06 982.21
Profit before tax 258.87 243.21
Profit after tax 166.41 157.00

Kotak Securities

Post the General Election results in the month of May 2010, there was a
pick up in the Capital Markets and average daily volumes in FY 09-10 were
57% higher than the year FY 08-09 in cash segment and 27% in derivative
segment. This resulted in an increase in the company's revenues.

The national outlet network stood at 1,113 (up from 783) due to the
introduction of new Sub-Brokers and new branches. The number of trading
accounts added during the year was 66,000.

The AUM of portfolio management services funds under management stood at
Rs. 2,302 crore as at 31st March, 2010 (Rs. 2,237 crore as at 31st March,
2009).

Primary market issuances were back in the Capital Markets. KS was able to
maintain its leadership position in mobilization for these issues.

Kotak Institutional Equities (KIE), a division of Kotak Securities, is one
of the leading institutional brokers in India. The division covers
secondary market broking and the marketing of Indian equity offerings,
including IPOs, FPOs & QIPs to domestic and foreign institutional investors
(FIIs). KIE has full financial service capability, which includes
derivatives, facilitating market access through affiliates and the
distinctive offering of corporate access to investors. KIE has a full-
fledged research division engaged in macro-economic studies, industry-and
company-specific equity research. KIE research is known for its in-depth
modeling, width of coverage and investment insights.

In the Asiamoney Brokers Poll 2009, KIE was ranked No. 1 among local
brokerages (for the 4th year in a row) and No. 2 in Country Research, Sales
Services and Sales Trading across domestic and international brokerages.
KIE was also named Best Broker in India by Finance Asia in 2009.

Financial Highlights

The financial position of Kotak Securities for the current and previous
financial year is given below:

Rs. crore
Particulars 2009-10 2008-09

Income 837.86 719.87
Profit before tax 403.88 166.77
Profit after tax 260.10 106.48

Kotak Mahindra Capital Company Limited

Kotak Mahindra Capital Company (KMCC) primarily operates as a full service
Investment Bank and is also a trading-cum-Clearing Member of the National
Stock Exchange on all three segments viz. Cash, F & O and WDM.

The year turned out to be a better year for the securities markets fund
raising, in sharp contrast to the year before. KMCC delivered improved
performance both in terms of business activity and revenues.

Strong relationship driven approach helped garner approximately 50% of the
fund raising activity in the domestic market. Significant progress has been
made on critical strategic initiatives that will drive our business in the
years ahead. During the year, KMCC expanded strategic alliance partner list
by entering into a co-operation agreement with Renaissance Capital for
cross-border M&A advisory. Renaissance Capital is the leading investment
bank in the Russia/CIS and Sub-Saharan African regions with market-leading
positions in each of its core businesses.

Amidst stiff competition, KMCC won the following awards and was ranked high
on the equity and M&A league table rankings:

* Ranked No. 1 in Domestic Fund Raising League Table for FY10 by Prime
Database.

* Ranked No. 1 Book Running Lead Manager in Initial Public Offerings
between FY07 -YTD FY10 by Prime Database and also for FY10.

* Ranked No. 4 in value of announced M&A Transactions in India
(inbound+outbound) for Calendar 2009 by Bloomberg.

* Best Investment Bank in India by Finance Asia, 2009-for the fourth year
in a row.

*Best Domestic Equity House by Asiamoney, 2009-for the second consecutive
year.

In the capital markets, in FY201 0, Kotak Investment Banking was the lead
manager to thirteen out of the twenty Initial/Follow on Public Equity
Offerings (above Rs. 2.5 billion) accounting for-85% of the total money
raised in these Offerings. We have helped companies raise more than Rs. 500
billion in the domestic markets during FY 2010. Some of the notable deals
that were concluded during the year are:

