Bharat Financial Inclusion Ltd. के निदेशक की रिपोर्ट

Mar 31, 2018

Directors'' Report

Dear Members,

The Board of Directors (the "Board") takes pleasure in presenting the Fifteenth Annual Report of Bharat Financial Inclusion Limited (the "Company") together with the audited financial statements for the year ended March 31, 2018.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

The financial performance of the Company is summarized below:

	FY 2018	FY 2017	Change (%)
Total revenue (Rs. in crore)	2,102.0	1,727.9	21.7%
Less: Total expenditure (Rs. in crore)	1,647.2	1,535.1	7.3%
Profit Before Tax (Rs. in crore)	454.8	192.8	135.8%
Profit After Tax (Rs. in crore)	455.5	289.7	57.2%
Earnings Per Share (EPS) (Rs.)	32.9	21.8	50.7%
Diluted EPS (Rs.)	32.6	21.6	51.1%

The operational highlights of the Company are summarized below:

Year ended March 31	2018	2017	Change (%)
Number of branches	1,567	1,399	12.0
Number of members (in lakh)	72.7	67.0	8.5
Number of employees	16,021	14,775	8.6
Amount disbursed (Rs. in crore)	18,472	14,666.9	25.9
Gross loan portfolio (Rs. in crore)	12,594.4	9,149.6	37.6
Gross loan portfolio* -(Rs. in crore)	12,594.4	9,149.6	37.6

*outside Andhra Pradesh and lelangana

The Government of India demonetized Rs.500 and Rs.1000 bank notes effective November 9, 2016. This step was taken with a view to curb financing of terrorism through the proceeds of Fake Indian Currency Notes and the use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India and to eliminate menace of black money. However, this has severely affected the growth and collection of all MFIs (including the Company) for almost six months.

As per the Company''s provisioning policy for portfolio loans, the Company was constrained to make provision of Rs.308.4 crore (in addition to the standard provision of Rs.71.8 crore) and consequently the Company had posted a loss of Rs.234.9 crore for the fourth quarter of FY17 and a profit of Rs. 289.7 Crore for FY17. Further, the Company was constrained to make provision of Rs.151.9 crore and consequently posted a loss of Rs.37 crore for the first quarter of FY18.

In view of the Company''s unique operating model of extending small ticket size loan to joint liability group repayable on weekly installment and various other initiatives undertaken by the Company which included cashless disbursement, credit discipline / controlled disbursement, the Company''s operations started to move towards to normalcy in Q1-FY18 and the Company reported PAT Rs.119.4 crore,

Rs.162.6 crore and Rs.210.5 crore in the second, third and fourth quarters of FY18 respectively. Further, the Company reported a PAT of Rs.455.5 crore for FY18 as compared to a PAT of Rs.289.7 crore for FY17.

CAPITAL INFUSION

During the year, the Company has allotted 13,39,842 equity shares arising out of the exercise of employees stock options granted to the employees and directors of the Company.

Post allotment of equity shares as aforesaid, the issued, subscribed and paid-up share capital of the Company stands at Rs. 139,32,11,400 (Rupees One Hundred Thirty Nine Crore Thirty Two Lakh Eleven Thousand Four Hundred only) comprising of 13,93,21,140 (Thirteen Crore Ninety Three Lakh Twenty One Thousand One Hundred Forty) equity shares of Rs.10 each as on March 31, 2018. The Company''s Capital Adequacy Ratio (''CAR'') as at March 31, 2018 was 33.2 % well in excess of the mandated 15% and the net worth of the Company as at March 31, 2018 was Rs.2,998.8 crore.

During the year, the Company has not raised capital in any other manner.

During the year, the Company has redeemed the following Debentures.

- 11.48% Series 1 secured, non-cumulative, redeemable, taxable, listed, rated non-convertible debentures of face value Rs.10 lakh each aggregating to Rs.100 crore (1,000 Debentures) on April 28, 2017;and

- 11.48% Series 2 secured, non-cumulative, redeemable, taxable, listed, rated non-convertible debentures of face value Rs.10 lakh each aggregating to Rs. 50 crore (500 Debentures) on April 28, 2017 and remaining Rs.50 crore (500 Debentures) on October 31, 2017.

Further, the Company has redeemed the following balance debentures on May 15, 2018:- 11.95% Series 3 secured, non- cumulative, redeemable, taxable, listed, rated non-convertible debentures of face value of Rs. 10 lakh each aggregating to Rs 100 crore (1,000 debentures); and

- 11.95% Series 4 secured, non- cumulative, redeemable, taxable,listed, rated non-convertible debentures of face value of Rs. 10 lakh each aggregating to Rs 100 crore (1,000 debentures)

RESOURCE MOBILISATION

During the year under review, the Company continued to diversify its sources of funds and raised a sum of Rs.9,977.2 crore by way of short-term loans, long-term loans and commercial papers, which was 44.6% higher as compared to Rs.6,900.2 crore raised during FY17.

The Company''s weighted average cost of borrowing including processing fees (on Balance sheet daily average) reduced to 9.8% in FY18 from 10.9% in FY 17. This reduction was mainly driven by sustained turnaround and diversification of sources of funding. In line with the Company''s policy of passing on the cost advantages accruing from economies of scale, operational efficiency and reduction in the cost of borrowing to its borrowers, the rate of interest charged by the Company, which is one of the lowest rate among the private sector Non-Banking Financial Company - Micro Finance Institutions (NBFC-MFIs), on its core Income Generating Loans (IGL) remained the same effective since December, 2015.

BUSINESS OVERVIEW

As of March 31, 2018, the Company had 72.7 lakh Members including 61.9 lakh Borrowers spread across 1,434 branches (all branches in states other than Andhra Pradesh and Telangana) in India, with a gross loan portfolio of Rs. 12,594.4 crore as compared to Rs. 9,149.6 crore in FY17.

Please refer Management Discussion and Analysis Report for more information on the Company''s Business Overview.

DIVIDEND

As on March 31, 2018, the Company has unabsorbed losses to the extent of Rs. 303.23 crore and in accordance with the Companies Act, 2013(CA 2013), Company can declare dividend only after setting of the unabsorbed losses fully against the Profit earned by the Company. In order to conserve the resources of the Company to meet its business requirements, the Company has not declared dividend in FY18.

COMPOSITE SCHEME OF ARRANGEMENT BETWEEN THE COMPANY AND INDUSIND BANK LIMITED:

The Board, after evaluating several options for the organic and inorganic growth of the Company had approved the Composite Scheme of Arrangement ("Scheme") between the Company, IndusInd Bank Limited ("Bank") and the wholly owned subsidiary of the Bank (under process of incorporation as on the date of this report) ("Subsidiary") and their respective shareholders and creditors under Section 230-232 of the CA 2013, subject to receipt of applicable regulatory approvals on October 14, 2017. The Scheme provides for the voluntary amalgamation of the Company with the Bank and dissolution of the Company without winding up and the consequent issuance of equity shares of the Bank to the shareholders of the Company. The share exchange ratio for the amalgamation of Company with the Bank shall be 639 (six hundred thirty nine) equity shares of the Bank for every 1,000 (one thousand) equity shares of Company.

Pursuant to the Scheme after the amalgamation, the business correspondent activities of the Company shall be transferred to the Bank and then as a going concern, on a slump sale basis, from the Bank to the Subsidiary in exchange for the equity shares of the Subsidiary to the Bank.

In this regard, as on date of this report, the amalgamation has been approved by the Competition Commission of India on December 19, 2017 and no objection has been issued by the Reserve Bank of India, the National Stock Exchange of India Limited and the BSE Limited on March 13, 2018, June 1, 2018 and June 4, 2018 respectively.

The Scheme remains subject to the receipt of approval from the National Company Law Tribunal, the respective shareholders and creditors of the Company and the Bank.

The amalgamation will provide the following benefits to the amalgamated entity and its stakeholders:

1. Combined business would create meaningful value for all stakeholders through increased scale, wider product diversification, lower funding cost, stronger balance sheet and ability to drive synergies across revenue opportunities, operating efficiencies and underwriting efficiencies.

2. Materially realizable synergies for the benefit of a large common shareholder base and stable market perception.

3. Access to a growing customer base and outlets to increase opportunities of various main-stream banking products to financially underserved customers in rural India.

4. Deeper reach in low income segment and increased access for the combined customer base to the Bank''s wide array of products and services.

5. Alignment of the mission objectives of both entities on increased financial inclusion.

DIRECTORS AND KEY MANAGERIAL PERSONNEL Changes in the composition of the Board of Directors

During the year under review, no change took place in the composition of the Board, except appointment of Mr. Ashish Lakhanpal as a Director by the members at the 14th AGM held on July 7, 2017.

Directors Retiring by Rotation

In terms of provisions of Section 152 of the CA 2013, Mr. Ashish Lakhanpal, Non-Executive Director shall retire by rotation at the ensuing AGM and being eligible, offered himself for reappointment.

Declaration of Independence

The Company has received declarations from all Independent Directors of the Company confirming that they meet the criteria of independence as prescribed under Section 149(6) of the CA 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI LODR Regulations").

Key Managerial Personnel

As on date of the report, Mr. M. R. Rao, Managing Director & CEO, Mr. Ashish Damani, Chief Financial Officer and Mr. Rajendra Patil, Sr. EVP - Legal & Company Secretary of the Company are the Key Managerial Personnel ("KMP") of the Company.

During the year under review, Mr. K. V. Rao, Chief Operating Officer, has resigned from the services of the Company and was relieved effective January 31, 2018.

Details of subsidiary, associate and joint venture of the company:

The Company doesn''t have any subsidiary, associate and joint venture.

DIRECTORS'' RESPONSIBILITY STATEMENT

Pursuant to the requirement under Section 134(3)(c) of the CA 2013 with respect to Directors'' Responsibility Statement, it is hereby confirmed that:

1. in the preparation of the accounts for the year ended March 31, 2018, the applicable accounting standards have been followed and there are no material departures from the same;

2. the Directors had selected such accounting policies and applied them consistently, and made judgments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2018 and of the profit of the Company for the year under review;

3. the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the CA 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

4. the Directors had prepared annual accounts of the Company on a ''going concern'' basis;

5. the Directors had laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and were operating effectively; and

6. the Directors had devised proper systems to ensure compliance with the provision of all applicable laws and that such systems were adequate and operating effectively.

POLICY FOR SELECTION AND APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY Policy for Selection and Appointment of Directors

In compliance with the provisions of the CA 2013 and SEBI LODR Regulations, the Board, on the recommendation of the Nomination and Remuneration Committee ("NRC"), had adopted the Policy for Selection and Appointment of Directors in the year 2015.

The aforesaid Policy provides a framework to ensure that suitable and efficient succession plans are in place for appointment of Directors on the Board so as to maintain an appropriate balance of skills and experience within the Board. The Policy also provides for selection criteria for appointment of directors, viz. educational and professional background, general understanding of the Company''s business dynamics, global business and social perspective, personal achievements, Board diversity and payment of remuneration to the directors of the Company.

NUMBER OF MEETINGS OF THE BOARD OF DIRECTORS

The details of the meetings of the Board of Directors of the Company held during the year are mentioned in the Corporate Governance Report which is provided separately in this Annual Report.

AUDITORS

(a) Statutory Auditors

At the Fourteenth Annual General Meeting of the Company held on July 7, 2017, the members approved the appointment of BSR & Associates LLP, Chartered Accountants (FRN : 116231W / W-100024) as the Statutory Auditors of the Company for a period of five continuous years i.e. from the conclusion of Fourteenth Annual General Meeting till the conclusion of Nineteenth Annual General Meeting of the Company subject to ratification by the members of the Company at every annual general meeting till the term of their appointment.

As per the recommendation of the Audit Committee and the Board of Directors of the Company, the proposal for ratification of appointment of BSR & Associates LLP as Statutory Auditors of the Company is being included in the notice of the ensuing AGM for your approval.

(b) Secretarial Auditors and Secretarial Audit Report

Pursuant to Section 204 of the CA 2013, the Company had appointed BS & Company, Company Secretaries LLP, as its secretarial auditors to conduct the secretarial audit of the Company for FY18. The Report of Secretarial Auditor for FY18 is annexed herewith as Annexure - I to Directors'' Report.

There are no qualifications, reservation or adverse remark made by the Auditors in their reports, save and except disclaimer made by them in discharge of their professional obligation.

DETAILS OF FRAUDS REPORTED BY THE STATUTORY AUDITORS

During the year under review, the Statutory Auditors, the Internal Auditors and the Secretarial Auditors of the Company have not reported any fraud as required under Section 143(12) of the CA 2013.

PARTICULARS OF LOANS OR GUARANTEES OR INVESTMENTS

Pursuant to the clarification dated February 13, 2015 issued by the Ministry of Corporate Affairs and Section 186(11) of the CA 2013, the provision of Section 134 (3)(g) of the CA 2013 requiring disclosure of particulars of the loans given, investments made or guarantees given or securities provided is not applicable to the Company.

RELATED PARTY TRANSACTIONS

All transactions entered into with Related Parties as defined under the CA 2013 and SEBI LODR Regulations during the year under review were in the ordinary course of business and at an arm''s length pricing basis and do not attract the provisions of Section 188 of the CA 2013.

Details of the related party transactions, which are exempted according to a proviso to Section 188 of the CA 2013, during FY18 are disclosed in Note 27 of the financial statements.

The policy on Related Party Transactions, as approved by the Board, is displayed on the website of the Company at http://www.bfil.co.in/wp-content/themes/sks/public/downloads/SKS-Related%20Party%20 Transaction%20Policy-Version%201-October%2029%202014.pdf

TRANSFER TO RESERVES

During the year, the Company has transferred an amount of Rs.91.1 crore to Statutory Reserve as required (20% of Profit after tax) under Section 45-IC of RBI Act, 1934.

MATERIAL CHANGES AND COMMITMENTS, IF ANY, AFFECTING THE FINANCIAL POSITION OF THE COMPANY

There are no material changes and commitments affecting the financial position of the Company, which has occurred between the end of the financial year of the Company i.e. March 31, 2018 and the date of the Directors'' Report.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO UNDER SECTION 134(3)(m) OF THE CA 2013

The provisions of Section 134(3) (m) of the CA 2013 relating to conservation of energy and technology absorption do not apply to the Company. The Company has, however, used information technology extensively in its operations.

Detailed information on usage of information technology is provided in the Management Discussion and Analysis Report which is provided separately in this Annual Report

During the year under review, the Company''s earning and outgo in foreign exchange earning was Nil and Rs.0.54 crore respectively. In connection with the foreign exchange outgo, you are also advised to refer Note 32 of the financial statements for FY18.

ANNUAL EVALUATION OF THE BOARD

A statement on formal evaluation of the Board is mentioned in the Corporate Governance Report which is provided separately in this Annual Report.

RISK MANAGEMENT POLICY

The Board of the Company has adopted the Risk Management Policy based on the recommendation of the Risk Management Committee in order to assess, monitor and manage risk throughout the Company.

Risk is an integral part of the Company''s business, and sound risk management is critical to the success of the organization.

Detailed information on risk management is provided in the Management Discussion and Analysis Report which is provided separately in this Annual Report.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

In compliance with Section 135 of the CA 2013 read with the Companies (Corporate Social Responsibility Policy) Rules 2014, the Company has established the Corporate Social Responsibility Committee (CSR Committee) in the year 2014 and the composition and function thereof are mentioned in the Corporate Governance Report.

The Board adopted the CSR Policy, formulated and recommended by the CSR Committee, and the same is available on the Company''s website.

During FY18, the Company has pursued three (3) CSR Projects viz. Drishti, Sanjeevani and Mental Health awareness programme, details thereof are given Report on Corporate Social Responsibility (CSR) Activities which is annexed herewith as Annexure - II to the Directors'' Report.

DEPOSITS

During the year under review, the Company has not accepted any deposit from the public.

DETAILS OF SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS OR TRIBUNALS IMPACTING THE GOING CONCERN STATUS AND COMPANY OPERATIONS IN FUTURE

There are no significant material orders passed by the Regulators, Courts or Tribunals which would impact the going concern status of the Company and its future operations.

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION & REDRESSAL) ACT, 2013

The Company has a policy against sexual harassment and a formal process for dealing with complaints of harassment or discrimination. The Company seeks to ensure that all such complaints are resolved within defined timelines. During FY18, the Company has received 15 complaints, of these 12 complaints have been resolved and 3 complaint were pending as on March 31, 2018. The Company has conducted 27 workshops/ awareness programs on prevention of sexual harassment.

INTERNAL FINANCIAL CONTROLS

The Company has adequate internal controls and processes in place with respect to its operations, which provide reasonable assurance regarding the reliability of the preparation of financial statements and financial reporting as also functioning of other operations. These controls and processes are driven through various policies and procedures.

Detailed information on Internal Financial Controls is provided in the Management Discussion and Analysis Report.

VIGIL MECHANISM

The Company has adopted the Whistle-blower Policy, and details of the same are explained in the Corporate Governance Report. The Policy is also available on the Company''s website.

PARTICULARS OF EMPLOYEES

The ratio of the remuneration of each director to the median employee''s remuneration and other details in terms of Section 197(12) of the CA 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, have been annexed herewith as Annexure - III to the Directors'' Report.

The statement containing particulars of employees as required under Rules 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is provided in a separate annexure forming part of the Directors'' Report. In terms of Section 136 of the CA 2013, the Directors'' Report and the Accounts are being sent to the Members excluding the aforesaid annexure and the same is open for inspection at the Registered Office of the Company. A copy of the statement may be obtained by the Members, by writing to the Company Secretary of the Company.

MANAGEMENT DISCUSSION AND ANALYSIS

The Management Discussion and Analysis Report for the year under review is presented separately in this Annual Report.

CORPORATE GOVERNANCE

The Company has adopted best corporate practices, and is committed to conducting its business in accordance with the applicable laws, rules and regulations. The Company follows the highest standards of business ethics. A report on Corporate Governance (forming part of Directors'' Report) is provided separately in this Annual Report. During the year under review, the Corporate Governance Rating of the Company was upgraded from CGR2 to CGR2 by ICRA Limited which implies that, in ICRA''s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders a high level of assurance on the quality of corporate governance.

The '' '' sign suffixed to the rating symbol indicates a relatively higher standing within the category.

The Compliance Certificate from BS & Company, Company Secretaries LLP regarding compliance of conditions of corporate governance under the SEBI LODR Regulations for FY18 is annexed to the Corporate Governance Report which is provided separately in the Annual Report.

BUSINESS RESPONSIBILITY REPORT

The Business Responsibility Report for the year under review has been annexed as Annexure - IV to the Directors'' Report.

EMPLOYEE STOCK OPTION PLAN (ESOP) AND EMPLOYEE SHARE PURCHASE SCHEME (ESPS)

Presently, stock options have been granted or shares have been issued under the following scheme/ plans :

A. SKS Microfinance Employee Share Purchase Scheme 2007 ("ESPS 2007")

B. SKS Microfinance Employee Stock Option Plan 2008 (Independent Directors) ("ESOP 2008 (ID)")

C. SKS Microfinance Employee Stock Option Plan 2008 ("ESOP 2008")

D. SKS Microfinance Employee Stock Option Plan 2009 ("ESOP 2009")

E. SKS Microfinance Employee Stock Option Plan 2010 ("ESOP 2010")

F. Bharat Financial Inclusion Employee Stock Option Plan 2011 ("ESOP 2011")

The disclosures with respect to each of the above-mentioned scheme/plans, as required by the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, is displayed on the Company''s website http://www.bfil.co.in.

EXTRACT OF ANNUAL RETURN

Pursuant to Section 134 (3)(a) and Section 92 (3) of the CA 2013, read with Rule 12 of the Companies (Management and Administration) Rules, 2014, an extract of the Annual Return as at March 31, 2018 in form MGT 9 has been annexed as Annexure - V to the Directors'' Report.

ACKNOWLEDGEMENTS

Your Directors take this opportunity to express their deep and sincere gratitude to the Sangam Members for their confidence and patronage, as well as to the Reserve Bank of India, the Government of India and Regulatory Authorities for their cooperation, support and guidance. Your Directors would like to express a profound sense of appreciation for the commitment shown by the employees in supporting the Company in its endeavor of becoming one of the leading microfinance institutions of the country. Your Directors would also like to express their gratitude to the members, bankers and other stakeholders for their trust and support.

For and on behalf of the Board of Directors

sd/- sd/-

P. H. Ravikumar M. R. Rao

Non-Executive Chairman Managing Director & CEO

Date: June 22, 2018 DIN No.: 00280010 DIN No.: 03276291

---

Mar 31, 2017

Dear Members,

The Board of Directors (the “Board”) takes pleasure in presenting the Fourteenth Annual Report of Bharat Financial Inclusion Limited (formerly known as “SKS Microfinance Limited”) (the “Company”) together with the audited financial statements for the year ended March 31, 2017.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

The financial performance of the Company is summarized below:

	Q1FY17	Q2 FY17	Q3 FY17	Q4 FY17	FY 2017	FY 2016	Change (%)
Total revenue (Rs. in crore)	414.1	449.6	454.9	409.3	1727.9	1320.7	30.8
Less: Total expenditure (Rs. in crore)	275.1	303.7	312.1	644.2	1535.1	926.8	65.6
Profit Before Tax (Rs. in crore)	139.1	145.9	142.8	(234.9)	192.8	393.9	-51
Profit After Tax (Rs. in crore)	235.9	145.9	142.8	(234.9)	289.7	303.0	-4.4
Earnings Per Share (EPS) (Rs.)	18.52	11.41	10.36	(17.03)	21.8	23.9	-8.7
Diluted EPS (Rs.)	18.29	11.26	10.26	(17.03)	21.6	23.6	-8.6

The operational highlights of the Company are summarized below:

Year ended March 31	2017	2016	Change (%)
Number of branches	1,399	1,324	5.7
Number of members (in lakh)*	67.0	69.7	(3.9)
Number of employees	14,775	11,991	23.1
Amount disbursed (Rs. in crore)	14,666.9	12,087.8	21.3
Gross loan portfolio (Rs. in crore)	9,149.6	7,688.0	19.0
Gross loan portfolio* (Rs. in crore)	9,149.6	7,676.9	19.2

*outside Andhra Pradesh and Telangana

The Government of India demonetized Rs.500 and Rs.1000 bank notes effective November 9, 2016. This step was taken with a view to curb financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN) and the use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India and to eliminate menace of black money. However, this has severely affected the growth and collection of all MFIs (including the Company).

As per the Company’s provisioning policy for portfolio loans, the Company was constrained to make NPA provision of Rs.308.40 crore crore (in addition to the standard provision of Rs.71.8 crore) and consequently the Company had posted a loss of Rs.234.9 crore for the fourth quarter of FY17. As a consequence of this, though the Company posted a profit after tax (‘PAT’) of Rs.381.8 for the half year ended September 30, 2016, the PAT of the Company for the financial year has reduced to Rs.289.7 as compared to a PAT of Rs.303.0 crore for FY16.

CAPITAL INFUSION

During the year under review, the Company successfully completed its fund raising through Qualified Institutional Placement (‘QIP’) of equity shares in the month of September 2016 resulting in a capital infusion of Rs.749.99 crore. The Company has issued 97,40,259 equity shares at price of Rs.770 per share. The QIP was oversubscribed multiple times.

RESOURCE MOBILISATION

During the year under review, the Company continue to diversify the sources of funds and raised a sum of Rs.6,900.2 crore by way of short-term, long-term loans and commercial papers, which was 5.7% lower as compared to Rs.7,317.4 crore raised during FY16 but 45.8% higher as compared to Rs.5,019.9 crore during FY15.

The net worth of the Company as on March 31, 2017 was Rs.2,446.7 crore and capital adequacy as on March 31, 2017 was 33.5%, well in excess of the mandated 15%.

The Company’s cost of borrowings reduced to 10.6% in FY17 as compared to 11.6% for FY16. This reduction was mainly driven by sustained turnaround and diversification of sources of funding. In line with the Company’s policy of passing on the cost advantages accruing from economies of scale, operational efficiency and reduction in the cost of borrowing to its borrowers, the rate of interest charged by the Company is the lowest rate among the private sector Non-Banking Financial Company -Micro Finance Institutions (‘NBFC-MFIs’) on its core Income Generating Loans (‘IGL’).

BUSINESS OVERVIEW

As of March 31, 2017, the Company had 67.0 lakh Members including 53.2 lakh Borrowers spread across 1,266 branches (All branches in states other than Andhra Pradesh and Telangana) in India, with a gross loan portfolio of Rs.9,149.6 crore as compared to Rs.7,676.9 crore in FY16.

Please refer Management Discussion and Analysis Report for more information on the Company’s Business Overview.

DIVIDEND

In order to conserve resources the Directors have not recommended any dividend for the year under review.

DIRECTORS AND KEY MANAGERIAL PERSONNEL Changes in the composition of the Board of Directors

During the year under review, Mr. Sumir Chadha and Mr. Paresh D. Patel ceased to be Directors of the Company effective from May 4, 2016 and July 21, 2016 respectively.

The Board wishes to place on record its appreciation for the valuable contribution of Mr. Sumir Chadha and Mr. Paresh D. Patel in the sustained growth of the Company during their tenure as Directors of the Company.

The Board, based on the recommendation of the Nomination and Remuneration Committee, appointed Mr. Ashish Lakhanpal as an Additional Director of the Company with effect from May 24, 2017.

A proposal to appoint Mr. Ashish Lakhanpal as a Director liable to retire by rotation, is being included in the Notice of the ensuing AGM to seek your approval.

Directors Retiring by Rotation

To comply with the provisions of Section 152 of the Companies Act, 2013 (‘CA 2013’) Mr. M.R. Rao, Managing Director & CEO shall retire by rotation at the ensuing AGM, being eligible, offered for reappointment.

Declaration of Independence

The Company has received declarations from all Independent Directors of the Company confirming that they meet the criteria of independence as prescribed under Section 149(6) of the CA 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”).

Key Managerial Personnel

As on date Mr. M.R. Rao, Managing Director & CEO, Mr. K. V Rao, Chief Operating Officer, Mr. Ashish Damani, Chief Financial Officer and Mr. Rajendra Patil, Company Secretary of the Company are the Key Managerial Personnel (“KMP”) of the Company. During the year under review, Mr. S. Dilli Raj, President, has resigned from the services of the Company on September 21, 2016 and was relieved from the services of the Company effective October 28, 2016

Details of Subsidiary, Associate and Joint Venture oF the Company:

The Company doesn’t have any subsidiary, associate and joint venture.

DIRECTORS’ RESPONSIBILITY STATEMENT

Pursuant to the requirement under Section 134(3)(c) of the CA 2013 with respect to Directors’ Responsibility Statement, it is hereby confirmed that:

1. in the preparation of the accounts for the year ended March 31, 2017, the applicable accounting standards have been followed and there are no material departures from the same;

2. the Directors had selected such accounting policies and applied them consistently, and made judgments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2017 and of the profit of the Company for the year under review;

3. the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the CA 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

4. the Directors had prepared annual accounts of the Company on a ‘going concern’ basis;

5. the Directors had laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and were operating effectively; and

6. the Directors had devised proper systems to ensure compliance with the provision of all applicable laws and that such systems were adequate and operating effectively.

POLICY FOR SELECTION AND APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY

Policy for Selection and Appointment of Directors

In compliance with the provisions of the CA 2013 and SEBI LODR Regulations, the Board, on the recommendation of the Nomination and Remuneration Committee (“NRC”), approved the Policy for Selection and Appointment of Directors.

The aforesaid Policy provides a framework to ensure that suitable and efficient succession plans are in place for appointment of Directors on the Board so as to maintain an appropriate balance of skills and experience within the Board. The Policy also provides for selection criteria for appointment of directors, viz. educational and professional background, general understanding of the Company’s business dynamics, global business and social perspective, personal achievements, Board diversity and payment of remuneration to the directors of the Company.

NUMBER OF MEETINGS OF THE BOARD OF DIRECTORS

The details of the meetings of the Board of Directors of the Company held during the year are mentioned in the Corporate Governance Report which is provided separately in this Annual Report.

AUDITORS

(a) Statutory Auditors

The existing Statutory Auditors, S. R. Batliboi & Co. LLP, Chartered Accountants, were appointed at the Eleventh Annual General Meeting for a period of three years until the conclusion of the Fourteenth Annual General Meeting.

In view of the mandatory requirement for rotation of auditors upon completion of 10 years of association with a company, in terms of Section 139 of the CA 2013, S. R. Batliboi & Co. LLP, Chartered Accountants, will retire as the Company’s Auditors at the conclusion of the ensuing Fourteenth Annual General Meeting. It is proposed to appoint BSR & Associates LLP, Chartered Accountants (FRN : 116231W / W-100024) as the new Statutory Auditors of the Company. BSR & Associates LLP, Chartered Accountants are proposed to be appointed for a period of five continuous years i.e. from the conclusion of Fourteenth Annual General Meeting till the conclusion of Nineteenth Annual General Meeting of the Company.

BSR & Associates LLP, Chartered Accountants have informed the Company that their appointment, if made, would be within the limits prescribed under Section 141 of the CA 2013 and have also confirmed that they have subjected themselves to the peer review process of the Institute of Chartered Accountants of India (‘ICAI’) and hold valid certificates issued by the Peer Review Board of the ICAI. BSR & Associates LLP have also furnished a declaration in terms of Section 141 of the CA 2013 that they are eligible to be appointed as auditors and that they have not incurred any disqualification under the CA 2013.

The Board recommends appointment of BSR & Associates LLP, Chartered Accountants as Statutory Auditors of the Company from the conclusion of Fourteenth Annual General Meeting up to the conclusion of Nineteenth Annual General Meeting of the Company, subject to ratification at every Annual General Meeting.

The Board of Directors places on record its appreciation for the services rendered by S. R. Batliboi & Co. LLP, Chartered Accountants as the Statutory Auditors of the Company.

Members’ attention is drawn to a Resolution proposing the appointment of BSR & Associates LLP, Chartered Accountants as the new Statutory Auditors of the Company which is included in the Notice convening the Fourteenth Annual General Meeting.

(b) Secretarial Auditor and Secretarial Audit Report

Pursuant to Section 204 of the CA 2013, the Company had appointed BS & Company, Company Secretaries LLP, as its Secretarial Auditors to conduct the secretarial audit of the Company for FY17. The Report of secretarial auditor for FY17 is annexed herewith as Annexure - I to Directors’ Report.

There are no qualifications, reservation or adverse remark made by the Statutory Auditor and Secretarial Auditor in their reports, save and except disclaimer made by them in discharge of their professional obligation.

DETAILS OF FRAUDS REPORTED BY THE STATUTORY AUDITORS

During the year under review, the Statutory Auditors of the Company have not reported any fraud as required under Section 143(12) of the CA 2013.

PARTICULARS OF LOANS OR GUARANTEES OR INVESTMENTS

Pursuant to the clarification dated February 13, 2015 issued by the Ministry of Corporate Affairs and Section 186(11) of the CA 2013, the provision of Section 134 (3)(g) of the CA 2013 requiring disclosure of particulars of the loans given, investments made or guarantees given or securities provided is not applicable to the Company.

RELATED PARTY TRANSACTIONS

All transactions entered into with Related Parties as defined under the CA 2013 and SEBI LODR Regulations during the year under review were in the ordinary course of business and at an arm’s length pricing basis and do not attract the provisions of Section 188 of the CA 2013. The details of the transactions with related parties, if any, are placed before the Audit Committee from time to time.

Details of the related party transactions, which are exempted according to a proviso to Section 188 of the CA 2013, during FY17 are disclosed in Note 27 of the financial statements.

The policy on Related Party Transactions, as approved by the Board, is displayed on the website of the Company at http://www.bfil.co.in/wp-content/themes/sks/public/downloads/SKS-Related%20Party%20 Transaction%20Policy-Version%201-October%2029%202014.pdf

TRANSFER TO RESERVES

During the year the Company has transferred an amount of Rs.57.94 crore to Statutory Reserve as required (20% of Profit after tax) under Section 45-IC of RBI Act, 1934.

MATERIAL CHANGES AND COMMITMENTS, IF ANY, AFFECTING THE FINANCIAL POSITION OF THE COMPANY

There are no material changes and commitments affecting the financial position of the Company, which has occurred between the end of the financial year of the Company i.e. March 31, 2017 and the date of the Directors’ Report.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO UNDER SECTION 134(3)(M) OF THE CA 2013

The provisions of Section 134(3) (m) of the CA 2013 relating to conservation of energy and technology absorption do not apply to the Company. The Company has, however, used information technology extensively in its operations.

During the year under review, the Company’s earning and outgo in foreign exchange earning was Nil and Rs.1.9 crore respectively. In connection with the foreign exchange outgo, you are also advised to refer Note 32 of the financial statements.

ANNUAL EVALUATION OF THE BOARD

A statement on formal evaluation of the Board is mentioned in the Corporate Governance Report which is provided separately in this Annual Report.

RISK MANAGEMENT POLICY

The Board of the Company has adopted the Risk Management Policy based on the recommendation of the Risk Management Committee in order to assess, monitor and manage risk throughout the Company.

Risk is an integral part of the Company’s business, and sound risk management is critical to the success of the organization.

Detailed information on risk management is provided in the Management Discussion and Analysis Report.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

In compliance with Section 135 of the CA 2013 read with the Companies (Corporate Social Responsibility Policy) Rules 2014, the Company has established the Corporate Social Responsibility Committee (CSR Committee) in the year 2014 and the composition and function thereof are mentioned in the Corporate Governance Report.

The Board adopted the CSR Policy, formulated and recommended by the CSR Committee, and the same is available on the Company’s website.

During FY17, the Company has pursued four (4) CSR Projects viz. Drishti, Animal Wellness Camps, Sanjeevani and Mental Health awareness programme, details thereof are given in the Report on Corporate Social Responsibility Activities which is annexed herewith as Annexure - II to the Directors’ Report.

DEPOSITS

During the year under review, the Company has not accepted any deposit from the public.

DETAILS OF SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS OR TRIBUNALS IMPACTING THE GOING CONCERN STATUS AND COMPANY OPERATIONS IN FUTURE

There are no significant material orders passed by the Regulators, Courts or Tribunals which would impact the going concern status of the Company and its future operations.

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION & REDRESSAL) ACT, 2013

The Company has a policy against sexual harassment and a formal process for dealing with complaints of harassment or discrimination. The Company seeks to ensure that all such complaints are resolved within defined timelines. During FY17, the Company has received ten complaints, of these seven complaints have been resolved and three complaint were pending as on March 31, 2017. The Company has conducted 20 workshops/ awareness programs on prevention of sexual harassment.

INTERNAL FINANCIAL CONTROLS

The Company has adequate internal controls and processes in place with respect to its operations, which provide reasonable assurance regarding the reliability of the preparation of financial statements and financial reporting as also functioning of other operations. These controls and processes are driven through various policies and procedures.

Detailed information on Internal Financial Controls is provided in the Management Discussion and Analysis Report.

VIGIL MECHANISM

The Company has adopted the Whistle-blower Policy, and details of the same are explained in the Corporate Governance Report. The Policy is also available on the Company’s website.

PARTICULARS OF EMPLOYEES

The ratio of the remuneration of each director to the median employee’s remuneration and other details in terms of Section 197(12) of the CA 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, have been annexed herewith as Annexure - III to the Directors’ Report.

The statement containing particulars of employees as required under Rule 5(2) and Rule 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is provided in a separate annexure forming part of the Directors’ Report. In terms of Section 136 of the CA 2013, the Directors’ Report and the Accounts are being sent to the Members excluding the aforesaid annexure and the same is open for inspection at the Registered Office of the Company. A copy of the statement may be obtained by the Members, by writing to the Company Secretary of the Company.

MANAGEMENT DISCUSSION AND ANALYSIS

The Management Discussion and Analysis Report for the year under review is presented separately in this Annual Report.

CORPORATE GOVERNANCE

The Company has adopted best corporate practices, and is committed to conducting its business in accordance with the applicable laws, rules and regulations. The Company follows the highest standards of business ethics. A report on Corporate Governance (forming part of Directors’ Report) is provided separately in this Annual Report. During the year under review, the Company was assigned a Corporate Governance Rating of CGR2 by ICRA Limited which implies that in ICRA’s opinion, the company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders a high level of assurance on the quality of corporate governance. The Compliance Certificate from BS & Company, Company Secretaries LLP regarding compliance of conditions of corporate governance under the SEBI LODR Regulations is annexed to the Corporate Governance Report.

BUSINESS RESPONSIBILITY REPORT

The Business Responsibility Report for the year under review has been annexed as Annexure - IV to the Directors’ Report.

EMPLOYEE STOCK OPTION PLAN (ESOP) AND EMPLOYEE SHARE PURCHASE SCHEME (ESPS)

Presently, stock options have been granted or shares have been issued under the following scheme/ plans

A. SKS Microfinance Employee Share Purchase Scheme 2007 (“ESPS 2007”)

B. SKS Microfinance Employee Stock Option Plan 2008 (Independent Directors) (“ESOP 2008 (ID)”)

C. SKS Microfinance Employee Stock Option Plan 2008 (“ESOP 2008”)

D. SKS Microfinance Employee Stock Option Plan 2009 (“ESOP 2009”)

E. SKS Microfinance Employee Stock Option Plan 2010 (“ESOP 2010”)

F. SKS Microfinance Employee Stock Option Plan 2011 (“ESOP 2011”)

The disclosures with respect to each of the above-mentioned scheme/plans, as required by the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, is displayed at Company’s website http://www.bfil.co.in/.

EXTRACT OF ANNUAL RETURN

Pursuant to Section 134 (3)(a) and Section 92 (3) of the CA 2013, read with Rule 12 of the Companies (Management and Administration) Rules, 2014, an extract of the Annual Return as at March 31, 2017 in form MGT 9 has been annexed as Annexure - V to the Directors’ Report.

ACKNOWLEDGEMENTS

Your Directors take this opportunity to express their deep and sincere gratitude to the Sangam Members for their confidence and patronage, as well as to the Reserve Bank of India, the Government of India and Regulatory Authorities for their cooperation, support and guidance. Your Directors would like to express a profound sense of appreciation for the commitment shown by the employees in supporting the Company in its endeavor of becoming one of the leading microfinance institutions of the country. Your Directors would also like to express their gratitude to the members, bankers and other stakeholders for their trust and support.

For and on behalf of the Board of Directors

Sd/- Sd/-

P.H. Ravikumar M.R. Rao

Non-Executive Chairman Managing Director & CEO

Date: June 8, 2017 DIN No.: 00280010 DIN No.: 03276291

---

Mar 31, 2015

Dear Members,

The Board of Directors (the "Board") takes pleasure in presenting the Twelfth Annual Report of SKS Microfinance Limited (the "Company") together with the audited financial statements for the year ended March 31, 2015.

FINANCIAL HIGHLIGHTS

The financial performance of the Company for the year ended March 31, 2015 is summarized below:

2015 2014 Year ended March 31 Change (%) (Rs. in crore) (Rs. in crore)

Total revenue 803.1 544.8 47.4

Less: Total expenditure 609.5 475.0 28.3

Profit (Loss) Before Tax 193.6 69.9 177.1

Profit (Loss) After Tax 187.7 69.9 168.7

Earnings Per Share (EPS) 15.2 6.5 136.0

Diluted EPS 15.0 6.4 133.6

- The Company has posted a profit after tax (PAT) of Rs. 187.7 crore for FY15 as compared to a PAT of Rs. 69.9 crore for FY14. A sum of Rs. 37.5 crore is proposed to be transferred to statutory reserve as against Rs. 14 crore for FY14. Consequently, the deficit in the P&L Account to be carried forward has reduced to Rs. 1,143.1 crore as against Rs. 1,292.6 crore for FY14.

- ROA (including managed loans and securitized loans) and ROE for FY15 were 4.3% and 21.6%, respectively.

OPERATIONAL HIGHLIGHTS

Year ended March 31 2015 2014 Change (%)

Number of branches 1,268 1,255 1.0

Number of Members (in lakh) 64.0 57.8 10.7

Number of employees 9,698 8,932 8.6

Amount disbursed (Rs. in crore) 6,890.8 4,787.6 43.9

Gross loan portfolio (Rs. in crore) 4,184.5 3,112.8 34.4

Gross loan portfolio outside Andhra Pradesh and Telangana 4,171.2 2,836.8 47.0 (Rs. in crore)

RESOURCE MOBILIZATION

During the year under review, the Company has diversified its sources of funds and raised a sum of Rs. 5,019.9 crore by way of short- term and long-term loans, commercial papers as also non-convertible debentures ("NCDs"), which was 43.3% higher as compared to Rs. 3,503.1 crore raised during FY14 and 21.9% higher as compared to Rs. 2,874.7 crore during FY13.

The Company has successfully completed fund raising through a Qualified Institutional Placement ("QIP") by way of issue of 17,670,534 equity shares in May 2014, resulting in a capital infusion of Rs. 397.6 crore. The QIP was oversubscribed multiple times. The net worth of the Company as on March 31, 2015 was Rs. 1,046.5 crore and capital adequacy as on March 31, 2015 was 31.7%, well in excess of the mandated 15%. This has enhanced the credit quality of the Company''s debt instruments and helped it in obtaining competitive pricing. In addition to the aforesaid QIP, the Company also issued 408,997 equity shares consequent to the exercise of stock options by the employees under the Company''s various employee stock option plans.

The Company''s cost of borrowings reduced to 12.8% in FY15 as compared to 13.6% for FY14. This reduction was mainly driven by a sustained turnaround, capital raise, rating upgrade and diversification of sources of funding. Therefore, in line with the Company''s policy of passing on the cost advantages accruing from economies of scale, operational efficiency and reduction in the cost of borrowing to its Borrowers, the Company reduced the rate of interest by 1% in October 2014 and again by 1.55% in July 2015.