(1) NMDC Follow-on Offer Rs. 99.30 bn

(2) NTPC Follow-on Offer Rs. 84.80 bn

(3) NHPC Initial Public Offer Rs. 60.39 bn

(4) HDFC - First ever QIP of NCD
with detachable warrants Rs. 43.00 bn

(5) REC Follow-on Offer Rs. 35.30 bn

(6) Adani Power Initial Public Offer Rs. 30.17 bn

(7) JSW Energy Initial Public Offer Rs. 27.00 bn

(8) HDIL QIP Rs. 16.88 bn

(9) DB Realty Initial Public Offer Rs. 15.00 bn

(10) GMR Energy Private placement
of shares to Temasek Holdings Rs. 9.30 bn

(11) Delisting offer by Huber
Group for Micro Inks Limited Rs. 3.98 bn

(12) Keystone Realtors entity level
PE by Sun Apollo India Real Estate Rs. 2.80 bn

(13) Cipla Sale of Intellectual
Property Rights to the 'I-Pill' brand Rs. 1.00 bn

(14) Nelco Sale of Traction Electronics,
SCADA and Industrial Drives Rs. 0.90 bn
businesses to Crompton Greaves

Financial Highlights
Rs. crore
Particulars 2009-10 2008-09

Income 101.40 97.82
Profit before tax 34.62 21.61
Profit after tax 23.86 12.81

The large scale Government Divestment program should continue to keep the
IPO/FPO markets robust. KMCC has a strong pipeline of mandates in various
sectors for Mergers and acquisitions as also Equity Capital markets.

KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE

Kotak Mahindra Old Mutual Life Insurance is a 74:26 joint venture
partnership between Kotak Mahindra Group and Old Mutual Plc, an
international savings, wealth management and Insurance company based in UK.

Kotak Life Insurance is in the business of life Insurance, deferred annuity
and providing employee benefit products to its individual and group
clientele. The company has developed a multi-channel distribution network
to cater to its customers and markets through tied, alternate, group and
direct marketing channels on a pan-India basis.

In FY 2009-10 the company's ULIP basket was realigned to meet IRDA's
regulation on 'Cap on Charges'.

The non-ULIP offering was bolstered with the introduction of two revised
plans, Kotak Term Plan and Kotak Preferred Term Plan. The revision resulted
in a reduction of upto 45% in Term rates, making the products more
competitive while helping customers attain a higher degree of life cover.

The key products in the company's portfolio are Kotak Super Advantage,
Kotak Platinum Edge, Kotak Guaranteed Pension Builder and Kotak Headstart
Child plans. The Company also filed 4 specific products for the Online
Sales Channel this year. These products include 2 Unit Linked, one each in
Retirement and Investment categories and 2 Non Unit linked Term Insurance
Plans. These Term Insurance Plans are versions of the existing Term and
Preferred Term plans with further reduced rates.

Significant Achievements in FY 2009-10

The company implemented major customer centric initiatives by strengthening
its technology backbone and made significant progress in improving self
service capabilities of its customers, Life Advisors and employees,
substantially improving overall process efficiencies.

Some of the major initiatives implemented were

*D An online portal which enables efficient and faster servicing to
customers, and has enabled in streamlining query handling at branches.

* A system to handle the entire gamut of receipting and payment activity of
the company.

* A system to handle commission calculation and Rewards and recognition.

The company revisited its brand positioning. A new tag line 'Faidey Ka
Insurance' was adopted, that neatly combines the idea of good returns with
protection.

The company was awarded the prestigious NASSCOM CNBC TV 18 IT User Award
for its superior adaptation of Information Technology to maximize cost-
effectiveness and stakeholder impact and the Edge Award instituted by
Network Computing for the use of Information Technology for maximising
business impact.

The company's Corporate Marketing and Communications, Treasury and
Investment, Accounts and Finance and Human Resources departments of the
company achieved the prestigious ISO 9001:2008 certification awarded by TOV
SOD, the highly reputed global certifying organisation. This is in addition
to Central Processing Centre and the Underwriting and Claims department
which continue to be certified by the said standard.

Industry

The Indian life insurance industry is bracing itself to tackle the economic
challenges that have unfolded in the previous year. After several years of
unbridled expansion, the sector is experiencing certain moderation. The
focus of most insurers is shifting from large-scale expansion to sustained
value creation and efficient use of capital. Special emphasis is placed on
cost reduction and cost management.