With the aforesaid reduction, the rate of interest charged by the Company is the lowest rate among Non-Banking Financial Company - Micro Finance Institutions ("NBFC-MFIs") on its core Income Generating Loans ("IGL").

In addition to the listing of equity shares, the NCDs issued by the Company are listed on the wholesale debt segment of BSE Limited.

BUSINESS OVERVIEW

During FY15, the Company''s total revenue and PAT were Rs. 803.1 crore and Rs. 187.7 crore respectively. As of March 31, 2015, the Company had 64 lakh Members (44.8 lakh Members in states other than Andhra Pradesh and Telangana), including 53.3 lakh Borrowers (36.5 lakh Borrowers in states other than Andhra Pradesh and Telangana) spread across 1,268 branches (1,135 branches in states other than Andhra Pradesh and Telangana) in India, with a gross loan portfolio of Rs. 4,184.5 crore (Rs. 4,171.2 crore in states other than Andhra Pradesh and Telangana).

Please refer Management Discussion and Analysis Report for more information on the Company''s Business Overview.

SMALL FINANCE BANKING LICENCE

On November 27, 2014, the Reserve Bank of India ("RBI") issued final guidelines for licensing of Small Finance Banks in the private sector to promote financial inclusion through high technology-low cost operations.

The Company has submitted an application to the RBI for the grant of a licence to set up/ operate as a Small Finance Bank.

DIVIDEND

In order to conserve resources and according to the provisions of the Companies Act, 2013 ("CA 2013"), the Directors have not recommended any dividend for the year under review.

DIRECTORS AND KEY MANAGERIAL PERSONNEL

Changes in the composition of the Board of Directors

The Board, based on the recommendation of the Nomination and Remuneration Committee ("NRC"), appointed Dr. Punita Kumar-Sinha as an Additional and Independent Director of the Company with effect from March 23, 2015.

A proposal to appoint Dr. Kumar-Sinha as an Independent Director of the Company for a period of five (5) years with effect from March 23, 2015, is being included in the notice of the Twelfth Annual General Meeting (AGM) to seek your approval.

Directors Retiring by Rotation

In terms of Section 152 of the CA 2013, Mr. Paresh Patel is due to retire by rotation at the ensuing AGM and, being eligible, has offered himself for re-appointment.

Declaration of Independence

The Company has received declarations from all Independent Directors of the Company confirming that they meet the criteria of independence as prescribed under Section 149(6) of the CA 2013 and Clause 49 of the Equity Listing Agreement.

Key Managerial Personnel

Mr. M. R. Rao, Managing Director and CEO; Mr. S. Dilli Raj, President; Mr. K. V. Rao, Chief Operating Officer; Mr. Ashish Damani, Chief Financial Officer and Mr. Rajendra Patil, Company Secretary of the Company are the Key Managerial Personnel ("KMP") of the Company.

Effective May 2, 2014, the Board has appointed Mr. Rajendra Patil as the Company Secretary and designated Mr. Sudershan Pallap as the Deputy Company Secretary, who was earlier associated with the Company as its Company Secretary. Other KMP, as mentioned above, were already in office prior to the year under review.

None of the KMP has resigned during the year under review.

DIRECTORS'' RESPONSIBILITY STATEMENT

Pursuant to the requirement under Section 134(3)(c) of the CA 2013 with respect to the Directors'' Responsibility Statement, it is hereby confirmed that:

1. in the preparation of the accounts for the year ended March 31, 2015, the applicable accounting standards have been followed and there are no material departures from the same;

2. the Directors had selected such accounting policies and applied them consistently, and made judgments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2015 and of the profit of the Company for the year under review;

3. the Directors took proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the CA 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

4. the Directors prepared annual accounts of the Company on a ''going concern'' basis;

5. the Directors laid down internal financial controls to be followed by the Company and such internal financial controls are adequate and are operating effectively; and

6. the Directors devised proper systems to ensure compliance with the provision of all applicable laws, and that such systems are adequate and operating effectively.

POLICY FOR SELECTION AND APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY

In compliance with the provisions of the CA 2013 and the revised Clause 49 of the Equity Listing Agreement, the Board has, on the recommendation of the NRC, approved the Policy for Selection and Appointment of Directors.

The aforesaid Policy provides a framework to ensure that suitable and efficient succession plans are in place for appointment of Directors on the Board so as to maintain an appropriate balance of skills and experience within the Board. The Policy also provides for a selection criteria for appointment of Directors, viz., educational and professional background, general understanding of the Company''s business dynamics, global business and social perspective, personal achievements and Board diversity. In additon, the policy also contains principles relating to remuneration payable to Directors.

AUDITORS

(a) Statutory Auditors

At the Eleventh AGM held on September 29, 2014, the Members approved the appointment of M/s. S. R. Batliboi & Co. LLP, Chartered Accountants as statutory auditors for a period of three (3) years commencing from the Eleventh AGM till the conclusion of the Fourteenth AGM subject to ratification by Members every year. As recommended by the Audit Committee, the appointment of M/s. S. R. Batliboi & Co. LLP, Chartered Accountants as statutory auditors of the Company until the conclusion of the Thirteenth AGM is placed for ratification at the ensuing AGM.

Response of the Board to the Auditors'' Comments

The Report of the statutory auditor of the Company, dated May 4, 2015 for the audit conducted by them for FY15 is being circulated to Members along with the financial statements. There are no qualifications/ reservations in the said report, except the comments in respect of which the Board would like to place on record its explanation against each of the comments, as detailed in Annexure - I to the Directors'' Report.

(b) Secretarial Auditors and Secretarial Audit Report

Pursuant to Section 204 of the CA 2013, the Company had appointed M/s. BS & Company, Company Secretaries LLP, as its secretarial auditors to conduct the secretarial audit of the Company for FY15. The Report of secretarial auditor for FY15 is annexed herewith as Annexure - II to the Directors'' Report. There are no qualifications, reservations or adverse remarks made by the secretarial auditors in their report.

PARTICULARS OF LOANS OR GUARANTEES OR INVESTMENTS

Pursuant to the clarification dated February 13, 2015 issued by the Ministry of Corporate Affairs, provisions of Sections 186(11) and 134(3)(g) of the CA 2013 requiring disclosure of particulars of the loans given, investments made or guarantees given or securities provided is not applicable to the Company.

RELATED PARTY TRANSACTIONS

All transactions entered into with Related Parties as defined under the CA 2013 and Clause 49 of the Equity Listing Agreement during the year under review were in the ordinary course of business and at an arm''s length pricing basis and do not attract the provisions of Section 188 of the CA 2013. The details of the transactions with related parties, if any, are placed before the Audit Committee from time to time.

Details of the related party transactions, which are exempted according to a proviso to Section 188 of the CA 2013, during FY15 are disclosed in Note 28 of the financial statements.

The policy on Related Party Transactions, as approved by the Board, is displayed on the website of the Company at http://www. sksindia.com/downloads/SKS-Related%20Party%20Transaction%20Policy- Version%201-October%2029%202014.pdf.

MATERIAL CHANGES AND COMMITMENTS, IF ANY, AFFECTING THE FINANCIAL POSITION OF THE COMPANY

There are no material changes and commitments affecting the financial position of the Company, which occurred between the end of the financial year of the Company i.e. March 31, 2015 and the date of the Directors'' Report.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO

The provisions of Section 134(3)(m) of the CA 2013 relating to conservation of energy and technology absorption do not apply to the Company. The Company has, however, used information technology extensively in its operations.

During the year under review, the Company''s earning and outgo in foreign exchange were Nil and Rs. 1.96 crore respectively.

RISK MANAGEMENT POLICY

The Board has adopted the Risk Management Policy based on the recommendation of the Risk Management Committee in order to assess, monitor and manage risk throughout the Company.

Risk is an integral part of the Company''s business, and sound risk management is critical to the success of the organization.

Detailed information on risk management is provided in the Management Discussion and Analysis Report.

CORPORATE SOCIAL RESPONSIBILITY ("CSR")

In compliance with Section 135 of the CA 2013 read with the Companies (Corporate Social Responsibility Policy) Rules 2014, the Company has established the Corporate Social Responsibility Committee ("CSR Committee").

The Board adopted the CSR Policy, formulated and recommended by the CSR Committee, and the same is available on the Company''s website.

In light of the CSR Policy, the Company has been pursuing two (2) CSR Projects, viz., ''Jagruti Se Unnati'' and ''Drishti'' in the states of Jharkhand, Maharashtra and Odisha.

Jagruti Se Unnati is an awareness programme through which the Company has tried to build awareness about various Central and State Government benefit schemes, amongst people in the villages of Maharashtra.

Drishti is a programme through which the Company has sponsored HelpAge India to organize eye camps to identify cataract affected people and conduct free cataract surgeries in the states of Jharkhand and Odisha.

The disclosure of the contents of the CSR policy pursuant to Section 134(3)(o) of CA 2013 and Rule 9 of the Companies (Corporate Social Responsibility) Rules, 2014, is annexed herewith as Annexure - III to the Directors'' Report.

DEPOSITS

During the year under review, the Company has not accepted any deposit from the public.

DETAILS OF SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS, COURTS OR TRIBUNALS IMPACTING THE GOING CONCERN STATUS AND COMPANY OPERATIONS IN FUTURE

There are no significant material orders passed by the Regulators, Courts or Tribunals which would impact the going concern status of the Company and its future operations.

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT THE WORKPLACE (PREVENTION, PROHIBITION & REDRESSAL) ACT, 2013

The Company has a policy against sexual harassment and a formal process for dealing with complaints of harassment or discrimination. The Company seeks to ensure that all such complaints are resolved within the defined timelines. During FY15, the Company received three (3) complaints, and the same have been resolved. None of the cases was pending for more than 90 days, and the Company conducted 22 workshops/ awareness programmes on prevention of sexual harassment.

INTERNAL FINANCIAL CONTROLS

The Company has adequate internal controls and processes in place with respect to its operations, which provide reasonable assurance regarding the reliability of the preparation of financial statements and financial reporting as also functioning of other operations. These controls and processes are driven through various policies and procedures.

Detailed information on Internal Financial Controls is provided in the Management Discussion and Analysis Report.

VIGIL MECHANISM

The Company has adopted the Whistle-blower Policy, and details of the same are explained in the Corporate Governance Report. The Policy is also available on the Company''s website.

PARTICULARS OF EMPLOYEES

The ratio of the remuneration of each Director to the median employee''s remuneration and other details in terms of Section 197(12) of the CA 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, have been annexed herewith as Annexure – IV to the Directors'' Report.

The statement containing particulars of employees as required under Section 197(12) of the CA 2013 read with Rule 5(2) and Rule 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is provided in a separate annexure forming part of the Directors'' Report. In terms of Section 136 of the CA 2013, the Directors'' Report and the Accounts are being sent to the Members excluding the aforesaid annexure and the same is open for inspection at the Registered Office of the Company. A copy of the statement may be obtained by the Members, by writing to the Company Secretary of the Company.

MANAGEMENT DISCUSSION AND ANALYSIS

The Management Discussion and Analysis Report for the year under review is presented elsewhere in this Annual Report.

CORPORATE GOVERNANCE

The Company has adopted best corporate practices, and is committed to conducting its business in accordance with the applicable laws, rules and regulations. The Company follows the highest standards of business ethics. A report on Corporate Governance is provided elsewhere in this Annual Report.

EMPLOYEE STOCK OPTION PLAN AND EMPLOYEE SHARE PURCHASE SCHEME

Stock options have been granted or shares have been issued under the following plans/ schemes:

A. SKS Microfinance Employee Share Purchase Scheme 2007 ("ESPS 2007")

B. SKS Microfinance Employee Stock Option Plan 2008 (Independent Directors) ("ESOP 2008 (ID)")

C. SKS Microfinance Employee Stock Option Plan 2008 ("ESOP 2008")

D. SKS Microfinance Employee Stock Option Plan 2009 ("ESOP 2009")

E. SKS Microfinance Employee Stock Option Plan 2010 ("ESOP 2010")

F. SKS Microfinance Employee Stock Option Plan 2011 ("ESOP 2011")

The disclosures with respect to each of the above-mentioned Employee Share Purchase Schemes ("ESPS") and Employee Stock Option Plans ("ESOP"), as required by the guidelines/ regulations issued by the Securities and Exchange Board of India, have been annexed as Annexure - V to the Directors'' Report.

EXTRACT OF ANNUAL RETURN

Pursuant to Section 134(3)(a) and Section 92(3) of the CA 2013, read with Rule 12 of the Companies (Management and Administration) Rules, 2014, an extract of the Annual Return as at March 31, 2015 in form MGT 9 has been annexed as Annexure - VI to the Directors'' Report.

ACKNOWLEDGEMENTS

Your Directors take this opportunity to express their deep and sincere gratitude to the Sangam Members for their confidence and patronage, as well as to the Reserve Bank of India, the Government of India and Regulatory Authorities for their cooperation, support and guidance. Your Directors would like to express a profound sense of appreciation for the commitment shown by the employees in supporting the Company in its endeavour of becoming one of the leading microfinance institutions of the country. Your Directors would also like to express their gratitude to the Members, Bankers and other stakeholders for their trust and support.

For and on behalf of the Board of Directors

Sd/- Sd/-

August 18, 2015 P. H. Ravikumar M. R. Rao

Non-Executive Chairman Managing Director and CEO

DIN: 00280010 DIN: 03276291

---

Mar 31, 2014

Dear Members,

The Directors have pleasure in presenting the Eleventh Annual Report of your Company together with the audited statement of accounts for the year ended March 31, 2014.

FINANCIAL HIGHLIGHTS

The financial performance for the year ended March 31, 2014 has been summarized in the following table:

(Rs. in Crore)

Year ended March 31 2014 2013

Total revenue 544.8 352.6

Less: Total expenditure 475.0 649.7

Profit/ (Loss) Before Tax 69.9 (297.1)

Profit/ (Loss) After Tax 69.9 (297.1)

Surplus/ (Deficit) brought forward (1,348.4) (1,051.3)

Amount available for appropriation - -

Appropriation has been made as under:

Add: Profit/ (Loss) for the financial year 69.9 (297.1)

Less: Transfer to Statutory Reserve (14.0) -

Net Surplus/ (Deficit) in the statement of profit & loss (1,292.6) (1,348.4)

Earnings Per Share (EPS) 6.5 (30.6)

Diluted EPS 6.4 (30.6)

Your Company has posted a Profit After Tax (PAT) of Rs. 69.9 crore for FY14 as compared to a loss of Rs. 297.1 crore for FY13. l Net worth of your Company as on March 31, 2014 was Rs. 459.2 crore with a capital adequacy of 27.2% (20.7% without the Reserve Bank of India (RBI) dispensation on the undivided Andhra Pradesh provisioning) as on March 31, 2014. l RoA (including managed loans) and RoE for FY14 were 2.3% and 16.7% respectively. l Incremental drawdowns stood at Rs. 3,503.1 crore for FY14 as compared to Rs. 2,874.7 crore for FY13, registering a growth of 21.9%. l Gross loan portfolio grew by 32.0% to Rs. 3,112.8 crore.

OPERATIONAL HIGHLIGHTS

Year ended March 31 2014 2013 Change

Number of branches 1,255 1,261 (0.5%)

Number of Members (in lakh) 57.8 50.2 15.2%

Number of employees 8,932 10,809 (17.4%)

Amount disbursed (Rs. in crore) 4,787.6 3,319.6 44.2%

Portfolio outstanding (Rs. in crore) 3,112.8 2,359.0 32.0%

BUSINESS OVERVIEW

During the financial year 2013-14, your Company''s total revenue and Profit After Tax were Rs. 544.8 crore and Rs. 69.9 crore respectively. As of March 31, 2014, your Company had 58 lakh (39 lakh outside the undivided Andhra Pradesh) Members, including 50 lakh (33 lakh outside the undivided Andhra Pradesh) Borrowers spread across 1,255 branches (1,139 branches outside the undivided Andhra Pradesh) with a gross loan portfolio of Rs. 3,112.8 crore (Rs. 2,836.8 crore outside the undivided Andhra Pradesh).

Please refer the Management Discussion and Analysis Report (on Page 24) for more information on your Company''s Business Overview.

CAPITAL INFUSION

Your Company successfully completed its fund raising through Qualified Institutional Placement (QIP) of equity shares in May 2014, resulting in a capital infusion of Rs. 397.6 crore. Your Company has issued 1,76,70,534 equity shares at Rs. 225 per share. The QIP was oversubscribed multiple times.

The capital infusion has strengthened your Company''s capital adequacy ratio to 41.7% as of June 30, 2014 from 27.2% as of March 31, 2014, which is way above the regulatory requirement of 15.0%. Further, the net worth of your Company had increased to Rs. 890.9 crore as of June 30, 2014 from Rs. 459.2 crore as of March 31, 2014 and this, if leveraged well, could fund your Company''s growth over the next three years without any further infusion of equity capital. Such an overwhelming response to the QIP endorses investor confidence in your Company''s turnaround and the improved business prospects.

DIVIDEND

In order to conserve the resources, the Directors have not recommended any dividend for the year under review.

THE COMPANIES ACT, 2013

The Companies Bill 2012 was passed by the Lok Sabha on December 18, 2012 and was ratified by the Rajya Sabha on August 8, 2013. The Bill received the assent of the Hon''ble President of India on August 29, 2013 and was notified in the Official Gazette on August 30, 2013 pursuant to which the Companies Act, 2013 (CA 2013) has come into effect. The Ministry of Corporate Affairs (MCA) has notified 282 sections of the CA 2013 in tranches in September 2013 and in March 2014 with a majority of the sections as well as rules being notified in March/ April 2014. The Companies Act, 1956 (CA 1956) continues to be in force to the extent of the corresponding provisions of the CA 2013, which are yet to be notified. The MCA, vide its Circular dated April 4, 2014, has clarified that the financial statements and documents annexed thereto, Auditor''s Report and Board''s Report in respect of financial years that have commenced earlier than April 1, 2014 shall be governed by the provisions of the CA 1956 and, in line with the same, your Company''s financial statements, Auditors'' Report and Directors'' Report and attachments thereto have been prepared in accordance with the provisions of the CA 1956. With respect to other provisions of the CA 2013, appropriate references have been made in this report to the extent these provisions have become applicable effective April 1, 2014.

DIRECTORS

Changes in the Composition of the Board of Directors

Mrs. Ranjana Kumar, Independent Director of your Company, resigned from the Board effective September 10, 2013. The Board placed on record its appreciation for her contributions to the progress of the Company.

The Board, at its meeting held on July 24, 2014, appointed Mr. S. Balachandran as an additional Director effective July 24, 2014. Mr. Balachandran holds office up to the date of the forthcoming Annual General Meeting (AGM) and is eligible for appointment.

Classification of Directors as per CA 2013

Section 149 of the CA 2013, which defines the composition of the Board and the criteria for considering a director to be independent, was notified effective April 1, 2014. Nominee director, i.e., a director nominated by any financial institution/ Government/ other person in pursuance of the provisions of any law for the time being in force, or of any agreement to represent the interests of the said financial institution/ Government/ any other person is excluded from the definition of independent director.

As per the provisions of the CA 2013, the Companies (Appointment and Qualification of Directors), Rules 2014 and the clarification dated June 9, 2014 issued by the Ministry of Corporate Affairs, Non-Executive (Independent) Directors have to be appointed expressly under Section 149(10) and Section 149(5) of the CA 2013 read with Schedule IV of the CA 2013 within one year from April 1, 2014, otherwise the said Directors would continue to hold office till expiry of their term (based on the retirement period calculation) as per the resolution pursuant to which they were appointed as Non-Executive Directors. Therefore, the Board, at its meeting held on July 24, 2014, proposed the appointment of Mr. P. H. Ravikumar, Dr. Tarun Khanna and Mr. Geoffrey Tanner Woolley as Independent Directors at the ensuing AGM of the Company in September 2014, who, being eligible and seeking appointment, be considered by the Members for appointment for a term of up to five (5) consecutive years.

It is also proposed to appoint Mr. S. Balachandran as an Independent Director at the ensuing AGM of your Company for a period of five (5) consecutive years.

The Members are requested to consider the above proposals.

In classification of the aforesaid Directors as Independent Directors, your Company has relied on the declaration of independence provided by the said Directors as prescribed under Section 149(7) of the CA 2013 and placed at the Board Meeting of your Company held on July 24, 2014.

Retirement by Rotation

In accordance with the provisions of the CA 2013, Mr. Sumir Chadha is due to retire by rotation at the ensuing AGM and, being eligible, offered himself for re-appointment.

Directors'' Responsibility Statement

Pursuant to the requirement under Section 217 (2AA) of the CA 1956, with respect to the Directors'' Responsibility Statement, it is hereby confirmed that:

1. in the preparation of the accounts for the year ended March 31, 2014, the applicable accounting standards have been followed and there are no material departures from the same;

2. the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of your Company as at March 31, 2014 and of the profit of your Company for the year under review;

3. the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the CA 1956 for safeguarding the assets of your Company and for preventing and detecting fraud and other irregularities; and

4. the Directors had prepared the annual accounts of your Company on a ''going concern'' basis.

AUDITORS

The Statutory Auditors of your Company, S. R. Batliboi & Co. LLP, Chartered Accountants, will retire at the ensuing AGM and have confirmed their eligibility and willingness to accept the office of the Auditors, if re-appointed. As recommended by the Audit Committee, the Board has proposed to the Members in the Notice of the ensuing AGM the re-appointment of S. R. Batliboi & Co. LLP, Chartered Accountants, as the Statutory Auditors of your Company for a period of three (3) years commencing from the ensuing AGM, subject to ratification by the Members every year. Members are requested to consider their re-appointment.

RESPONSE OF THE BOARD TO THE AUDITORS'' COMMENTS

In terms of the provisions of Section 217(3) of the CA 1956, the Board would like to place on record an explanation to the Auditors'' comments in their Audit Report dated April 28, 2014:

Auditors'' Comments

The Company''s accumulated losses at the end of the financial year are more than fifty percent of its net worth. The Company has not incurred cash loss during the year. In the immediately preceding financial year, the Company had incurred cash loss.

Board''s Response

For FY14, the Company had a net profit of Rs. 69.9 crore as compared to a net loss of Rs. 297.1 crore for FY13 and a net loss of Rs. 1,360.6 crore for FY12. Your Company reported profits for six consecutive quarters and for FY14.

Your Company had obtained incremental drawdowns (including securitizations and assignments) of Rs. 3,503.1 crore during FY14, an increase of 21.9% compared to FY13. This aided higher disbursements and your Company had registered a growth of 40.7% in its loan portfolio (barring undivided Andhra Pradesh) to Rs. 2,836.8 crore as of March 31, 2014.

Your Company had a net worth of Rs. 459.2 crore after adjusting the accumulated losses and its capital adequacy was 27.2% (capital adequacy without RBI dispensation for the provisioning with respect to undivided Andhra Pradesh was 20.7%), as of March 31, 2014.

We have been informed that during the year there were instances of cash embezzlements by the employees of the Company aggregating Rs. 9,285,788; loans given to non-existent borrowers on the basis of fictitious documentation created by the employees of the Company aggregating Rs. 6,260,275; and misrepresentation by certain borrowers for obtaining loans aggregating Rs. 387,900. As informed, services of employees involved have been terminated and the Company is in the process of taking legal action against the employees and the borrowers. The outstanding balance (net of recovery) aggregating Rs. 8,423,073 has been written off.

Fraud has been an inherent risk in the business your Company operates in, since all the transactions are cash-based with the borrowers, given the customer segment your Company operates in.

In case of cash embezzlements, your Company has recovered an amount of Rs. 54 lakh, including proceeds from insurance claims. Cash embezzlement was 0.02% of disbursement during FY14.

To mitigate this risk to a large extent, your Company has put in place several preventive control measures as under:

- Managerial staff conduct surprise visits during hours when employees are engaged in cash/ bank transactions.

- Minimizing cash balances at various branches to the lowest level possible (Rs. 20,000 cash required for next day disbursement).

- Every bank transaction (deposit/ withdrawal) is required to be executed by a minimum of two employees, comprising a bank signatory and a confirmed staff.

- The strongbox at every branch is controlled by two keys held by two different employees in the branch.

- Procuring indemnity bond from every field staff, with personal guarantee of a third person.

Your Company has instituted several other controls, such as:

- Daily employee-wise reconciliation of cash balances by managerial employees at each branch.

- Frequent surprise visits by accountants and internal auditors, including verification of physical cash and bank balances.

Your Company undertook the following actions in cases pertaining to fraud:

- Termination of service of all employees involved in cash embezzlements.

- Appropriate legal action pursued against errant employees.

- Recovering embezzled money from errant employees.

- Fidelity insurance to minimize the losses against cash embezzlements.

In the case of loans given to non-existent or fictitious borrowers, your Company has recovered an amount of Rs. 21 lakh, including proceeds from the insurance. These cases constitute 0.01% of disbursement during FY14.

Your Company has instituted various preventive or control measures in the loan process to mitigate the risk of extending loans to non- existent borrowers or fictitious borrowers:

- All disbursed loans are passed through a checker control system, where loans processed by a Sangam Manager are first approved by a Branch Manager or an Assistant Branch Manager.

- In order to prevent collusion with the local residents, Sangam Managers are deployed away from their home towns.

- Half yearly employee rotation ensures that Sangam Managers manage different centres at the end of every six months.

- Sangam Managers are regularly transferred in a span of 12 months.

- Development of internal processes to restrict loan disbursements to inactive Members.

Further details of the preventive and other controls are set out below:

- Managerial employees at the branch perform a Loan Utilization Check (LUC) for every loan disbursed.

- The internal audit staff, on a test basis, verifies loan documents and performs random LUCs for loans disbursed.

The net impact of frauds is approximately 0.02% (as compared to 0.06% in the previous year) of the total amount disbursed by your Company during FY14. Your Company is working towards further reducing this percentage by making process improvements, obtaining adequate insurance cover and by increasing engagements and opportunities for direct contact with the Members. During FY14, your Company has recovered an amount of Rs. 74 lakh against the fraud amount written off in previous years.

MANAGEMENT DISCUSSION AND ANALYSIS

The Management Discussion and Analysis Report for the year under review is presented on Page 24 in the Annual Report.

CORPORATE GOVERNANCE

The Company has adopted best corporate practices, and is committed to conducting its business in accordance with the applicable laws, rules and regulations. Your Company follows the highest standards of business ethics. A report on Corporate Governance is provided on Page 38 in the Annual Report.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

Your Company has set up CSR Committee and details are available in the Corporate Governance Report.

INFORMATION TECHNOLOGY

Your Company has been a leader and innovator in the use of technology in the microfinance industry in India. Please refer Management Discussion and Analysis Report on Page 36 for information on your Company''s IT initiatives.

EMPLOYEE SHARE PURCHASE SCHEME (ESPS) AND EMPLOYEE STOCK OPTION PLAN (ESOP)

Presently, employee stock options have been granted or shares have been issued under the following schemes:

A. SKS Microfinance Employee Share Purchase Scheme 2007 ("ESPS 2007")

B. SKS Microfinance Employee Stock Option Plan 2008 (Independent Directors) ("ESOP 2008 (ID)")

C. SKS Microfinance Employee Stock Option Plan 2008 ("ESOP 2008")

D. SKS Microfinance Employee Stock Option Plan 2009 ("ESOP 2009")

E. SKS Microfinance Employee Stock Option Plan 2010 ("ESOP 2010")

F. SKS Microfinance Employee Stock Option Plan 2011 ("ESOP 2011")

Disclosures with respect to each of the above-mentioned Employee Share Purchase Schemes (ESPS) and Employee Stock Option Plans (ESOP), as required by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines 1999, are appended as Annexure - 1 and form part of this Report.

PARTICULARS OF EMPLOYEES

The statement containing particulars of employees as required under Section 217 (2A) of CA 1956 forms part of this Report. In terms of Section 219(1)(b)(iv) of the CA 1956, the same is open for inspection at the Registered Office of your Company. A copy of the statement may be obtained by Members by writing to the Company Secretary of your Company.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO UNDER SECTION 217(1) (E) OF THE COMPANIES ACT, 1956

The provisions of Section 217(1)(e) of the Companies Act, 1956 relating to the conservation of energy and technology absorption do not apply to your Company. Your Company has, however, used information technology extensively in its operations.

During the year under review, your Company''s earning and outgo in foreign exchange was Nil and Rs. 79.3 lakh respectively.

FIXED DEPOSITS

Your Company has not accepted any fixed deposits and, as such, no amount of principal or interest was outstanding as on the date of the Balance Sheet.

ACKNOWLEDGEMENTS

The Directors take this opportunity to express their deep and sincere gratitude to the Sangam Members for their confidence and patronage, as well as to the Reserve Bank of India, the Government of India and Regulatory Authorities for their co-operation, support and guidance. The Directors would like to express a profound sense of appreciation for the commitment shown by the employees in supporting your Company in its endeavour towards becoming a leading microfinance institution of the country. The Directors would also like to express their gratitude to shareholders, bankers and other stakeholders for their trust and support.

For and on behalf of the Board of Directors

Place: Mumbai SD/- SD/-

Date: August 27, 2014 P. H. Ravikumar M. R. Rao

Non-Executive Chairman Managing Director and CEO

---

Mar 31, 2012

The Directors have pleasure in presenting the Ninth Annual Report of your Company together with the audited statement of accounts for the year ended March 31, 2012.

The year was momentous for the microfinance industry in India in general and your Company in particular due to the significant regulatory changes. The following are the major developments on the regulatory front:

* On May 3, 2011 the Reserve Bank of India (RBI) accepted the recommendations of the Malegam Committee, set up to study issues and concerns in the microfinance sector. Also, the RBI re-affirmed priority sector status for microfinance.

* On December 2, 2011, the RBI created a new category of finance companies, the Non-Banking Finance Companies-Micro Finance Institutions (NBFC-MFIs), and released operational guidelines for these firms which will be regulated by the RBI. The guidelines lay considerable emphasis on the financial stability of MFIs and prescribe prudential norms for capital adequacy, asset classification and provisioning for bad assets. Further, ceilings have also been imposed on individual interest rates and realizable margins. Also, certain norms have been stipulated in relation to fair collection practices and transparency in pricing.

* On May 22, 2012, the Micro Finance Institutions (Development and Regulation) Bill, 2012 was introduced in Parliament.

Your Company has already adopted several aspects of the new regulatory framework and has applied to the RBI for the classification of your Company as an NBFC-MFI.

Your Company continues to be one of the largest microfinance institutions (MFIs) in India in terms of the total value of loans outstanding and the number of borrowers, as of March 31, 2012, and the only MFI listed in India.

Financial highlights

The financial performance for fiscal ended March 31, 2012 is summarized in the following table:

(Rs. in Crore)

Year ended March 31 2012 2011

Total revenue 472.3 1,269.5

Less: Total expenditure 1,796.1 1,098.6

Profit (Loss) Before Tax (1,323.7) 170.9

Profit (Loss) After Tax (1,360.6) 111.6

Surplus brought forward 309.3 220.0

Amount available for appropriation - 331.6

Appropriation has been made as under:

Transfer to Statutory Reserve - 22.3 Surplus carried to Balance Sheet (1,051.3) 309.3 Earnings Per Share (EPS) (188.06) 16.1 Diluted EPS (188.06) 15.2

- Your Company's total revenue for the year ended March 31, 2012 has recorded a reduction of 62.8 percent from Rs. 1,269.5 crore to Rs. 472.3 crore.

- Net Profit After Tax for the year declined from Rs. 111.6 crore to a loss of Rs. 1,360.6 crore in FY12.

Operational highlights

The following table summarizes the operational performance of your Company for the year ended March 31, 2012:

Year ended March 31 2012 2011 Percentage change

Number of branches 1,461 2,379 (38.6)

Number of members (in Lakhs) 53.5 73.1 (26.8)

Number of employees 16,194 22,733 (28.8)

Amount disbursed (Rs.in Crore) 2,737 7,831 (65.1)

Portfolio outstanding (Rs. in Crore) 1,669 4,111 (59.4)

During the year under review, your Company's member base has decreased by 26.8 percent to 53.5 lakh (5.35 million) as compared to 73.1 lakh (7.31 million) for the previous year, which is primarily due to Andhra Pradesh Microfinance Institutions (Regulation of Money-Lending) Act, 2010 (AP MFI Act). Consequently, loan disbursement decreased by 65.1 percent from Rs. 7,831 crore to Rs. 2,737 crore. Your Company has closed or merged 918 branches as part of its business rationalization policy.

Unique strengths

Your Company continues to be recognized as one of the largest MFIs in India with unique achievements and strengths. Among these are:

* Your Company has repaid more than Rs. 3,800 crore to the banking system since the Andhra Pradesh microfinance situation without even a day's delay and did not join CDR.

* Your Company has healthy cash and bank balances of Rs. 690 crore with a networth of Rs. 435 crore and strong capital adequacy of 35.4 percent (as against the 12 percent stipulated by the Reserve Bank of India) as of March 31, 2012. In addition, the unavailed deferred tax benefit stands at Rs. 460 crore.

* Your Company has also brought about a significant reduction in operating costs from Rs. 106 crore in Q4-FY11 to Rs. 81 crore in Q4-FY12 on account of branch consolidation from 2,379 in Q4-FY11 to 1,461 in Q4-FY12.

* Your Company has not lost a single Core Management Team member voluntarily since the Andhra Pradesh microfinance situation.

* In order to protect members from over-indebtedness, your Company has been playing a leading part in pioneering industry-wide efforts on creating and sharing credit-related information with Credit Bureaus. Between September 2011 and April 2012, your Company obtained Credit Bureau reports for 44 lakh members, while loans have been given to only 26percent of them.

* Your Company's policies and processes along with documentation have been modified to comply with:

1. RBI guidelines of December 2, 2011.

2. RBI Fair Practice Code guidelines of July 2, 2012.

3. Guidelines and codes of industry bodies like Sa-Dhan and MFIN.

* Your Company disclosed on December 7, 2011 that it would invest Rs. 15 crore in the next three years in order to align its customer grievance redressal and Customer Protection Practices (CPP) with globally recognized benchmarks.

* Your Company announced on December 7, 2011 that it will cap Return on Assets at 3 percent for the core microfinance business. Your Company's present interest is 24.55 percent as against the Reserve Bank of India prescribed limit of 26 percent.

* Mr. Verghese Jacob, a seasoned corporate and social sector expert with three decades of experience, was appointed as your Company's Ombudsman on January 31, 2012.

* Your Company commissioned EDA Rural Systems, a reputed development sector consultancy, to develop a training programme encompassing the seven principles (avoidance of over-indebtedness, transparency, responsible pricing, appropriate collection practices, ethical staff behavior, privacy of client data and grievance redressal mechanism) of CPP and also certify several staff members after imparting Train-The-Trainer coaching to them.

On account of such distinctions, your Company has been appreciated by key stakeholders including banks and financial institutions. Your Company completed 23 transactions with leading banks and financial entities and obtained sanction for incremental debt of Rs. 1,360 crore in Q4-FY12. During the fiscal, your Company also accomplished the largest rated pool assignment transaction of Rs. 354 crore in the Indian microfinance history.

Andhra Pradesh microfinance situation

The achievements should be viewed in the backdrop of the sensitive Andhra Pradesh situation post the promulgation of the Andhra Pradesh Micro Finance Institutions (Regulation of Money-Lending) Ordinance, 2010. Subsequently, on January 1, 2011, the Government of Andhra Pradesh introduced the AP MFI Act to replace the Ap MFI Ordinance. Prior to the promulgation of the new law, Andhra Pradesh was India's largest microfinance market accounting 30 percent of borrower accounts and loan outstanding of microfinance institutions. Post the promulgation, the Indian microfinance industry faced its worst crisis ever with the lower middle class borrower bearing the brunt of the situation.

"The Andhra Pradesh Government's stated aim was to protect the poor and yet its actions have resulted in a 600-fold decrease in financing to the very poorest of India's citizens," according to Legatum Ventures' report, "Microfinance in India: A Crisis at the Bottom of the Pyramid'. "This should make everyone pause. The rural poor depend on access to consistent and dependable finance to help smooth patchy income streams and avert financial crisis. The Andhra Pradesh Government's actions have effectively shut off finance to these most vulnerable of India's citizens. Indeed, as this paper discusses, the very premise of the AP MFI Act was fundamentally flawed. Quite apart from protecting the poor, the AP MFI Act does just the opposite and risks creating a near term financial and human crisis amongst the rural poor in Andhra Pradesh, while also potentially jeopardizing the Indian Government's broader financial inclusion agenda."

The impact of the new law could be summed up on the following lines:

* In the first half of FY11, prior to the promulgation of the new law, MFIs in Andhra Pradesh disbursed Rs. 5,000 crore to borrowers. This dropped to Rs. 8.5 crore in the second half of FY11.

* The exit of microfinance companies had created a credit gap of Rs. 4,000 crore in Andhra Pradesh, The Hindu newspaper quoted a senior official of National Bank for Agriculture and Rural Development as saying.

* Close to 9.2 million customers or almost one in three microfinance borrowers (almost equal to Mumbai's suburban population) have defaulted on loan repayment, according to Business Standard and The Economic Times. These members would appear as defaulters in Credit Bureau lists.

* Microfinance recovery rates in Andhra Pradesh had fallen to 10 percent from 95 percent.

* Your Company has also brought down the residual Andhra Pradesh exposure (Net) to Rs. 236 crore from a high of Rs. 1,491 crore in October 2010 by writing off/ provisioning Rs. 1,129 crore.

MicroSave report: No harassment

The report of MicroSave, an independent international organization and a close affiliate of CGAP which is housed at the World Bank, is an eye-opener for all concerned. The report, "What are Clients doing Post the Andhra Pradesh MFI Crisis', is based on 76 sessions using participatory methods like focus group discussions, relative preference ranking and financial sector trend analysis during July- August 2011 in the Telangana, Rayalaseema and Coastal Andhra regions of Andhra Pradesh covering the districts of Anantapur, Krishna, Nizamabad and Adilabad. MicroSave also interviewed several government officials, who are involved in SHG movement, bank officials, who have experience in SHG-bank linkage, field staff of SHG federations, field staff of MFIs and their borrowers and SHG members. Below are the extracts from the same:

Key findings of MicroSave study are:

* MFI members have taken loans at exorbitant interest rates from moneylenders in the absence of loans from MFIs. Moneylenders have increased lending in the past eight to 10 months in areas with higher penetration of MFIs.

* Many members had reduced the scale of their business because of lack of access to alternate sources of credit. Members have sold their assets such as house, vehicle, cattle, jewellery, etc., to meet their productive as well as essential non- productive expenditure which have to be met.

* Most of the members stopped repaying as other members of the group and the community stopped repaying.

* Most of the members denied any harassment from the MFIs, and said that they are willing to repay their loans if MFIs start disbursing fresh loans and if other members in the community also start repaying.

* Members would like to carry forward their relationship with MFIs, given the fact that it is an economical and convenient credit option for them.

One of the key recommendations (for the State Government/ MFIs): As the majority of the clientele of MFIs are members of SHGs promoted by the Government of Andhra Pradesh, there are chances of issues of conflict between MFIs and the local machinery of the Government. The Government and MFIs should take initiative to establish a forum at both district and state level to resolve any conflicts.

Ex Andhra Pradesh Sarpanches back MFIs

The grassroots Andhra Pradesh perspective too reflects the plight of the lower middle classes. In view of their plight, eminent ex Sarpanches and other grassroots opinion leaders from 15 districts of Andhra Pradesh have urged the State Government to restart microfinance loans for the poor.

Media reports, featuring such requests, have been published regularly by leading regional newspapers including Andhra Bhoomi, Andhra Jyothi, Andhra Prabha, Eenadu, Namasthe Telangana, Sakshi, Surya and Vaartha during the latter half of the fiscal. The media reports focus on the following aspects:

* Repeal Ordinance: Sakshi has reported that the State Ordinance against MFI loans had caused the people in Shadnagar area to again depend on usurious moneylenders to run their small businesses since they were unable to find easy credit after MFIs stopped offering loans due to the Ordinance.

* Uncertainty due to lack of MFI loans leading to problems: Andhra Prabha has reported that there was an urgent need for the Government to reinstate MFI loans to farmers and the poor classes, who have been badly affected by the lack of credit. The report went on to note that non-availability of bank loans in villages could create a drop in farm output, which could have an adverse impact on the state economy.

* Poor in the vortex of debt: Namasthe Telangana has pointed out that farmers had been caught in the vortex of debt as the exit of MFIs has forced them back into the clutches of moneylenders. It reported that the previous year had seen farmers utilize loans from MFIs in a proper manner and benefiting from them. The MFI ordinance had once again increased their reliance on moneylenders, this year.

* Interest rates should be reduced: Eenadu has emphasized on the increased interest burden on the lower income classes as a result of the Government's MFI Ordinance and subsequent dependence on moneylenders. The article highlighted the hardships faced by the rural poor on account of the exit of MFIs and lack of alternative credit options at hand.

* Need for microfinance loans: Andhra Prabha has explained the indispensable role that microfinance loans had played not just in agricultural businesses but also in other important small businesses such as the purchase of buffaloes and selling of milk to villagers. Microfinance loans had benefitted a number of people and families improving their living standards. The article emphasized on the advantages of microfinance loans compared to loans from moneylenders in villages.

The validity of the AP MFI Act has been challenged by several MFIs, including your Company. The matter is currently pending in the Honorable High Court of Andhra Pradesh.

The Sa-Dhan 2011 report had stated that concerted action from all the stakeholders, viz, the Central Government, the RBI, the Government of AP banks, Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD), in addition to involvement from industry associations such as the Microfinance Institutions Network (MFIN) and Sa-Dhan (the Association of Community Development Finance Institution), is important for resolution of the AP microfinance crisis.