KLI Highlights:

(1) Over 35,897 life advisors with significant efforts directed towards
their training and enhancing their effectiveness.

(2) 95 corporate agents and 117 empanelled brokers.

(3) Widened its reach and operates from 214 branches in 152 cities.

(4) Achieved 85% growth in coverage of Social lives as against previous
year. Covered 1,31,166 customers against a statutory requirement of 45,000.

(5) The Gross Total Premium Received has grown from Rs. 2,343.19 Crores to
Rs. 2,868.04 Crores, a growth of 22%.

(6) Renewal income has grown by 53% to Rs. 1,534 Crores.

(7) Total Assets under Management has grown by 70% to Rs. 6,709.77 Crores.

(8) Conservation Ratio was 70% as against 65% in previous year.

(9) Operating Expense ratio has reduced to 20% as against 26% in previous
year.

Kotak Life Insurance has shown consistent value based growth in a
challenging economic and business environment.

Financial highlights

The financial position of Kotak Life Insurance for the current and previous
financial year is given below:

Rs. Crore
Particulars 2009-10 2008-09

Gross Premium Income 2,868.05 2,343.19
First Year Premium (Ind Group and Single) 1,333.98 1,343.01
Profit Before Tax 70.71 14.44
Profit after Tax 70.71 14.44

Kotak Mahindra Asset Management Company Limited (KMAMC) & Kotak Mahindra
Trustee Company Limited (KMTC).

Kotak Mahindra Asset Management Company Limited (KMAMC) is the asset
manager of Kotak Mahindra Mutual Fund (KMMF) and Kotak Mahindra Trustee
Company (KMTC) is the trustee company.

The Average Assets under Management (AAUM) with Kotak Mahindra Asset
Management Company for the month of March, 2010 were Rs. 34,787.36 crores,
as compared to Rs. 18,369.97 crores for the month of March, 2009 an
increase of 89.3%, as against the industry increase of 51.7%. The overall
market share has also improved from 3.69% in March, 2009 to 4.64% in March
2010. Based on average assets under management, KMAMC is now ranked eighth
compared to ninth for March, 2009 and is the 5th largest private sector
mutual fund house in the country.

The number of folios as on March 31, 2010 was over 10.1 lakh. KMAMC has a
presence in 24 cities and 82 branches.

In terms of performance of the funds managed by KMAMC, mainstream debt
schemes of the fund performed well. Long duration funds outperformed short
tenure funds. Your company was once again awarded 'Best Debt fund house-
2009' by Outlook Money NDTV Profit awards 2009. Kotak Bond fund was awarded
as the best bond fund over ten years by Lipper.

In FY 2009-10, the market regulator, Securities and Exchange Board of India
(SEBI), initiated several reforms to protect investor interest which
redefined the way the Mutual Fund industry would function. In light of the
impact of SEBI regulations, the asset management companies would have to
work more closely with distributors to educate them that Mutual Funds would
continue to be a part of the core investment in any financial plan. With
increased transparency, lower costs and increased customer education,
investor participation in Mutual Funds is likely to only increase from
hereon.

Financial Highlights

The financial position of KMAMC and KMTC for the current and previous
financial year is given below:
Rs. crore
Particulars 2009-10 2008-09

Total Income 186.91 95.18
Profit Before Tax 109.57 24.60
Profit After Tax 72.46 16.13

Innovative product offerings, continued focus on fund performance and
franchise building in terms of geographical expansion, penetration and
distributor tie ups would be the key drivers of growth during FY 10-11.

International Subsidiaries

The bank has overseas subsidiaries with offices in Mauritius, London,
Dubai, Singapore, New York & San Francisco.

The overseas subsidiaries are mainly engaged in investment advisory and
investment management of funds, Equity & Debt Trading, management of
GDR/FCCB issuances, broker and broker dealer activities and investments.

The financial markets brought some relief to the equity asset management
business. With capital markets bouncing back the assets managed/advised by
the international operations closed the year at USD 1,568 million (2009:
USD 1,088 million).

In the previous year, the international operations had activated a desk to
trade in euro bonds and convertibles.