In July 2011, the Central Government released the draft Micro Finance Institutions (Development and Regulation) Bill, 2011 ("draft MFI Bill") for public comments. The Draft MFI Bill was subsequently replaced by the Micro Finance Institutions (Development and Regulation) Bill, 2012 ("MFI Bill 2012"). The MFI Bill 2012, which was presented before the Indian Parliament on May 22, 2012, attempts to regulate the entire microfinance sector, irrespective of the form of institutions involved. The MFI Bill 2012 states that its provisions shall be effective notwithstanding anything inconsistent contained in any other law. The MFI Bill 2012 will require the approval of the Indian Parliament as well as the assent of the President of India and publication in the Official Gazette before becoming law. The draft MFI Bill, among other things, states that its provisions shall be effective notwithstanding anything inconsistent contained in any other law and that microfinance services extended by any MFI registered with the RBI shall not be treated as money-lending for the purpose of any state enactments relating to money-lending and usurious loans. The introduction of the draft MFI Bill is being seen by the MFI industry as a key step towards resolving the uncertainty created by the AP MFI Act.

No contagion effect

The sensitive Andhra Pradesh situation has not shown any contagion effect with non-Andhra Pradesh operations of SKS Microfinance registering a 11 percent quarter-on-quarter portfolio growth to Rs. 1,320 crore in Q4-FY12 reversing the declining trend over the previous five quarters. Your Company continued to maintain its high collection efficiencies in 17 non-Andhra Pradesh states with the collection figure for the quarter ending March 2012 standing at 95.1 percent.

New business initiatives

Your Company has built a large distribution network in rural India. As of March 31, 2012, your Company has 13,596 branch managers, assistant branch managers and Sangam Managers who comprise 84 percent of it's total workforce, across 1,461 branches in 18 states. Your Company can leverage this network to distribute financial and non-financial products of other institutions to the borrower- members at a cost lower than the market price. Your Company's network also allows such distributors to access a segment of the market to which many do not otherwise have access to.

Your Company intends to diversify into other businesses while retaining the core microfinance business focus. Your Company is scaling up certain pilot projects involving fee-based services and secured lending, gradually converting them into separate business verticals. Your Company's objective in these non-microfinance businesses is to focus on lending that will sustain high repayment rates, increase borrower-members' loyalty and also provide economic benefits to the borrower-members and their families. Such non- microfinance products and services offer higher operating margins and thus may help your Company to increase the overall Return on Assets (ROA).

Your Company currently offers certain loan products that borrower-members can use to purchase products that will increase the productivity of borrower-members and their businesses. Your Company is selective about the products for which loans are issued. To ensure the loans are used for the purchase of the specified product, your Company first enters into a strategic relationship with a selected supplier of the product and specifies the loan disbursement will be made directly to the supplier of the product rather than to the borrower-member.

Your Company has two programmes under this category, namely Mobile Phone Loans and Sangam Store Loans.

Mobile Phone Loans

After a successful pilot programme with Nokia during FY10 and FY11 for financing of mobile phones for the borrower-members, your Company extended this initiative to 11 states in India. The following are the features of MBL:

* The annual effective interest rate of the Mobile Phone Loans programme is 26.0 percent and the loan processing fee is 1.0 percent.

* A processing/ referral fee is paid to your Company by Nokia and its distributors.

* The term of this loan is typically 25 weeks.

* The price of the mobile phones financed by your Company ranges from Rs. 1,800 to Rs. 3,000.

* Principal and interest payments are due on a weekly basis during the term of the loan.

As of March 31, 2011 and March 31, 2012, Mobile Phone Loans constituted 0.4 percent and 1.3 percent respectively, of your Company's total outstanding loan portfolio.

Sangam Store Loans

Your Company has also undertaken a pilot project involving a business-to-business loan programme with Metro to fund the working capital requirements of the borrower-members and certain non-borrower-members, who own and operate 'kirana' or Sangam Stores.

* This programme allows Sangam Stores to purchase their inventory of consumer goods and groceries from Metro at wholesale prices.

* Loan amounts range from Rs. 2,500 to Rs. 12,500 and are interest free.

* The term of the loan is seven days.

* Non-members are serviced on the basis of cash-on-delivery.

* Your Company also offers credit to non-borrower-members upon satisfactory credit appraisals and obtaining requisite approvals.

* Your Company receives a fixed commission from Metro for the total purchases a store makes from it, while utilizing the productivity loan.

Dividend

Your Directors have not recommended any dividend as your Company reported losses during the year under review.

Change in Registered Office

The Registered Office of your Company was shifted from Ashoka Raghupathi Chambers, D. No. 1-10-60 to 62, Opp. Shoppers Stop, Begumpet, Hyderabad - 500 016, Andhra Pradesh, India to 3rd Floor, My Home Tycoon, Block - A, 6-3-1192, Kundanbagh, Begumpet, Hyderabad - 500 016, Andhra Pradesh, India with effect from May 7, 2012.

Further, the Board in its meeting held on May 7, 2012 recommended shifting of the Registered Office from Andhra Pradesh to Maharashtra, by amendment to the Situation Clause of the Memorandum of Association of your Company, subject to approvals of the Members and Statutory Authorities.

Your Company is in the process of obtaining necessary approvals.

Management Discussion and Analysis

The Management Discussion & Analysis Report for the year under review is presented in a separate section on Page 39 in this Annual report.

Corporate Governance

Your Company adopts the corporate best practices and is committed to conducting its business in accordance with applicable laws, rules and regulations. Your Company follows the highest standards of business ethics. A report on Corporate Governance is provided on Page 55 in this Annual Report.

Resources and liquidity

Your Company, being a Systemically Important Non-Deposit Accepting NBFC, is subject to the capital adequacy requirements prescribed by the Reserve Bank of India. Your Company has to maintain a minimum ratio of 15 percent as prescribed under the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time to time) based on total capital to risk weighted assets. Your Company maintained Capital to Risk Asset Ratio (CRAR) of 35.4 percent and 45.4 percent respectively as on March 31, 2012 and as on March 31, 2011 respectively, which is higher than the statutory 15 percent requirement.

During the year, your Company has received ratings for various instruments to raise funds and a summary of the ratings is presented in the following table:

Agency Item Rating

CARE Rating Short Term Debt CARE A1*

CARE Rating MFI Grading MFI 2

CARE Rating Assignment CARE A1 (SO)

CARE Rating Securitization CARE A1 (SO)

*Rating withdrawn in May 2012 as no instrument is outstanding.

Fixed deposits

Your Company has not accepted any fixed deposits and, as such, no amount of principal or interest was outstanding as of the Balance Sheet date.

Increase in share capital

During the year under review, 32,985 equity shares were issued under the ESOP plans of your Company. Thus, the issued, subscribed and paid-up equity share capital increased from 72,323,910 to 72,356,895 as on March 31, 2012.

Post the Balance Sheet date, your Company issued 906,734 Equity Shares under ESOP 2007 on May 4, 2012 and opened QIP issue on July 12, 2012 for issue of Equity Shares pursuant to and in accordance with the provisions of Chapter VIII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended. The said QIP issue is being carried out in accordance with the resolution passed by the shareholders of your Company through Postal Ballot on December 7, 2011. Further, in terms of Regulations 81(c) of Chapter VIII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, the Board has fixed July 12, 2012 as the 'Relevant Date' for the purpose and accordingly the floor price is Rs. 75.40 per Equity Share as per the pricing formula under Regulation 85 of Chapter VIII of the SEBI ICDR Regulations, 2009.

RBI guidelines

The Reserve Bank of India, based on the recommendations of the Malegam Committee, notified the directions, inter alia, for the introduction of new category for MFIs, known as Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs).

Following is the criteria for classifying an NBFC as an NBFC- MFI:

* Minimum net owned funds of Rs. 5 crore.

* Not less than 85 percent of its net assets are in the nature of 'qualifying assets'.

* Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall be in accordance with the regulations specified in this regard.

* An NBFC, which does not qualify as an NBFC-MFI shall not extend loans to the microfinance sector, which in aggregate exceed 10 percent of its total assets.

* Qualifying asset' shall mean a loan, which satisfies the following criteria:

* Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000.

* Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles.

* Total indebtedness of the borrower does not exceed Rs. 50,000.

* Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty.

* Loan to be extended without collateral.

* Aggregate amount of loans, given for income generation, is not less than 75 percent of the total loans given by the MFIs.

* Loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

Capital requirement

All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital, which shall not be less than 15 percent of their aggregate risk weighted assets. The total of Tier II Capital at any point in time shall not exceed 100 percent of Tier I Capital.

Note:

i. Among the existing NBFCs to be classified as NBFC-MFIs, those with asset size less than Rs. 100 crore will be required to comply with this norm w.e.f April 01, 2012. Those with asset size of Rs. 100 crore and above are already required to maintain minimum CRAR of 15 percent.

ii. The CRAR for NBFC-MFIs, which have more than 25 percent loan portfolio in the state of Andhra Pradesh will be at 12 percent for the year 2011-2012 only. Thereafter, they have to maintain CRAR at 15 percent.

Asset classification norms: With effect from April 01, 2013:

i. Standard asset means the asset in respect of which no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business.

ii. Non-performing asset means an asset for which interest/ principal payment has remained overdue for a period of 90 days or more.

Provisioning norms: With effect from April 01, 2013

The aggregate loan provision to be maintained by NBFC-MFIs at any point in time shall not be less than the higher of:

* 1 percent of the outstanding loan portfolio, or

* 50 percent of the aggregate loan installments, which are overdue for more than 90 days and less than 180 days and

* 100 percent of the aggregate loan installments, which are overdue for 180 days or more.

The RBI has, through its circular dated March 20, 2012, deferred the implementation of the asset classification and provisioning norms prescribed for NBFC-MFIs until April 1, 2013.

Pricing of credit:

i. All NBFC-MFIs shall maintain an aggregate margin cap of not more than 12 percent. The interest cost will be calculated on the basis of average fortnightly balances of outstanding borrowings, and interest income is to be calculated on the basis of average fortnightly balances of outstanding loan portfolio of qualifying assets.

ii. Interest on individual loans will not exceed 26 percent per annum and the same will be calculated on a reducing (diminishing) balance basis.

iii. Processing charges shall not be more than 1 percent of gross loan amount. Processing charges need not be included in the margin cap or the interest cap.

iv. NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges, where recovered, shall be as per Insurance Regulatory Development Authority (IRDA) guidelines.

Fair Practices Code

The Reserve Bank of India on March 26, 2012 amended the Fair Practices Code for all NBFCs including MFIs and Gold Loan companies, requiring NBFC-MFIs and Gold Loan companies to comply with certain additional norms with respect to their lending practices and recovery methods.

Your Company has revised the Code of Conduct for field staff, who have been involved in microfinance activities and Gold Loans along with relevant policies and documents in line with the RBI guidelines on Fair Practices Code for NBFCs.

On December 21, 2011, your Company submitted an application to the RBI for classification as an NBFC-MFI and is awaiting necessary approval from the RBI.

Credit bureau for MFIs

In order to address the issue of multiple lending or over-indebtedness, various Micro Finance Institutions/ NBFCs have come together to invest in the Credit Information Bureau, namely High Mark Credit Information Services Private Limited via Alpha Micro Finance Consultants Private Limited. In order to facilitate the collective investment in High Mark as well as undertake other collective steps for building the technology infrastructure for credit information sharing among themselves, and to educate their staff in ensuring good Customer Protection Practices are followed, Alpha has been established as a collective entity by 25 NBFC-MFIs which together have about 70 percent of the total portfolio of the microfinance loans. Your Company invested Rs. 20 lakh in Alpha.

Self-regulations for MFIs

Your Company is a member of both Industry Associations viz., Microfinance Institutions Network (MFIN) and Sa-Dhan (the Association of Community Development Finance Institution) that aim to work with various stakeholders, including regulators to promote microfinance as a tool for achieving larger financial inclusion goals. These self-regulatory organisations have defined an Unified Code of Conduct for microfinance institutions in India, which seek to create social benefits and promote financial inclusion by providing affordable services to un-served and underserved households. The Code, in addition to reiterating the regulatory guidelines, defines core values and fair practices for the sector so as to ensure that microfinance services through MFIs are provided in a manner that benefit borrowers- members. Ethical approach and dignity for borrowers-members are the key elements of the Code.

Globally benchmarked Customer Protection Practices

In view of the concerns raised during the Andhra Pradesh situation, your Company has been rolling out several initiatives in order to make Client Protection Principle (CPP) a strategic priority as also to integrate the same into the business plan. Among the initiatives are:

Credit bureaus and over-indebtedness: In order to protect members from over-indebtedness, your Company has been playing a leading part in pioneering industry-wide efforts on creating and sharing credit-related information with Credit Bureaus. Between September 2011 and April 2012, your Company obtained Credit Bureau reports for 44 lakh members, while loans have been given to only 26 percent of them.

Regulatory compliance: Your Company's policies and processes along with documentation have been modified to comply with: 1. RBI guidelines of December 2, 2011; 2. RBI Fair Practice Code guidelines of July 2, 2012; 3. Guidelines and codes of industry bodies like Sa-Dhan and MFIN.

Third-party verification and endorsement: Your Company has been seeking external validation for compliance. Accordingly, M-Cril, a well-known rating agency, conducted a study during October 2011-December 2011 across five states and issued a "fully complaint" report. A similar study for the period January 2012-June 2012 covering eight states is being commissioned.

Rs. 15 crore investment for CPP: Your Company disclosed on December 7, 2011 that it would invest Rs. 15 crore in the next three years in order to align its customer grievance redressal and CPP with globally recognized benchmarks.

Cap on Return on Asset: Your Company announced on December 7, 2011 that it will cap Return on Assets at 3 percent for the core microfinance business. Your Company's present interest is 24.55 percent as against the Reserve Bank of India prescribed limit of 26 percent.

Ombudsman: Mr. Verghese Jacob, a seasoned corporate and social sector expert with three decades of experience, was appointed as its Ombudsman on January 31, 2012.

CPP training and certification: Your Company commissioned EDA Rural Systems, a reputed development sector consultancy, to develop a training programme encompassing the seven principles (avoidance of over-indebtedness, transparency, responsible pricing, appropriate collection practices, ethical staff behavior, privacy of client data and grievance redressal mechanism) of CPP and also certify several staff members after imparting Train-The-Trainer coaching to them.

CPP assessment: Your Company has volunteered for an independent assessment of its current practices by Smart Campaign Team of Accion International. Their initial comments capture the best practices being implemented by your Company. The final report is awaited.

Upgradation of Customer Grievance Redressal systems and processes: Your Company was the first microfinance company in India to start a Toll-free Helpline (1800 300 10000), which is operational in eight Indian languages since July 6, 2009. A couple of new Customer Grievance Redressal initiatives are being implemented to ensure faster complaint resolution.

Integrating CPP into employee KRAs: Zero-tolerance policies have been rolled out specifying severe penalties including termination for non-compliance of the regulatory guidelines.

The above-mentioned measures will align your Company's CPP with globally benchmarked best practices, helping your Company's customer satisfaction levels while addressing policy-makers' concerns, if any.

Information technology

Your Company is focused on technology solutions that drive growth. Initiatives are being taken in the following areas:

* Cost-effective total branch connectivity solution and strengthen existing communication channels.

* Centralization of data for real-time decision making.

* Building strong business intelligence reporting and analytics capability.

* Consolidation of network, storage and hardware infrastructure by using Cloud and virtualization services to drive economies of scale.

* Use of advanced communication channels like video conferencing to increase productivity and efficiencies.

* Build robust framework to strengthen technology assets, artifacts and data.

The execution of the above-mentioned initiatives will help your Company in achieving its goals.

Human Resource Management

The Human Resources function has been implementing several initiatives to attract and retain talent. In this regard, the function has been implementing various programmes in the areas of manpower planning and optimization, devising development plans, employee engagement as also indiscipline. A key initiative in this regard is CARE built on the four pillars of: Creative communication, Appreciation for all, Reward and recognition and Energy and enthusiasm.

The function has been playing a critical role in ensuring that the field employees follow a standardized set of processes and policies resulting in minimization of business risks and enhancing customer satisfaction. It plays a pivotal role in disseminating Client Protection Practices, Code of Conduct and Staff Ethical Behavior across the organization enabling the human capital of your Company to gear up for future with a special focus on rapid changes pertaining to internal and external environment.

Your Company continues to implement various industry first initiatives in the areas of role-based training and certification, performance differentiation and value-based approaches. Building leaders from within will continue to be a priority and your Company continues to strengthen its efforts to build the pipeline.

Employee Stock Option Plan (ESOP) and Employee Share Purchase Scheme (ESPS)

Presently, stock options have been granted or shares have been issued under the following schemes:

A. SKS Microfinance Employee Share Purchase Scheme 2007 ("ESPS 2007")

B. SKS Microfinance Employee Stock Option Plan 2007 ("ESOP 2007")

C. SKS Microfinance Employees Stock Option Plan 2008 (Independent Directors) ("ESOP 2008 (ID)")

D. SKS Microfinance Employee Stock Option Plan 2008 ("ESOP 2008")

E. SKS Microfinance Employee Stock Option Plan 2009 ("ESOP 2009")

F. SKS Microfinance Employee Stock Option Plan 2010 ("ESOP 2010")

G. SKS Microfinance Employee Stock Option Plan 2011 ("ESOP 2011")

The disclosures with respect to each of the above-mentioned Employee Share Purchase Schemes (ESPS) and Employee Stock Option Plans (ESOP), as required by Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999, are appended as Annexure - 1 and form part of this report.

Particulars of employees

Pursuant to the provisions of Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of employees are set out in Annexure - 2 to the Directors' Report.

Directors

During the year under review, following are the changes:

1. Mr. Suresh Gurumani and Mr. Pramod Bhasin resigned as Directors from the Board of Directors of your Company with effect from May 27, 2011 and August 12, 2011 respectively.

2. Dr. Vikram Akula resigned as the Executive Chairman of your Company with effect from November 23, 2011.

3. Mr. V. Chandrasekaran's nomination on the Board was withdrawn by Small Industries Development Bank of India (SIDBI) with effect from June 8, 2012.

The Board places on record its appreciation for the contribution made by the above-mentioned Directors to your Company and industry during their tenure.

Your Company is in the process of appointing a new incumbent in place of Mr. V Chandrasekaran as SIDBI nominee on the board of your Company on completion of certain formalities.

Mr. PH. Ravikumar and Mr. Paresh Patel will retire by rotation and are eligible to offer themselves for re-appointment in the ensuing Annual General Meeting. A brief profile of the Directors is given in the Notice of the Ninth Annual General Meeting.

Directors' Responsibility Statement

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, your Directors confirm as under:

i) In the preparation of the annual accounts, the applicable accounting standards read with requirements set out under Schedule VI to the Companies Act, 1956 had been followed and there are no material departures from the same.

ii) Your Company has selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of your Company at the end of the financial year and of the profit of your Company for that year.

iii) Your Company has 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 your Company and for preventing and detecting fraud and other irregularities.

iv) Your Company has prepared the annual accounts of your Company on a 'going concern' basis.

Auditors

The Statutory Auditors of your Company, M/s. S. R. Batliboi & Co, Chartered Accountants, Mumbai, retire at the ensuing Ninth Annual General Meeting and have confirmed their eligibility and willingness to accept office of the Auditors, if appointed. The Audit Committee and the Board of Directors have recommended reappointment of M/s. S. R. Batliboi & Co., as Statutory Auditors of the Company for the FY2012 - 2013 for your approval.

Response of the Board to the Auditors' Comments

In terms of the provisions of Section 217(3) of the Companies Act, 1956, the Board would like to place on record an explanation to the Auditors' comments in their Audit Report dated May 8, 2012:

S.No. Auditors' Comments Response

1. The Company's Due to the impact of the Andhra Pradesh Microfinance (Money-lending) Regulation Act on accumulated losses at the the field operations in Andhra Pradesh, the Company has prudently written off substantial part end of the financial year of the loans outstanding in the state during the FY2011-12. Your Company has reduced its net are more than fifty percent exposure in AP to Rs. 236.0 crore as on March 31, 2012 from Rs. 1,303.2 crore as on March of its net worth and it has 31, 2011. The net exposure is post provisions and write-offs of Rs. 1,007.2 crore on the AP incurred cash losses in the portfolio during the financial year, which have contributed primarily to the losses reported by current financial year. The your Company for the first time in its history. Notably, the total provisions and write-offs of Company had not incurred Rs. 1,173.5 crore made during the financial year 2011-12 exceed the accumulated losses any cash losses in the of Rs. 1,051.3 crore at the end of the financial year. The Company has a strong networth of immediately preceding Rs. 434.7 crore even after adjusting the accumulated losses and capital adequacy is 35.4 financial year. percent.