This business has further grown to become a significant piece of the
international operations.

The desk has been extended from Dubai to Singapore and London, and has
established an extensive network of market counterparties and clients which

we consider is a key to the success and sustainability of this business.

The international entities took advantage of the high yields on quality
Indian Eurobonds and convertibles, to build investment positions in select
names.

The drop in yield on this investment portfolio and significant contraction
in credit spreads, resulted in significant returns.

The coming year is expected to throw a lot of opportunities in the
international space.

Financial highlights

The financial position of the international subsidiaries for the current
and previous financial year is given below:

Particulars 2009-10 2008-09

Total Income 162.89 97.20
Profit Before Tax 88.93 34.84
Profit after Tax 81.80 24.29

KOTAK INVESTMENT ADVISORS LIMITED

(Alternate asset management & advisory) Kotak Investment Advisors Limited
(KIAL) is the investment manager/advisor for private equity and realty
funds.

The aggregate alternate assets managed/advised by KIAL as at 31st March,
2010 was around Rs. 5,450 crores (USD 1.2 billion). The Company manages
five domestic funds and advises three offshore funds.

Private Equity Funds

(a) India Growth Fund

India Growth Fund (IGF) was set up as a unit scheme of Kotak SEAF India
Fund with investors from select institutional and high net worth investors,
from both India and abroad, on a private placement basis IGF has made 15
investments across diversified sectors such as logistics, technology
services, retail, media and entertainment, engineering, bio-technology,
textiles, aviation, telecom and power infrastructure and financial
exchanges.

(b) Kotak India Venture Fund I

Kotak India Venture Fund I (KIVF-I) is a domestic fund with the objective
of making investments primarily in companies operating in Biotechnology and
Life Sciences sector. The Fund as made three investments till date.

(c) Kotak India Growth Fund II

Kotak India Growth Fund II is aimed at investing in mid sized corporates
with a growth orientation. KIGF-11 has made one investment till date.

Realty Funds

(a) Kotak Mahindra Realty Fund

Kotak Mahindra Realty Fund (KMRF) was formed in May, 2005. The primary
objective of KMRF is to invest in and provide finance to real estate sector
and allied services sectors in India with an intention to generate long-
term capital appreciation. Kotak India Real Estate Fund-I (KIREF-I) has
been set up as a unit scheme of KMRF. KIREF-I had fully committed its
capital in eleven investments, of which it has till date exited fully from
two investments and partially from two investments.

(b) Kotak Alternate Opportunities (India) Fund

Kotak Alternate Opportunities (India) Fund (KAOIF) was set up in July, 2007
with an objective of investing in the securities of companies operating in
real estate, infrastructure and allied services sectors in India with an
intention to provide long-term capital appreciation to its investors. KAOIF
has till date made thirteen investments in a diversified portfolio of which
5 investments were made in 2009-10. It has also divested from a 2
investments during the year at a blended IRR of 45%.

Financial Highlights:

The financial position of KIAL for the current previous financial year is
given below:
Rs. Crore
Particulars 2009-10 2008-09

Income 99.11 114.78
Profit before tax 59.83 74.77
Profit after tax 39.75 48.04

Technology

After consolidation of the data centers last year, the primary focus this
year has been on facilitating 'green energy' initiatives. As a part of this
strategy, a transformational project of 'virtualizing' a majority of the
servers in the data center, was executed. 400 servers across the group were
virtualized thereby saving on power consumption and enabling redeployment
of the surplus servers for future expansion.

Additionally, a number of energy saving initiatives such as using active
cooling technologies (controlled cool air throughput to servers based on
their heat), usage of air-cooled water chillers and usage of integrated
building management system for controlling lighting/other electrical
equipments within the data center have been deployed. The target is to be
on par with global standards PUE (Power usage effectiveness).

This year saw cross deployment of standardized technology. An in-house Call
Center platform on upgraded VOIP technology was deployed for the
businesses. It enables automated outbound calling and provides a full range
of state of the art functions. Siebel CRM was launched for sales and
marketing across all business units.