The regulatory uncertainty created by the AP MFI Act led to reduced bank lending to the sector and for your Company resulting in a decline in the non-AP outstanding loan portfolio during the first three quarters of the financial year 2011-12. Subsequently, with clarity from the nBfC- MFI directions issued by the RBI and the Central Micro Finance Institutions (Development and Regulation) Bill, 2012, your Company accessed higher funds in the fourth quarter of financial year 2011-12, resulting in quarter-on-quarter growth in the non-AP portfolio. The Company expects this trend to continue into the next financial year. However, lower revenues, due to the reduction in non-AP portfolio over the full year, coupled with less than proportionate decrease in expenses, resulted in cash losses in the financial year 2011-12. To control costs, your Company has initiated several measures and also steps to ensure AP operations are cash neutral.

2. We have been informed Employee fraud is an inherent risk in the business the Company operates in, since all the

that during the year transactions are cash-based. In case of cash embezzlements, your Company has recovered an

there were instances of amount of Rs. 10,859,714 including the insurance cover. Cash embezzlement is 0.09percent

cash embezzlements of disbursement during the year.

by the employees of the To mitigate this risk to a large extent, the management has put in place several preventive

Company aggregating control measures as under: Rs 25,091,317; and loans given to non " Procuring indemnity bond from every field staff, with personal guarantee of a third person.

existe nt borrowers on - Every bank transaction (deposit/withdrawal) is to be executed by minimum of two staff the basis of fictitious comprising a bank signatory and a confirmed staff.

documentation created - The strongbox at every branch is controlled by two keys and the keys are held by two by the employees of the different employees in the branch.

company aggregating - Surprise visits are conducted by managerial employees, at the time of carrying out cash/

Rs 133, 313, 975. The bank transactions by field employees.

- Minimizing the cash balances at various branches to the lowest level possible (50,000

services of all such

employees involved have next day disbursement)

been terminated and the There are also several detective controls, as follows:

Company is in the process - Employee-wise daily reconciliation of cash balances by the managerial employees at each of taking legal action. The branch

outstanding balance (net - Frequent surprise visits by accountants and internal auditors, which covers verification of

of recovery) aggregating physical cash and bank balances

Rs. 142,440,656 has been - The following is the action taken in such cases:

written off. - Terminating services of all the employees involved in cash embezzlements and taking

legal action against them

* Recovering money from such employees

Also, your Company has taken fidelity insurance to minimize the losses from cash embezzlements.

In case of loans given to non-existent/ fictitious borrowers, your Company has recovered an amount of Rs. 7,397,648 against these cases including insurance cover. These cases are 0.49percent of disbursement during the year.

The following are the various preventive control measures included in the loan process to mitigate the risk of loans to non-existent borrowers/ fictitious borrowers:

- All the loans disbursed have a maker/ checker control; wherein all the loans processed by sangam managers are approved by branch managers/ assistant branch managers.

- Sangam managers are not deployed in their home towns, so as to prevent collusion with the local people there.

- Employee rotation every six months, where in the sangam managers manage different centres at the end of every six months.

- Transfer of sangam manager/ branch manager in a span of 9 to 12 months

- Developed internal processes to restrict loan disbursements to inactive members Detective controls:

- The branch managerial employees perform Loan Utilization Check for every loan disbursed.

- The internal audit team, on a test basis, verifies the loan documents and performs Loan Utilization Check for the loans disbursed.

Actions taken:

- Terminating services of all the employees involved in fake loan transactions and taking legal action against them

- Recovering money from such employees

The net impact of frauds comes to around 0.51 percent of the total amount disbursed during the year. Your Company is working towards reducing this percentage to the least possible by making process improvements, covering the loss by having an adequate insurance policy and by increasing opportunities for direct contact with our members. During the year, your Company has recovered an amount of Rs. 1.30 crore against fraud amount written off in previous years.

Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo

The particulars required to be furnished under sub section (1) (e) of Section 217 of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are set out in the Annexure - 3 to this report.

Green initiatives

During the previous fiscal, your Company started a sustainability initiative with the aim of going green and minimizing the environmental impact. Like last year, this year too your Company has published the Annual Report prepared in compliance with provisions of the Companies Act, 1956 and the Listing Agreement.

Intellectual property

Your Company has 11 trademarks registered in its name, including the trademark registrations for "SKS Microfinance", the composite trademark for "SKS" in English and eight other Indian languages, and the "Swarna Pushpam" logo in English. Our trademark registration application for the "Swarna Pushpam" logo in Telugu language as well as our application for registration of a composite trademark for "SKS Microfinance" in Bengali language are currently pending.

Your Company also has copyright certification of our anthem song titled "Udhte Jaayen Badte Jaayen".

Acknowledgements

Your Directors express their sincere appreciation of the cooperation and assistance received from Sangam Members, shareholders, bankers, and other stakeholders during the year under review. Your Directors also wish to place on record their deep sense of appreciation for the commitment displayed from all executives, officers and field employees resulting in the successful performance of your Company during the year.

For and on behalf of the Board of Directors

Place: Hyderabad SD/- SD/-

Date: July 14, 2012 P.H. Ravikumar M.R. Rao

Non-Executive Chairman-Interim Managing Director and CEO

---

Mar 31, 2011

The Directors have pleasure in presenting the Eighth Annual Report of your Company together with the audited statement of accounts for the year ended March 31, 2011.

Initial Public Offering

During the year under review, your Company successfully completed its Initial Public Offering (IPO) of equity shares and has achieved a rare distinction of becoming the first microfinance institution in India to be listed on the Bombay Stock Exchange and the National Stock Exchange on August 16, 2010.

Your Company completed an IPO of 1,67,91,579 equity shares of Rs. 10 each for cash consisting of a fresh issue of 74,45,323 equity shares at a premium of Rs. 975 each to Qualified Institutional Buyers and Non-Institutional Buyers and at a premium of Rs. 925 each to Retail Individual Buyers as well as an offer for sale of 93,46,256 equity shares at a premium of Rs. 975 each to Qualified Institutional Buyers and Non-Institutional Buyers and at a premium of Rs. 925 each to Retail Individual Buyers. The IPO was done in accordance with the terms of your Companys prospectus dated August 5, 2010.

Utilization of IPO Proceeds

As on March 31, 2011, the amount raised through the IPO has been utilized by your Company towards the following objectives of the Issue:

Particulars Amount (Rs. in Crore)

Total fresh Issue proceeds 722.20

Utilization for onward lending (business operations) 682.80

Retained for IPO expenditure 39.40

Financial Highlights

The financial performance for the fiscal ended March 31, 2011 is summarized in the following table:

(Rs. in Crore)

Year ended March 31 2011 2010

Total revenue 1,269.54 958.51

Less: total expenditure 1,097.11 690.81

Profit Before Tax (PBT) 172.43 267.70

Profit After Tax (PAT) 111.63 173.95

Surplus brought forward 220.00 80.84

Amount available for appropriation 331.63 254.79

Appropriation has been made as under:

Transfer to statutory reserve 22.33 34.79

Surplus carried to balance sheet 309.30 220.00

EPS (Rs.) 16.10 32.82

Diluted EPS (Rs.) 15.24 27.33

- The Companys total revenue for the year ended March 31, 2011 has increased to Rs. 1,269.54 crore from Rs. 958.51 crore in the previous year registering an increase of 32.4%.

- Net profit after tax for the year decreased by 36% to Rs. 111.63 crore from Rs. 173.95 crore in the previous year.

- An amount of Rs. 22.33 crore was transferred to the Statutory Reserve Fund pursuant to Section 45-IC of the Reserve Bank of India Act, 1934.

Operational Highlights

The following table summarizes the operational performance of your Company for the year ended March 31, 2011:

Year ended March 31 2011 2010 Percentage change

Number of branches 2,379 2,029 17.25%

Number of borrowers (in Lakh) 73.07 67.80 7.77%

Number of employees 22,733 21,154 7.46%

Amount disbursed (Rs. in Crore) 7,831 7,618 2.79%

Portfolio outstanding (Rs. in Crore) 4,111 4,321 (4.85%)

During the year under review, your Companys borrower base has increased to 73.07 lakh (7.31 million) as compared to 67.80 lakh (6.78 million) for the previous year which demonstrates a growth of 7.77%, resulting in a 2.79% increase in loans disbursed to Rs. 7,831 crore from Rs. 7,618 crore.

Industry Leader

Even as it continued to grow, your Company has displayed leadership in thought and action. Your Companys leadership position in the microfinance sector enhanced SKS reputation and credibility with various stakeholders. SKS continues to finance its expansion by accessing multiple sources of capital, both debt and equity, including listed debentures, priority sector qualifying loans from banks and equity investments. Additionally, your Company could sell/ assign its portfolio loans to banks to improve its financial position and finance its growth. Your Company continued to capitalize on its strengths on various parameters like superior asset quality, pan- India distribution channels, development of an Information Technology platform, strategic business alliances and an experienced management team.

Microfinance Situation in the State of Andhra Pradesh

The industry had its share of uncertainty with the Andhra Pradesh Government promulgating the Microfinance Institutions (Regulation of Money Lending), Ordinance 2010 in October 2010. The Ordinance — which later became an Act when the State Assembly passed the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending), AP Act 1 of 2011 (AP MFI Act) — hindered microfinance operations in the State, which until then was the role model state and accounted for nearly 40% of the industry. The hindrances from the new Act resulted in reduction in total MFI disbursement in Andhra Pradesh from Rs. 5,035 crore in first half of the year to a meager Rs. 8.5 crore in the second half of the year. While the Act had an impact on SKS, your Company is geographically well-diversified with a presence in 18 other states and Andhra Pradesh contributed only 28% of the portfolio when the AP MFI Ordinance was promulgated.

The AP MFI Act, which was aimed at curbing irresponsible players in the sector, raised a regulatory conundrum for NBFC-MFIs, such as SKS, which are registered with the RBI, as it was not clear whether the NBFC-MFIs should follow the State Government Act or the RBI guidelines. The RBI had set up the Malegam Committee to look into all aspects of microfinance. The Malegam Committees Report (MCR) effectively addressed all concerns regarding microfinance as it suggested that the RBI be the sole regulator for NBFC- MFIs, re-emphasized the priority sector status for microfinance and laid out detailed guidelines on operational aspects as well. In its monetary policy statement on May 3, 2011, the RBI accepted the broad framework of regulations recommended by the MCR, ending the regulatory uncertainty.

Business Initiatives

Your Company is currently reaching over one lakh (1,00,000) villages in India with a presence in 19 states and 2,379 branches. Your Company has begun leveraging this extensive branch network and its financing ability to provide more financial services to the bottom of the pyramid. In this direction, your Company undertook initiatives like mobile handset financing, financing loans against gold collateral and lending to kirana stores (Sangam stores).

- Mobile Financing Program

India has a high potential in the mobile telephony market, but the high cost of mobile handsets is a key deterrent for rural borrowers of SKS. Considering this, your Company has launched a mobile finance program that offers its borrowers mobile phones at a relatively lower price with the option of paying in small, easy installments. Your Company has partnered with Nokia India Pvt. Ltd. to supply quality handsets to its borrowers. A loan product has been designed to facilitate finance for handset purchases. Under this program, your Company has disbursed 3.5 lakh mobile loans to its borrowers in six states of India. This initiative has instilled confidence in its borrowers and improved their business through better access to communication.

- Sangam stores

A Sangam store is a kirana store run by an SKS borrower. The objective of your Companys Sangam store lending initiative is to enable Sangam store owners to buy — from a wholesale vendor — fast-moving consumer goods and groceries which they would then resell in their retail kirana stores. This will give them access to quality products at competitive prices. It also saves the borrower time and transport costs. About 8% of the total borrower base of SKS is running kirana stores (i.e 5 lakh kirana stores). With SKS providing finance and the wholesaler facilitating delivery to kirana stores, SKS and their partner wholesaler can both enhance the volume of business done by Sangam stores and meet working capital needs of Sangam store owners.

A suitable credit product has been designed to meet this specific need. SKS partnered with one of the worlds most reputed wholesalers, Metro Cash and Carry (India) Pvt. Ltd., in Hyderabad. SKS enrolled 3,500 stores and is now planning to expand this program geographically (to Bengaluru and Kolkata) as well as to different customer segments (non-borrowers). SKS is building new relationships to extend the non-borrower program across the country. SKS has also developed a mobile based MIS system to collect and consolidate orders and track the loan portfolio. The enhanced software system will help SKS in scaling the program in multiple locations working with multiple partners. This program can act as the first step in creating distribution channels for a wide range of other non-financial products. Your Company believes that it can offer profitable products that benefit its approximately 5 lakh Sangam store owners and which have trickle-down benefits to its broader borrower base.

- Gold Loan

Currently, the gold loan market is predominantly operated by usurious pawn-brokers with players in the organized sector having limited reach in the rural markets. To bridge this gap, your Company has initiated the Gold Loan pilot project. The objective is to enable borrowers to get loans at competitive rates to increase their business, to fulfill personal needs and to address other emergencies. Your Company plans to target its current borrowers as well as new ones with the product. A pilot project has been launched in three locations in Karnataka and in two centres in Gujarat to test the product and processes.

Dividend

Your Directors have not recommended any dividend during the year as the Board is of the view that the Company should retain capital in order to maintain a healthy capital adequacy ratio and to support future growth opportunities, such as taking advantage of potential opportunities for consolidation of borrowers of other MFIs.

Management Discussion & Analysis

The Management Discussion & Analysis Report for the year under review is presented in a separate section on Page 29 in this Annual Report.

Corporate Governance

Your Company adopts corporate best practices and is committed to conducting its business in accordance with applicable laws, rules and regulations. Your Company follows the highest standards of business ethics. A report on Corporate Governance is provided on Page 35 in this Annual Report.

Resources and Liquidity

Your Company, being a Systemically Important Non-deposit Accepting NBFC, is subject to the capital adequacy requirements prescribed by the RBI. Your Company needs to maintain a minimum ratio of 15% as prescribed under the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time to time) based on total capital to risk weighted assets. Your Company maintained a Capital to Risk Asset Ratio (CRAR) of 45.4% and 28.3% respectively, as on March 31, 2011 and as on March 31, 2010, which is higher than the statutory 15% requirement for the FY 2010-11 and 12% for the FY 2009-10 respectively.

During the year, your Company has received ratings for various instruments to raise funds and a summary of the ratings is presented in the following table

Agency Item Rating

CARE Ratings Short Term Debt PR1+

CRISIL Ratings^ Short Term Debt P1+

CARE Ratings Assignment PR1+ (SO)

CRISIL Ratings Securitization P1+ (SO)

ICRA Ratings Securitization A1 (SO)

^ Rating withdrawn

Further, CARE has revised its rating assigned to the Short Term Debt Program of Rs. 500 crore of your Company from PR1+ (One plus) to PR1 (One) and the rating has been kept under Credit Watch since October 2010 following the implementation of the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010 by the State Government of Andhra Pradesh.

Your Company accessed an incremental borrowing of Rs. 2,783 crore in debt including Commercial Paper for Rs. 245 crore, term loan of Rs. 1,727 crore and Asset Assignment/ Securitization of Rs. 811 crore in the financial year 2010-11 and sanctioned limits of Rs. 5,338 crore.

Fixed Deposits

Your Company has not accepted any fixed deposits and, as such, no amount of principal or interest was outstanding in the fiscal.

Increase in Share Capital

During the year under review, 74,45,323 equity shares were issued as part of the IPO and 3,51,368 equity shares were issued under SKS ESOP (Independent Directors) 2008 and SKS ESOP 2009 Plans.

Thus, the issued, subscribed and paid-up equity share capital increased from 6,45,27,219 to 7,23,23,910 as on March 31, 2011.

RBI Guidelines

Your Company is registered with the Reserve Bank of India, as a non-deposit accepting NBFC (NBFC-ND) under Section 45-IA of the RBI Act, 1934. As per Non-Banking Finance Companies RBI Directions, 1998, the Directors hereby report that the Company did not accept any public deposits during the year and did not have any public deposits outstanding at the end of the year.

In October 2010, the Reserve Bank of India has set up a sub-committee of the Central Board of Directors of the Reserve Bank of India, headed by Mr. Y H Malegam to study the issues and concerns of the microfinance sector, including ways and means of making interest rates charged by MFIs reasonable. The committee was set up after the Andhra Pradesh Government issued an Ordinance making registration of MFIs with the State Government compulsory.

On January 19, 2011, the sub-committee made the following recommendations after studying the issues and concerns in the MFI sector:

i. Creation of a separate category of NBFCs operating in the microfinance sector to be designated as NBFC-MFIs, with an NBFC-MFI defined as a company which provides financial services to pre-dominantly low-income borrowers, with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks.

ii. The NBFC-MFI will hold not less than 90% of its total assets (other than cash and bank balances as also money market instruments) in the form of qualifying assets, with restrictions on total outstanding loan per household and household income, among other restrictions, constituting what is deemed as qualifying.

iii. There are limits of an annual family income of Rs. 50,000 and an individual ceiling on loans to a single borrower of Rs. 25,000.

iv. Not less than 75% of the loans given by the MFI should be for income-generating purposes.

v. There is a restriction on the other services to be provided by the MFI, which has to be in accordance with the type of service and the maximum percentage of total income as may be prescribed.

vi. The interest chargeable to the borrower has been recommended with an average margin cap of 10% for MFIs having a loan portfolio of Rs. 100 crore and of 12% for smaller MFIs and a cap of 24% for interest on individual loans.

vii. MFIs can levy only three charges - (a) processing fee (b) interest and (c) insurance charge.

However, based on the recommendation of the Malegam Committee Report (MCR) on the MFI sector, the RBI has notified that all MFIs, including NBFCs working as MFIs on or after April 1, 2011, would be eligible for classification for Priority Sector Loans under respective category of indirect finance, provided:

- MFI loans are eligible only for a household with an annual income not exceeding Rs. 60,000 in case of rural areas (relaxation of MCR which recommended Rs. 50,000) and Rs.1,20,000 in case of urban areas.

- The maximum interest rate charged by MFIs is 26% (relaxation of MCR which recommended 24%).

- MFI loans must not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles.

- Total indebtedness of the borrower must not exceed Rs. 50,000 at any point.

Credit Bureau for MFIs

In order to address the issue of multiple lending or over indebtedness, various microfinance institutions/ NBFCs have come together to invest in a Credit Information Bureau, High Mark Credit Information Services Private Limited ("High Mark") via Alpha Micro Finance Consultants Private Limited ("Alpha"). In order to facilitate the collective investment in High Mark, as well as undertake other collective steps for building the technology infrastructure for credit information-sharing among themselves, and to educate their staff in ensuring good customer protection principles are followed, 25 NBFC-MFIs have established Alpha as a collective entity. These NBFC-MFIs together have about 70% of the total portfolio of the microfinance loans. In Alpha, your Company has invested Rs. 20 lakh. The RBI has issued a Certificate of Registration to High Mark on November 25, 2010 and SKS has started sharing its borrowers information with the credit bureau.

Self-regulation for MFIs

Your Company endorses the view that the existence of strong and effective Self-Regulatory Organizations (SROs) will result in development of best practices in various areas in which Microfinance Institutions (MFIs) work. These best practices will evolve through self-regulation/ self-discipline and eventually complement regulatory prescriptions or Government intervention by way of legislation.

In that spirit, your Company along with 43 other Non-Banking Financial Companies (NBFC-MFIs) is a member of and is duly represented on the Board of Microfinance Institutions Network (MFIN), a self-regulatory organization of NBFC-MFIs that aims to work with regulators to promote microfinance to achieve larger financial inclusion goals.

MFIN has set forth a Code of Conduct ("Code") upholding good governance and transparency. This Code broadly focuses on fair practices with borrowers including promoting transparency in communicating interest rates (on reducing balance method) and fees to borrowers in vernacular language, fixing overall lending limits at a borrower level, data sharing, recruitment practices, whistle-blowing, enforcement and an Ombdusperson mechanism for redressing grievances. Your Company has agreed to implement and follow the MFIN Code of Conduct in addition to adhering to the Fair Practice Code as laid down by the RBI.

During the year under review, as the microfinance sector witnessed the phase of regulatory ambiguity and for other reasons, MFIN concerted its efforts towards positioning itself as the primary representative body for the microfinance sector, developing a self- regulation policy, and advocating on sectoral issues to both regulatory bodies as well as to the media.

Lastly, your Company believes that steps towards self-regulation would bring the focus back to the borrowers, improve public trust, help guarantee long-term sustainability, and supplement the regulatory regime.

Information Technology Initiatives

The Information Technology (IT) team has focused on streamlining the cost of operations while improving service to end-users. In fiscal 2011, your Company adopted new technologies and launched initiatives to identify and eliminate unnecessary costs. Collaboration, consolidation and centralization are key objectives as SKS continues to utilize technology in order to further improve the performance of the Company.

Human Resource Management

Human resources is one of the key elements of your Companys growth.

The Human Resource (HR) function has over the years fully developed its capabilities and set up a scalable recruitment and human resources management process, which enables us to attract and retain higher calibre employees.

HR has played a critical role in supporting the business goals during the various changes in the sector as well as in the Company. HR has made changes in various policies, processes and systems to strengthen the effectiveness of operations and to keep pace with a rapidly changing business scenario. In the last year, your Company has undertaken various industry first initiatives in the areas of talent adequacy, capability enhancement and growing leaders from within.

The total manpower of your Company stood at 22,733 as on March 31, 2011 as compared to 21,154 as on March 31, 2010, a growth of 7.5%.

Employee Stock Option Plans (ESOP) and Employee Share Purchase Scheme (ESPS)

Presently, stock options have been granted or shares have been issued under the following schemes:

A. SKS Microfinance Employee Share Purchase Scheme 2007 ("ESPS 2007")

B. SKS Microfinance Employee Stock Option Plan 2007 ("ESOP 2007")

C. SKS Microfinance Employees Stock Option Plan 2008 (Independent Directors) ("ESOP 2008 (ID)")

D. SKS Microfinance Employee Stock Option Plan 2008 ("ESOP 2008")

E. SKS Microfinance Employee Stock Option Plan 2009 ("ESOP 2009")

The disclosures with respect to each of the Companys above-mentioned Employee Share Purchase Scheme (ESPS) and Employee Stock Option Plans (ESOP) as required by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 are appended as Annexure - 1 and form part of this report.

Further, it is proposed to ratify all pre-IPO SKS Microfinance Employees Stock Option Schemes in the ensuing Annual General Meeting.

Particulars of Employees

Pursuant to the provisions of Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of employees are set out in Annexure - 2 to the Directors Report.

Directors

During the year under review, Mr. M R Rao was appointed Additional Director under Section 260 of the Companies Act, 1956 with effect from October 4, 2010 on the Board of the Company as the Managing Director and Chief Executive Officer in place of Mr. Suresh Gurumani. Mr. M R Rao holds his office up to the date of the ensuing Annual General Meeting. The Company has received notice together with deposit as required under Section 257 of the Companies Act, 1956, proposing his appointment as Director of the Company.

Mr. M R Raos appointment as Managing Director and Chief Executive Officer for a period of three years with effect from October 4, 2010 is proposed to be ratified in the ensuing Annual General Meeting.

Mr. Sumir Chadha, Mr. Geoffrey Tanner Woolley and Dr. Tarun Khanna retire by rotation and are eligible to offer their services for re- appointment. A brief profile of the above Directors is given in the Notice of the Eighth Annual General Meeting.

Appointment of Dr. Vikram Akula as Executive Chairman (designated as Chairman) of the Company with effect from April 1, 2011 for a period of five years, subject to review by the Board after three years, is also proposed to be ratified in the ensuing Annual General Meeting.

Based on recommendations of the Nomination Committee and the Remuneration and Compensation Committee, the Board recommends the above appointments/ re-appointments for your approval.

Further, the following changes were effected during the year:

Mr. Ashish Lakhanpal resigned with effect from October 4, 2010 from the Board of Directors of the Company in order to comply with the requirements of Clause 49 of the Listing Agreement with the stock exchanges on composition of Independent and Non- Independent Directors by the Company.

Mr. Suresh Gurumani, vide his letter dated May 27, 2011, tendered his resignation as a Director from the Board of Directors of the Company with immediate effect.

The Board placed on record their appreciation for the contribution made by them to the Company during their tenure.

Directors Responsibility Statement

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, your Directors confirm as under:

i) In the preparation of the annual accounts, the applicable accounting standards read with requirements set out under Schedule VI to the Companies Act, 1956 had been followed and there are no material departures from the same.

ii) Your Company has selected such accounting policies and applied them consistently and made judgments 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 2010-11 and of the profit of the Company for that year.

iii) Your Company has 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.

iv) Your Company has prepared the annual accounts of the Company on a ‘going concern basis.

Auditors

The Statutory Auditors of the Company, M/s. S R Batliboi & Co, Chartered Accountants, Mumbai, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office of the Auditors, if appointed. The Audit Committee and the Board of Directors recommend reappointment of M/s. S R Batliboi & Co as Statutory Auditors of the Company for the financial year 2011-12 for your approval.

Response of the Board to the Auditors Comments

In terms of the provisions of Section 217(3) of the Companies Act, 1956, the Board would like to place on record an explanation to the Auditors comments in their Audit Report dated May 6, 2011.

S. Auditors Comments No.

1. One hundred and fifty six cases of cash embezzlements by the employees of the Company aggregating Rs. 16,018,106 were reported during the year. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. We have been informed that fifty two of these employees were absconding. The outstanding balance (net of recovery) aggregating Rs. 9,634,467 has been written off.

2. Two hundred and five cases of loans given to non-existent borrowers on the basis of fictitious documentation created by the employees of the Company aggregating Rs. 45,177,531 were reported during the year. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. The outstanding loan balance (net of recovery) aggregating Rs. 35,417,295 has been written off.

3. Forty seven cases of loans taken by certain borrowers, in collusion with and under the identity of other borrowers, aggregating Rs.13,786,130, were reported during the year. The Company is pursuing the borrowers to repay the money. The outstanding loan balance (net of recovery) aggregating Rs. 6,386,267 has been written off.

S. No. Response

1. Employee fraud is an inherent risk in the business in which the Company operates, since all the transactions are cash based. The Company has recovered from employees Rs. 53,41,192 towards cash embezzled and Rs. 10,42,447 under the insurance cover. Cash embezzlement is 0.02% of disbursement during the year.

To mitigate this risk to a large extent, the management has put in place several preventive control measures as under:

- Procuring an indemnity bond from every field staff, with personal guarantee of a third person.

- Every bank transaction (deposit/ withdrawal) is to be executed by minimum of 2 staff comprising a bank signatory and a confirmed staff.

- The cash safe at every branch is controlled by two keys and the keys are held by two employees in the branch.

- Surprise visits are conducted by managerial level staff, at the time of carrying out cash/ bank transactions by field-level staff.

- Minimizing the cash balances at various branches to the lowest level possible (Rs 50,000 + next day disbursement).

There are also several detective controls like

- Staff wise daily reconciliations of cash balances by the managerial level staff at each branch.

- Frequent surprise visits by accountants and the internal auditors, which covers verification of physical cash and bank balances.

The following is the action taken in such cases

- Terminating services of all the employees involved in cash embezzlement and taking legal action against them.

- Recovering money from such employees.

- Also, the Company has taken fidelity insurance to minimize the losses from cash embezzlement.

2. The Company has recovered an amount of Rs. 65,11,492 against these cases and Rs. 32,48,744 under insurance cover. These cases are 0.06% of disbursement during the year.

The following are the various preventive control measures included in the loan process to mitigate the risk of loans to non-existent borrowers/ fictitious borrowers:

- All the loans disbursed have a maker/ checker control, wherein all the loans processed by Sangam managers are approved by branch managers/ assistant branch managers.

- The Sangam managers are not deployed in their home towns, so as to prevent collusion with local people. - Employee rotation takes place every six months, wherein the Sangam managers handle different centres at the end of six months.

- Transfer of Sangam manager/ branch manager to different branches in a span of 9 to 12 months.

- Developed internal processes to restrict the loan disbursements to inactive members.

Detective controls

- The branch managerial staff performs a loan utilization check for every loan disbursed.

- The internal audit staff, on a test basis, verifies the loan documents and performs a loan utilization check for the loans disbursed.

Actions taken

- Terminating services of all the employees involved in fake loan transactions and taking legal action against them.

- Recovering money from such employees.

3. These frauds are largely concentrated in a specific region and the corrective measures taken by the Company have yielded positive results. The Company has recovered an amount of Rs. 73,99,863 against these cases which range from 17% to 100% on individual case basis. Average recovery against these cases is above 50%. These cases are 0.02% of disbursement during the year.

Preventive controls

- The branch managerial staff performs thorough screening of the loan applications and the groups by physically visiting the centre.

Detective controls

- The branch managerial staff performs a loan utilization check for every loan disbursed.

- The internal audit staff, on a test basis, verifies the loan documents and performs loan utilization checks for the loans disbursed.

Actions taken

- Recovering money from such borrowers.

- Drop out such borrowers from the group and ensure that no fresh loans are given to such borrowers in future.

Also, since the business is carried out on a joint liability model, the Company would be indemnified from such fraudulent cases.

The net impact of frauds comes to around 0.070% of the total amount disbursed during the year. The Company is working towards reducing this percentage by making process improvements, covering the loss by having an adequate insurance policy and by increasing opportunities for direct contact with our borrowers. During the year, the Company has recovered an amount of Rs. 0.96 crore against fraud amount written off in previous years.

Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo

The particulars required to be furnished under sub section (1) (e) of Section 217 of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are set out in the Annexure - 3 to this report.

Acknowledgements

Your Directors express their sincere appreciation of the co-operation and assistance received from Sangam members, shareholders, bankers, and other stakeholders during the year under review. Your Directors also wish to place on record their deep sense of appreciation for the commitment displayed by all executives, officers and field staff resulting in the successful performance of the Company during the year.

For and on behalf of the Board of Directors

SD/- SD/- Vikram Akula M R Rao Executive Chairman Managing Director

Place: Hyderabad Date : June 2, 2011

---

Mar 31, 2010

The Directors have pleasure in presenting the Seventh Annual Report of the Company together with the audited statement of accounts for the year ended 31st March, 2010.

Your Company in 2008 has become the largest microfinance institution in India in terms of total value of loans outstanding, number of borrowers and number of branches. This status received an endorsement in the October 2009 CRISIL report titled India Top 50 Microfinance Institutions. Even as it continued to grow, your Company has displayed leadership in thought and action. The Companys market leadership position in the microfinance sector enhances its reputation and credibility with various stakeholders resulting in numerous benefits. Your Company continued to finance its expan- sion by accessing multiple sources of capital, both debt and equity, including listed debentures, priority sector qualifying loans from banks, and equity investments from venture capital and private equity investors, institutions and others. Additionally, your Company could sell/assign its portfolio loans to banks to finance its growth. Your Company continued to capitalize on its strengths on various parameters like superior asset quality, pan India distribution channels, development of an Information Technology platform, strategic business alliances and experienced management team.

Financial Highlights

The financial performance for fiscal ended 31st March, 2010 is summarized in the following table:

(Rs. in Crores)

Year ended 31st March 2010 2009

Total Revenue 958.93 554.00

Less: Total Expenditure 691.23 429.94

Profit before tax 267.70 124.06

Profit after tax 173.95 80.22

Surplus brought forward 80.84 16.66

Amount available for appropriation 254.79 96.88

Appropriation have been made as under:

Transfer to Statutory Reserve 34.79 16.04

Surplus carried to Balance Sheet 220.00 80.84

- The Companys gross income for the year ended 31st March, 2010 has increased to Rs. 958.93 crore from Rs. 554.00 crore in the previous year registering a growth of 73.1 percent.

- Net profit after tax for the year increased by 116.8 percent to Rs. 173.95 crore from Rs. 80.22 crore in the previous year.

- An amount of Rs. 34.79 crore was transferred to Statutory Reserve Fund pursuant to section 45-IC of the Reserve Bank of India Act, 1934.

Operational Highlights

The following table summarizes the operational performance of the Company for the year ended 31st March, 2010 :

Year ended 31st March 2010 2009 % Change

Number of Branches 2,029 1,353 50.0

Number of Sangam members (in lakhs) 67.80 39.53 71.5

Number of Employees 21,154 12,814 65.1

Amount Disbursed (in Rs. Crore) 7,618.25 4,484.98 69.9

Portfolio Outstanding (in Rs. Crore)* 4,320.69 2,456.41 75.9

*Includes Assigned Portfolio

During the year under review, your Companys Sangam member base has increased to 67.8 lakh (6.78 million) as compared to 39.53 lakh (3.95 million) for the previous year which demonstrates a robust growth of 71.5 percent, resulting in a 69.9 percent increase in loans disbursed to Rs. 7,618.25 crore from Rs. 4,484.98 crore. Your Company was also able to extend its services to many new members by adding 676 new branches.

New Business Initiatives

In order to increase customer retention and diversify the revenue base, your Company is piloting innovative products that will increase the productivity of members like:

- EnteringintoastrategicrelationshipwithNokia

India Private Limited (Nokia) and Bharti Airtel Limited (Airtel) under which a loanis provided to members for the purchase of a Nokia mobile phone and availing services from Airtel mobile service provider. The members are assisted about the mechanism of the loan, its features, loan documentation and collection of installment towards repayment of the loan.

- A program with METRO Cash & Carry India Private Limited (METRO) and Future Agrovet Limited (Future Agrovet) to provide working capital finance to the members operating local retail shops called kirana stores that purchase supplies from METRO and Future Agrovet ton a wholesale basis.

- A project in housing in association with Housing Development Financial Corporation Limited (HDFC). Members are provided loans for construction, improvement and extension of their homes. The results have been encouraging and the number of branches covered under the project are being increased and extended to newer states. HDFC provides technology and financial support for the project.

Dividend

Your Directors have not recommended any dividend during the year as the Board is of the view that the Company should take advantage of the rapid growth potential in the microfinance sector by expanding and strengthening the operations funded by internal accruals to the extent possible.

Change in location of Registered Office

During the year under review the Registered Office of the Company was shifted from Maruthi Mansion, Municipality No. 2-3-578/1, Kachi Colony, Nallagutta, Minister Road, Secunderabad - 500 003, Andhra Pradesh, India to Ashoka Raghupathi Chambers, D No. 1-10-60 to 62, Opp: Shoppers Stop, Begumpet, Hyderabad - 500 016, Andhra Pradesh, India with effect from 15th January, 2010.

Managements Discussion and Analysis

The Managements Discussion and Analysis Report for the year under review is presented in a separate section of this Annual report.

Corporate Governance

Your Company adopts best corporate practices and is committed to conduct its business in accordance with applicable laws, rules and regulations and the highest standards of business ethics and ethical conduct. A report on Corporate Governance is provided separately in the Annual Report.

Resources and Liquidity

Your Company being a Systemically Important Non-Deposit Accepting NBFC is subject to the capital adequacy requirements prescribed by the Reserve Bank of India. Your Company was required to maintain a minimum Capital to Risk Asset ratio(CRAR) of 12% as prescribed under the Non- Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time to time) based on total capital to risk weighted assets. Your Company maintained a CRAR ratio higher than the RBI prescribed ratio which is 28.55% and 39.04 % as on 31st March, 2010 and 31st March, 2009 respectively.

During the year, on review of the Companys financial performance for Fiscal 2009, Credit Analysis & Research Limited has revised the rating from “‘PR2+ [Two Plus] ” to “ ‘PR1+ [One Plus] ” for “Credit Rating of Non - Convertible Debentures of Rs. 25 crore”. Further, the Company has re- ceived ratings for various instruments to raise funds and a summary of the ratings is presented in the following table:

Agency Item Rating

Credit Analysis & Research Limited Commercial Paper PR1+

Credit Analysis & Research Limited Non-Convertible Debentures PR1+

Credit Analysis & Research Limited Assignee Payouts PR1+ (SO)

CRISIL Limited Assignee Payouts P1+ (SO)

ICRA Limited Assignee Payouts A1+ (SO)

The Company accessed an incremental borrowing of Rs. 5,131.94 crore in debt (includes Commercial Paper of Rs. 190 crore and rated short-term Non Convertible Debenture of Rs. 175 crore) from 48 credit grantors in the financial year 2009-10.

The Non Convertible Debenture issued to Yes Bank Limited during the year for Rs. 50 crore is listed on Bombay Stock Exchange. The Listing fee for the year 2010-11 has been paid by the Company.

Increase in Share Capital

During the year under review, your Company issued 12,955,948 Equity Shares of Rs. 10/- each, which included 10,405,625 Equity Shares of Rs. 10/- each issued on conversion of 10,405,625 Compulsorily Convertible Preference Shares (CCPS) of Rs. 10/- each in the ratio of 1:1. Further 3,863,415 Equity Shares of Rs. 10/- each (paid-up Rs. 0.50 per Equity Share) were made fully paid-up. Accordingly, the issued, subscribed and paid-up equity share capital increased to Rs. 64.53 crore as at 31st March, 2010 as compared to previous year share capital of Rs. 57.06 crore.

The above issue of shares include strategic investment of Rs. 499,999,800/- by Bajaj Allianz Life Insurance Company Limited, a leading insurer offer- ing life insurance products. This was the first-ever investment by an insurance company in any Indian Microfinance Institution (MFI). Another strategic investment of Rs. 281,331,000/- was made by Catamaran Fund 1-A and Catamaran Fund 1-B (represented by their Trustee, Catamaran Management Services Fund Private Limited). The above strategic capital infusions give your Company greater stability and credibility, as well as a stronger capital base to extend its reach to serve more poor customers.

During the year under review, your Company proposed to increase the Authorized Share Capital of the Company to accommodate the proposed issue of Bonus Shares by passing necessary Special Resolutions. However, the said resolutions were withdrawn with the consent of the members present at the 6th Annual General Meeting dated 30th September 2009 and accordingly there was no Bonus Issue/increase in Authorized Share Capital.

Initial Public Offer (IPO) of the Company

In order to augment the capital base to meet the future capital requirements arising out of growth in our business and achieve the benefits of listing on the stock exchange interalia, your Company proposes to raise the capital from the primary market by way of its initial public offering (IPO/Issue) and has filed its Draft Red Herring Prospectus (DRHP) with the Securities & Exchange Board of India (SEBI)

The Issue comprises 16,791,579 Equity Shares of Rs. 10/- each (“Equity Shares”) for cash, at a price to be decided through a 100% book building process (“Issue”), consisting of a fresh issue of 7,445,323 Equity Shares by the Company and an offer for sale of 9,346,256 Equity Shares by certain selling shareholders. The Equity Shares to be offered through IPO are proposed to be listed on the Bombay Stock Exchange Limited and the National Stock Exchange of India Limited. The Issue will constitute 21.6% of the fully diluted post issue paid-up capital of the Company.

The Book Running Lead Managers (BRLMs) to the Issue are Kotak Mahindra Capital Company Limited, Citigroup Global Markets India Private Limited and Credit Suisse Securities (India) Private Limited.

RBI Guidelines

Your Company is registered with Reserve Bank of India (RBI), as a non-deposit accepting NBFC (“NBFC-ND”) under Section 45-IA of the RBI Act, 1934. As per Non-Banking Finance Companies RBI Directions, 1998, the Directors hereby report that the Company did not accept any public deposits during the year and did not have any public deposits outstanding at the end of the year.

Further, in the month of March, 2010 the Department of Non Banking Supervision (DNBS) - RBI has conducted annual onsite inspection at the Reg- istered Office of the Company for scrutiny of books of account/records. The Company has provided all the relevant information as requested during the inspection to the officials of DNBS - RBI.

Credit Bureau for MFIs

In order to address the issue of multiple lending or over indebtedness, various Micro Finance Institutions/NBFCs have come together to invest in the Credit Information Bureau namely High Mark Credit Information Services Private Limited (“High Mark”) via Alpha Microfinance Consultants Private Limited (“Alpha”). In order to facilitate the collective investment in High Mark, as well as undertake other collective steps for building the technology infrastructure for credit information sharing among themselves, and to educate their staff in ensuring good customer protection principles are fol- lowed, Alpha has been established as a collective entity by 32 NBFC MFIs which together have about 70% of the total portfolio of the microfinance loans. Your Company invested Rs. 20 lakhs during the year in Alpha and Mr. Suresh Gurumani represents your Company on the Board of Alpha.

Self regulations for MFIs

Microfinance Institutions Network (MFIN), a self-regulatory organization of NBFC - Microfinance Institutions (NBFC-MFIs) that aims to work with regulators to promote microfinance to achieve larger financial inclusion goals. Along with the other NBFC-MFIs, your Company also has a representation in MFIN and Mr. Suresh Gurumani represents your Company on the Board of MFIN. MFIN has also defined a Code of Conduct which focuses on fair practices with borrowers including promoting transparency, fixing overall lending limits at the client level, data sharing, recruitment practices, whistle blowing and enforcement mechanisms. Members of MFIN have committed to communicate interest rates on reducing balance method and other charges clearly to borrowers while following fair recovery mechanisms. Your Company has subscribed to implement and follow the above MFIN Code of Conduct.

Information Technology Initiatives

As a leader and innovator in the use of technology in the microfinance industry, with the assistance of carefully selected technology partners, your Company has developed its technology platform into a business tool for achieving and maintaining high levels of customer service, enhancing opera- tional efficiency and creating competitive advantages for the organization.

Human Resource Management

Human resources are the key fuel to your Companys incredible growth and key element in attracting and retaining talent.

The Human Resource function has over the year fully developed its capabilities and set up a scalable recruitment and human resources management process, which enables us to attract and retain higher caliber employees and contribute to the Company in its role as a Strategic Business Partner.

The total manpower strength of your Company stood at 21,154 as on March 31, 2010 as compared to 12,814 as on March 31, 2009, a growth of 65.1%.