Kotak Technology continued its focus on constant enhancement of customer
experience across all channels. The following are some of these:

* The Kotak website was enhanced to provide an improved look and feel and
ease of navigation.

* Several business units launched self service portals.

* Kotak Life Individual and Group customers can now login to one stop self
service portals to pay premiums and obtain information about their
policies.

* Consumers who have availed of loans from the bank can login to a portal
and get details on the status of their loans.

* Kotak Securities online customers got a new state of the art online
trading solution.

* Kotak bank customers got improved IVR features and NRI customers have a
new website.

* Confirm that all of the above are live.

System interfaces with Corporate Customers' applications were also
enhanced. Corporate customers can now get Straight Through Processing (STP)
for their daily banking transactions, such as payments, from their own ERP
system to Kotak Bank's systems. Host to Host integration enables secure,
encrypted online transfer of file based payments from the customer's system
to the bank's payment processing engine.

Likewise communication with Institutional Equity customer applications was
standardized using global standard FIX protocols. Innovative technology
solutions were introduced to support new product offerings. Calypso, a
world standard treasury product was implemented for fixed income products
and support for algorithmic trading was implemented for Institution
Equities. As in previous years, Kotak Technology continued to be recognized
for its excellence. Kotak Bank received awards for storage virtualization
and e-Governance. Kotak Life Insurance won the CNBC TV 18 IT User Awards
2009 and the EDGE award for the workflow & STP.

RISK MANAGEMENT

The Bank's risk management strategy and objectives are guided by the
Enterprise Risk Management (ERM) Policy. The risk management framework lays
emphasis on the Group's risk philosophy, proper organizational structure,
risk and reward balance and is supported by dedicated monitoring and risk
assessment mechanism.

Risk Governance

The Bank's risk management is overseen by the Board of Directors, and
various committees are specifically entrusted with the execution
responsibilities for risk management. The Management Committee provides
overall risk management supervision for the Group as a whole.

Committees that form part of Risk Governance include Audit Committee (ACB),
Asset Liability Committee (ALCO), Credit Committee, Risk Management
Committee (RMC) etc. During the year, operational risk governance was
strengthened with introduction of the Operational Risk Executive Committee
(OREC) as a dedicated sub-committee of the RMC.

Risk Management Tools

The Bank uses a range of tools and metrics for measuring, monitoring and
managing risks. Some of these tools are common to a number of risk
categories whereas the others are tailored to address the particular
features of specific risk categories.

During the year, loss forecasting models and stress testing methodologies
were refined to better predict the potential losses.

Credit Risk

The bank has devised its Credit Policy to create an enabling framework for
ensuring smooth & timely flow of credit to the Bank's customers while
ensuring prudent credit growth-both quantitatively and qualitatively. The
bank has created a multi-layered credit risk management process through
clearly defined credit policies and processes. These process is divided
into three stages-pre-sanction, sanction and post-sanction process.

Internal rating model is an integral part of credit lending decision
decisions.

The internal credit rating systems would facilitate migration to advanced
internal rating-based approaches of Basel II Accord in due course.

Market Risk

The Asset Liability Committee and the Risk Management committee of the Bank
are the two bodies that give direction to the market risk department to
manage various risks arising out of market movements. The treasury
activities are documented in the ALM and Investment policy.

The risk monitoring and measurement is done through the advanced market
risk systems, which are capable to be customized as per the changing market
scenarios.

* Value at Risk and Back testing

The Bank measures the risk of losses arising from future potential adverse
movements in market rates, prices and volatilities using a VaR methodology.
Value at risk is computed for each type of market risk i.e. interest rate,
foreign currency, equity etc. The Bank intends to use this value at risk
number for maintaining capital as per internal model approach when
permitted by the regulator.

To ensure the predictive power of the value at risk model they are back
tested periodically by comparing the daily VAR against actual P&L. Back
testing results are placed before the Board.

* Interest Rate Risk:

The Bank assesses Interest Rate Risk in the Banking Book from two different
but complementary perspectives, namely the Earnings Perspective and the
Economic Value Perspective. The Bank uses Gap Analysis to evaluate the
impact of shifts in interest rates on NIL. The Duration Gap Approach is
used to determine the sensitivity of the Economic Value of the Bank to
changes in interest rates.

* Liquidity Risk:

The Liquidity Risk Management framework is reviewed and approved by ALCO
and the Board. Treasury is responsible for the management of Liquidity
Risk.

In order to ensure adequate liquidity availability and healthy funding
profile, the Bank uses the following key metrics and internal controls.
Intraday Liquidity Management, Early warning indicator and Gap analysis.

Stress Testing and Scenario Analysis have also been incorporated in the
Liquidity Risk Management structure. The Bank follows a scenario based
approach towards Liquidity Stress Testing. Both historical and hypothetical
scenarios & assumptions are employed to evaluate the impact of stresses on
the liquidity position of the Bank.

Operational Risk

The Bank has a board approved Operational Risk Management (ORM) policy that
outlines the ORM governance, key risk assessment, monitoring and mitigating
activities.

Some of the key focus areas for operational risk efforts during the year
include implementation of risk registers to capture top risks and
significant coverage in the Risk Control Self Assessment (RCSA) program.
Some of the key aspects of operational risk management framework are
analysis of loss events, KYC policy, Disaster recovery and Business
Continuity Plans (BCP), reputation risk management and outsourcing policy.

(a) The Bank has Board approved Fraud Risk Management policy. Committee on
frauds has been constituted for monitoring and reviewing all the frauds
involving amount Rs. 1 Crore and above. Bank has taken additional measures
to monitor suspicious transactions, review cases of attempted and actual
frauds. Bank also counters frauds by contributing to the CIBIL detect and
using the database for improving processes, implementing and modifying
necessary controls.

Capital Adequacy and Basel II

Capital is a Bank's ultimate protection against potential losses due to
various risk types. The Bank's high level of capital adequacy ratio
provides its customer a positive assurance against unexpected losses. In
this respect, the regulator has been urging banks to adopt some of the best
practices in risk management. The Bank currently applies standardized
approach for Market and Credit Risk, the Basic Indicator approach for
Operational Risk. The Reserve Bank of India has now come out with draft
timelines for implementation of the advanced approaches. Your Bank is well
positioned to meet the RBI set timelines in this regard.

ICAAP

During the year, the bank prepared its ICAAP policy that was approved by
the board and submitted to the regulator. Under the Internal Capital
Adequacy Assessment Process (ICAAP), material Pillar II credit risks such
as credit concentration, underestimation of credit risk, liquidity risk,
Interest Rate risk on the Banking Book (IRRBB), strategic risk etc. have
been identified and appropriate identification, assessment and capital
allocation methodologies have been developed. Based on the ICAAP, the bank
was well capitalized throughout the year. A key element of the ICAAP is
stress testing. As described above, the bank has a comprehensive board
approved stress testing framework that provides for severe shocks to
various risk parameters and assesses the impact on P&L and Capital
position. The results of these stress tests are placed before the senior
management and board for necessary action. After considering the results of
the stress tests and key sensitivities, Capital Adequacy position of the
bank was considered adequate.

Compliance

An independent and comprehensive compliance structure addresses the Bank's
compliance and reputation risk. All key subsidiaries of the Bank have an
independent Compliance function. Compliance officials across the group
interact on various issues including the best practices followed by the
respective companies.

The compliance framework, approved by the Board of Directors, broadly sets
out the compliance risk management processes and tools to be used by
businesses, management and compliance officers for managing its compliance
risks. Apart from the Bank's compliance framework, each of the subsidiary
companies has its own Compliance Manual.

The Compliance function is responsible for all aspects of compliance across
the Bank and 16 professionals cover various businesses across the Bank's
line of business. There are dedicated resources that focus on areas like
regulatory reporting, AML, compliance monitoring etc.

The Compliance team provides compliance assistance and support to
Management and manages and supervises the compliance framework.

Compliance works with business units to develop procedures to implement the
requirements of the various regulations and policies. It also works closely
with other support functions including the Legal department and outside
counsel.

The Bank uses the Knowledge Management Tools to assist it with monitoring
for new or revised regulations. The Bank also looks at regulatory websites
and participates in industry working groups that discuss evolving
regulatory requirements. The Compliance team remains in constant touch with
the firm's regulators. In-house Compliance Newsletter keeps the employees
abreast of the key regulatory updates affecting the businesses of the Bank
and its subsidiaries. Training on compliance matters is imparted to
employees on an ongoing basis both online and classroom. The Compliance
Department keeps the top management/Board informed about important
compliance related matters through monthly, quarterly, annual compliance
reviews.

Internal Controls

The Bank's internal audit department assesses business and control risks of
all branches and businesses to formulate a risk-based internal audit plan,
as recommended by the Reserve Bank of India. The audit process followed is
as below:

An annual risk-based internal audit plan is drawn up on the basis of risk
profiling of Bank's branches and businesses/departments which is approved
by the Audit Committee.

The audit plan is prioritised based on areas which pose a higher risk to
the bank and such areas and branches are targeted for more frequent audits

The Internal Audit Policy includes the risk assessment methodology which
provides for coverage of all auditable areas once in three years.

After assessing the overall risk of a branch or business or department, the
Bank takes measures to minimize such risk. Senior officers also assess and
evaluate the mitigating measures taken by the branch during their visits.

Post issue of Audit reports there is a detailed process for monitoring of
progress on implementation of action plans.

Status of resolution tracking as well as pending issues is reported to
senior management on a regular basis and a formal report on pending issues
is issued once every half year.

Human Resources

As of 31st March, 2010, the Bank and its subsidiaries employed around
20,000 employees at various locations in India and abroad. The Bank
continued to maintain its status as amongst the Top 25 Best Employers in
India as rated by Hewitt Associates.

While hiring gathered momentum during the latter part of the year, the bank
continued to invest and adopt best practices and processes in Selection,
Talent Management, and Welfare of its people. Substantial Learning &
Development interventions linked to the competency frame work were
delivered during the year, to ensure that the people had the necessary
skill sets to excel in theirjobs.

The robust Talent acquisition and Development process, Leadership
capability building, and a well aligned Performance Management System have
enabled the Bank and its subsidiaries to build a highly engaged work force
that excels in delivering our customer value proposition.

Opportunities and Threats:

Opportunities:

* Being part of the India's growth story

* Utilise the emerging opportunity of getting the wallet share of the
burgeoning middle class

* Utilise technology to provide solutions to customers

* Increase distribution strength

Threats

* Volatile environment
* Fiscal deficit
* Volatile interest rate movement's
* Competition

Outlook

Kotak Mahindra Group's results for the financial year demonstrate the
strong fundamental growth in the India story. However, the economy inhibits
the concerns over the impact of inflation, level of fiscal deficit and
rising crude oil prices.

The Group believes that the present economic scenario offers immense
opportunities for it to grow in scale and reach coupled with value
creation.

The Group is confident that with its integrated business model it shall be
able to take advantage of the significant growth opportunities in the
coming years.

Safe harbour

This document contains certain forward-looking statements based on current
expectations of Kotak Mahindra management. Actual results may vary
significantly from the forward-looking statements contained in this
document due to various risks and uncertainties. These risks and
uncertainties include the effect of economic and political conditions in
India and outside India, volatility in interest rates and in the securities
market, new regulations and Government policies that may impact the
businesses of Kotak Mahindra Group as well as its ability to implement the
strategy. Kotak Mahindra does not undertake to update these statements.

This document does not constitute an offer or recommendation to buy or sell
any securities of Kotak Mahindra Bank or any of its subsidiaries and
associate companies. This document also does not constitute an offer or
recommendation to buy or sell any financial products offered by Kotak
Mahindra, including but not limited to units of its mutual fund and life
insurance policies.

All investments in mutual funds and securities are subject to market risks
and the NAV of the schemes may go up or down depending upon the factors and
forces affecting the securities market. The performance of the sponsor,
Kotak Mahindra Bank Limited, has no bearing on the expected performance of
Kotak Mahindra Mutual Fund or any schemes there under.

Figures for the previous year have been regrouped wherever necessary to
conform to current year's presentation.