Employee Stock Option Plan (ESOP) and Employee Share Purchase Scheme (ESPS)

Presently, stock options have been granted or shares have been issued under the following schemes :

A. SKS Microfinance Employee Share Purchase Scheme 2007 (ESPS 2007)

B. SKS Microfinance Employee Stock Option Plan 2007 (ESOP 2007)

C. SKS Microfinance Employees Stock Option Plan 2008 (Independent Directors) (ESOP 2008 (ID))

D. SKS Microfinance Employee Stock Option Plan 2008 (ESOP 2008)

E. SKS Microfinance Employee Stock Option Plan 2009 (ESOP 2009)

The disclosures with respect to each of the above mentioned Companys Employee Share Purchase Scheme (ESPS) and Employee Stock Option Plan (ESOP) as required by Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 are appended as Annexure - 1 and form part of this report.

Particulars of Employees

Pursuant to the provisions of Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of employees are set out in Annexure - 2 to the Directors Report.

Directors

During the year under review, Mr. Gurcharan Das has resigned from the Board with effect from 5th January, 2010. The Directors place on record their appreciation of the services rendered by him during his tenure as Director on the Board of the Company.

On satisfying the “fit and proper” criteria as stipulated by RBI vide its Master Circular on Corporate Governance, Mr. Pramod Bhasin was appointed as Additional Director under Section 260 of the Companies Act, 1956 w.e.f. 4th November, 2009 on the Board of the Company as an “Independent Director”. Mr. Bhasin holds this office up to the date of the ensuing Annual General Meeting. The Company has received notice together with deposit as required under Section 257 of the Companies Act, 1956, proposing his appointment as Director of the Company liable to retire by rotation.

Mr. P. H. Ravi Kumar, Dr. Vikram Akula and Mr. Paresh Patel retire by rotation and being eligible offer themselves for re-appointment. A brief profile of the above Directors is given in the Notice of the Seventh Annual General Meeting.

The Board recommends the above appointments/re-appointments for your approval.

Directors Responsibility Statement

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, your Directors confirm as under:

i) In the preparation of the annual accounts, the applicable accounting standards read with requirements set out under Schedule VI to the

Companies Act, 1956 have been followed and there are no material departures from the same.

ii) Your Company has selected such accounting policies and applied them consistently and made judgments 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 2009-10 and of the profit of the Company for that year.

iii) Your Company has 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.

iv) Your Company has prepared the annual accounts of the Company on a going concern basis.

Auditors

The Statutory Auditors of the Company, M/s. S.R.Batliboi & Co, Chartered Accountants, Mumbai, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office of the Auditors, if appointed. The Audit committee and the Board of Directors recom- mend reappointment of M/s. S. R. Batliboi & Co as Statutory Auditors of the Company for the financial year 2010-11 for your approval.

Response of the Board to the Auditors Comments

In terms of the provisions of Section 217(3) of the Companies Act, 1956, the Board would like to place on record an explanation to the Auditors comments in their Audit Report dated 4th May 2010.

Sl. No. Auditors Comments Respon

(i) Eighty two cases of cash embezzle ments by There is an inherent risk involved in our operations as all the transactions at the the employees of the Company aggregating Rs. field are in cash. The Company has taken legal or remedial action in almost all 15,024,158 were reported during the year. The services of the cases of embezzlement of cash and issue of fake loans by employees. The all such employees involved have been terminated and the Company has recovered an amount of Rs. 2,226,304 out of cash embezzled

Company is in the process of taking legal action. We have from the employees and an amount of Rs. 4,134,552 from the Insurance been informed that thirty seven of these employees were Company, as the company has the adequate Insurance coverage in place. absconding. The outstanding balance (net of recovery) aggregating to Rs. 8,663,302 has been written off;

(ii) Sixty one cases of loans given to non-existent borrowers To mitigate this risk the com pany has formed the policy which is as follows: on the basis of fictitious documentation created by the employees of the Company aggre gating to Rs.13,645,345 a. Not to deploy the Sangam Manager in their Home Town were reported during the year. The services of all such employees involved have been terminated and b. Rotate the Centres handled by Sangam Managers in every six months

the Company is in the process of taking legal action. The outstanding loan balance (net of recovery) c. Transfer Sangam Manager/ Branch Manager in a span of 9 to 12 months. aggregating Rs. 11,029,667 has been written off.

In addition to the above stringent monitoring sys tems at all levels have been implemented and checked/verified by Risk/ Audit Team on a monthly basis. Going forward at Head Office level we are implementing automated drop outs of dor mant members month on month to mitigate the risk of fake loans.

(iii) Thirty one cases of loans taken by certain borrowers, While the system of Joint Liability Groups in the Centre and changing in collusion with and under the identity of other loan Centre Leader every one year persists, intentional and fraudulent members, aggregating to Rs. 6,025,000, were reported Centre Leaders have been identified and we have initiated legal during the year. The Company is pursuing the members proceedings with the help of Group Leaders and respective members. to repay the money. The outstanding loan balance (net of recovery) aggregating Rs. 2,359,930 has been written The net impact of frauds comes to around 0.029% of the total amount off disbursed during the year. The company is working towards bringing down this percentage to the least possible by making process improvements, covering the loss by having adequate Insurance Policy and by increasing the number of opportunities for direct contact with our members.

Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo

The particulars as prescribed under sub section (1) (e) of Section 217 of the Companies Act, 1956, read with the Companies (Disclosure of Particu- lars in the Report of Board of Directors) Rules, 1988, are set out in the Annexure - 3 to this report.

Acknowledgements

Your Directors express their sincere appreciation of the co-operation and assistance received from Reserve Bank of India, Sangam Members, Shareholders, Bankers, and other stakeholders during the year under review. Your directors also wish to place on record their deep sense of appre- ciation for the commitment displayed from all executives, officers and field staff resulting in the successful performance of the Company during the year.

For and on behalf of the Board of Directors

Place: Hyderabad Sd/- Sd/-

Date: 4th May, 2010 Vikram Akula Suresh Gurumani

Chairman Managing Director

---

Mar 31, 2009

Vikram Akula was named by TIME Magazine as one of the "People Who Shape Our World" in 2006, the annual list of the worlds 100 most influential people. A former management consultant with McKinsey & Company, he has over a decade of work and research experience in microfinance. He was a Fulbright Scholar in India, during which he coordinated an action-research project on providing micro-credit to farmers. He was also researcher with the Worldwatch Institute, where he wrote articles focused on poverty and development, and has worked as a community organizer with the Deccan Development Society in India. He holds a B.A. from Tufts, an M.A. from Yale, and has a Ph.D. from the University of Chicago. His Ph.D. dissertation focused on the impact of microfinance. He has received several awards for his work with SKS, including the Echoing Green Public Service Entrepreneur Fellowship, Ernst & Youngs Entrepreneur of the Year Award in the Startup category (2006), and the Social Entrepreneur of the Year Award (2006) from the Schwab and Khemka Foundations. Vikram has also been profiled in numerous publications, including the front page of the Wall Street Journal.

Suresh Gurumani is a banking veteran with 22 years of valuable experience. He has a keen understanding of pan- India consumer market, emerging opportunities and profitability models. At Barclays, he launched retail banking in less than a years time. Barclays retail banking achieved leadership position in personal and business loans, mobile banking for mass segment and NRI services. He was also instrumental in launching Barclays Finance, an NBFC with 120 branches across 40 cities to create alternate distribution channels. Suresh has also been associated with Standard Chartered for 12 years. He was the General Manager, Consumer Finance and SME banking and launched SME Banking which delivered significant revenues of the consumer bank. He was also actively involved in the merger with Grindlays Bank. One of the major initiatives undertaken by Suresh at Standard Chartered was the launch of Business Installment Loans which currently accounts for significant revenue share of SME business. Suresh also set up the Consumer Finance business at Standard Chartered. The key challenge in this role was to establish the market opportunity and identify the right business model, technology, Risk and operational model for the business. He was also part of the India Consumer Banking team which was involved in the strategy development for the Bank and identifying opportunities in the market place.

Gurcharan Das is an author and public intellectual. He is the author of the international bestseller, India Unbound, which has been published in many countries and languages and filmed by the BBC. He has published numerous books and plays and writes a regular column on Sundays for the Times of India and Dainik Bhaskar, as well as occasional guest columns for the Wall Street Journal, Financial Times and Time Magazine. Gurcharan was CEO of Procter & Gamble India and Vice President, Procter & Gamble Far East from 1985 to 1992 and later Vice President and Managing Director, Procter & Gamble Worldwide. Prior to P&G, he was Chairman and Managing Director of Richardson Hindustan Limited from 1981 to 1985, the Company where he started as a trainee. He currently consults with a number of companies on global corporate strategy and is associated with a private equity fund. Gurcharan Das graduated with honors from Harvard University in Philosophy and Politics. He later attended Harvard Business School (AMP). He is an independent Director on the SKS board.

Ravikumar has 32 years of banking experience, spanning retail, corporate and treasury banking areas in India and abroad. Prior to his current assignment, Ravikumar was Senior General Manager & Head of Emerging Corporates (SMEs) & Agri Business at ICICI Limited. His responsibilities included business strategy and risk management and he helped this unit become an industry leader in a short span of time. As Head of Agri Business, his role included similar responsibilities. In its first full year of functioning, the bank emerged as the second largest lender to the agri business sector in India, with disbursements of over Rs. 20 billion. Ravikumar was awarded the Gold Medal for Excellence in Banking by French Chamber of Commerce, Industry and Economy. He is a regular guest speaker on issues in banking at Bankers Training College, National Institute of Bank Management and other major Institutes of Management. He is an independent Director on the SKS Board.

Sumir Chadha is the Managing Director with Sequoia Capital India. Sequoia Capital India was formed by merging Sequoia Capital and WestBridge Capital Partners, Indias leading venture capital fund, which Sumir co-founded in 2000. Sumir has been investing in the Indian venture capital industry for the past ten years in several industries including offshore services, consumer internet and financial services. Prior to co-founding WestBridge, Sumir was a member of the Principal Investment Area at Goldman Sachs & Co., where he led a number of successful software and services investments. Prior to that, Sumir worked at McKinsey & Co. in New York and New Delhi. Sumir received an MBA with Distinction from Harvard Business School and a BSE in Computer Science from Princeton University. Sumir is the co-founder and Chairman of the US-India Venture Capital Association (US-IVCA) and also a Charter Member of The Indus Entrepreneurs (TiE).

Geoff Woolley is founding partner of Dominion Ventures, Inc., which he founded in 1985, Chairman of European Venture Partners and Chairman of MACC Private Equity. For over 25 years, Geoff has been involved in financing more than 300 emerging growth companies, including Ceina, Coinstar, Hotmail and Human Genome Science while managing more than USD 1.5 billion in cumulative assets. His non-profit experience includes being the founding chairman of the NAMES Project Foundation, (the AIDS Memorial Quilt) and working with foundations to empower the less fortunate. He founded and chairs the University Venture Fund at the University of Utah, the nations largest and most successful student led venture fund. Geoff holds a B.S. in Business Management from Brigham Young University and an M.B.A from the University of Utah. Geoff represents Unitus on the SKS Board.

Chandrashekaran is a veteran in the banking industry with an extensive stint at the apex banking institution SIDBI. He has extensive exposure to understanding the needs and potential of the under-developed regions of the country, creating not only income generating avenues for the poor but also rural employment and overall rural economic growth, by virtue of his work at SIDBI. He retired recently as head of credit at SIDBI and represents SIDBI on the SKS Board.

Tarun Khanna, Jorge Paulo Lemann Professor at Harvard Business School, has been a member of the faculty since 1993, where he studies, and works with, multinational and indigenous companies and investors in emerging markets worldwide. He has served as course head of the required Strategy course in the Harvard MBA program, and chaired the executive education program on Strategy, Leadership & Governance. Currently, he teaches in Harvards comprehensive general management executive education programs. He earned a Bachelors of Science in Engineering degree from Princeton University in 1988, summa cum laude, Phi Beta Kappa, and a Ph.D. in Business Economics from Harvard University in 1993. A forthcoming book, Billions of Entrepreneurs: How China and India are Reshaping their Futures and Yours, will be published by Harvard Business School Press (Penguin in South Asia) in 2008. In 2007, he was nominated to be a Young Global Leader (under 40) by the World Economic Forum.

Paresh Patel is the CEO of Sandstone Capital, an India-focused hedge fund. Sandstone is a value-oriented investment partnership focused on long-term opportunities in India, with a preference for deep value, special situations, midcaps and complex opportunities. Sandstone Capital has an office in Boston. Prior to Sandstone Capital LLC, Paresh was the Managing Director of Sparta Group, the private investment office of Gururaj Deshpande, founder of Sycamore Networks. At Sparta, Paresh invested with Desh in early-stage ventures in the US and India - including A123 Systems, Indian Lotus, Relicore and Tejas Networks. Paresh is a graduate of Harvard Business School and Boston College.

Ashish Lakhanpal is the Founder and Managing Director of Kismet Capital, LLC, a private equity investment firm focused on growth and special situation opportunities in India and ASEAN countries. Since its founding in 2004, Kismet and its affiliates have invested over USD100 m across industries including real estate, energy, financial services, hospitality, and energy services. Prior to Kismets founding Hashish was the Managing Director of Think Capital, LLC, a New York based Family Office with diverse interests in areas such as contract manufacturing, energy, real estate, software, and IT enabled services. Prior to Think, Ashish has experience at Goldman Sachs & Co. as well as McKinsey & Co. Ashish received an MBA from Harvard Business School and a Bachelor of Arts, Summa Cum Laude, from Georgetown University.

Dear Members,

Your Directors have pleasure in presenting the Sixth Annual Report of the Company together with the audited statement of accounts for the year ended 31st March, 2009.

The year was significant on quite a few counts for your Company. SKS Microfinance became the largest microfinance institution in the country. Your Company was also listed among the Top 5 Emerging companies to watch out for in the world by Business Week. By announcing a fresh equity round - that too the largest in the microfinance sector - right in the middle of the global financial crisis, the Company firmly helped establish credibility for the sector. Even as it continued to grow during the year, the Company has displayed leadership in thought and action. The commercial model of microfinance envisioned by the Company is fast gaining credibility among investors and the communities it works with.

Financial Highlights

The financial performance for fiscal ended 31st March, 2009 is summarized in the following table:

(Rs. in crores)

Year ended 31st March 2009 2008

Gross Income 554.00 170.00

Less: Expenditure 429.94 141.06

Profit Before Tax 124.06 28.94

Profit After Tax 80.22 16.64

Surplus brought forward 16.65 3.31

Amount available for appropriation 96.87 19.95 Appropriation have been made as under:

Transfer to Statutory Reserve 16.04 3.33

Surplus carried to Balance Sheet 80.83 16.62

- The Companys gross income for the year ended 31st March, 2009 has increased to Rs. 554 crore from Rs. 170 crore in the previous year registering a growth of 226 per cent. - Net profit after tax for the year increased by over 382per cent to Rs. 80.22 crore from Rs. 16.64 crore in the previous year .

- An amount of Rs. 16.04 crore was transferred to Statutory Reserve Fund pursuant to section 45-IC of the Reserve Bank of India Act, 1934.

Operational Highlights

The following table summarizes the operational performance of the Company for the year ended 31st March, 2009:

Year ended 31st March 2009 2008 Percent Change

Number of Branches 1,354 771 76

No. of Sangam members (in lakhs) 39.53 18.79 110

Number of Employees 12,814 6,425 99

Number of loans disbursed (in lakhs) 46.99 20.50 129

Amount Disbursed (Amount in crores) 4,398.83 1,678.90 162

Portfolio Outstanding (Amount in crores) 2,456.53 1,050.60 134

In the year under review, the Companys Sangam member base was at 39.53 lakh (3.95 million) as on 31st March, 2009 up from 18.79 lakh (1.87 million) Sangam members on 31st March, 2008 a robust growth of 110 per cent, which resulted in a 162 per cent increase in loans disbursed to Rs. 4,398.83 crore from Rs. 1,678.90 crore during the previous year ended 31st March, 2008. Your Company was also able to extend services to many new members by adding 583 new branches.

Dividend

Your Directors have not recommended for any dividend as the Board is of the view that the Company is growing at a rapid pace and strong net worth will act as a catalyst for growth.

Capitalization of Reserves/Issue of Bonus Shares

Your Directors recommend, subject to the approval of the shareholders in the forthcoming Annual General Meeting, issue of Bonus Shares in the proportion of 1 (One) Equity Share of Rs. 10/- (Rupees Ten only) fully paid-up for every 1 (One) Equity Share of Rs. 10/- (Rupees Ten only) fully paid-up held by the shareholders as on the Record date. The Company will separately announce the record date in due course.

Conversion to Public Company

Your Company has become a Public Limited Company pursuant to the special resolution passed by the shareholders at the extra-ordinary general meeting of the Company held on 2nd May, 2009 and a fresh Certificate of Incorporation, dated 20th May, 2009 in the name of "SKS Microfinance Limited" has been obtained from the Registrar of Companies, Andhra Pradesh, Hyderabad in this regard. Fresh Certificate of Registration in the name of ‘SKS Microfinance Limited has also been obtained from Reserve Bank of India, Regional office, Hyderabad on 3rd June, 2009.

Liaison/Representative Office

During the year under reference, your Directors have proposed the opening of a Liaison/Representative Office in Palatine, Illinois, United States of America for creating awareness about the Company and microfinance in general for alleviation of poverty at various US and International markets. Your Company has obtained permission from the Reserve Bank of India to open a Liaison/Representative Office on 13th May, 2009.

Management Discussion and Analysis

The Management Discussion and Analysis Report for the year under review is presented in a separate section of this Annual report.

Capital Infusion

Your Company has raised Rs. 366 crore (USD 75 million), the largest private equity investment in any microfinance institution till date in India. The fact that this investment has come during the global economic meltdown is proof of the confidence that investors have in the Company and

more importantly of the resilience and entrepreneurial abilities of the poor not only to survive in periods of economic crisis but actually to prosper because the poor are largely de-coupled from global trends.

Your Company issued 3,051,875 equity shares and 9,155,625 compulsorily convertible preference shares under fourth round capital infusion. The investment was led by Sandstone Investment Partners I with total investment of USD 51.25 million along with existing investors, KISMET SKS II (an affiliate of Kismet Capital)and ICP Holding I (an affiliate of Silicon Valley Bank), who invested USD 21.75 million and USD 2.00 million respectively. Also, the Company has issued some shares/options to its employees as mentioned under "Employee Share Purchase Scheme and Employee Stock Option Plan" below.

Your Company further received strategic domestic investment of Rs. 50 crore from Bajaj Allianz Life Insurance Company subscribing to 416,666 equity shares and 1,250,000 Compulsorily Convertible Preference Shares of the Company.

Resources and Liquidity

Your Company being a Systemically Important Non-Deposit Accepting NBFC is subject to the capital adequacy requirements prescribed by the Reserve Bank of India. We need to maintain a minimum ratio of 10 per cent as prescribed under the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time to time) based on total capital to risk weighted assets. Your Company maintains capital adequacy higher than the statutorily prescribed Capital Adequacy Ratio (CAR). Our CAR as on 31st March, 2009 and as on 31st March, 2008 was 39.04 per cent and 24.77 per cent respectively.

During the year, the Company has received ratings for various instruments to raise funds and a summary of the ratings is presented in the following table:

Agency Commercial Paper Non Convertible Debenture (Short term) Pool Rating Organization Rating

CRISIL NA P2+ P1+(so) mfR2

CARE PR 1 PR2+* PR1+(so) NA

* Subsequently upgraded to PR1+ (Highest Safety Rating)

- The Company accessed an incremental borrowing of Rs. 3,762 crore in debt (including commercial paper and rated short-term Non Convertible Debenture) from 39 credit grantors in the financial year 2008-09;

- Accessed Rs. 25 crore during the year under review by issue of Commercial Paper, a first of its kind in the history of Microfinance in the world;

- It became the first MFI in India to issue rated short-term Non Convertible Debentures worth Rs. 25 crore;

- It became the first MFI in India to issue Non Convertible Debentures for Rs. 75 Crore which are listed with BSE. Our credit rating, risk containment measures and position in MFI Sector help us to access capital on relatively favorable terms.

RBI Guidelines

Your Company is registered with Reserve Bank of India (RBI), as a non-deposit accepting NBFC ("NBFC-ND") under Section 45-IA of the RBI Act, 1934. As per Non-Banking Finance Companies RBI Directions, 1998, the Directors hereby report that the Company did not accept any public deposits during the year and did not have any public deposits outstanding at the end of the year.

Pursuant to RBI guidelines on regulation of interest charged by NBFCs, your Board of Directors have readopted an interest rate model to determine the rate of interest to be charged for loans to provide consistency and transparency.

Further, in the month of May 2009 the Department of Non Banking Supervision (DNBS) - RBI has conducted annual onsite inspection at the Registered Office of the Company for scrutiny of books of account/records with reference to the financial position of the Company as on 31st March,

2009. The Company has provided all the relevant information as requested during the inspection to the satisfaction of the officials of DNBS - RBI.

Directors

During the year under reference, Mr. V. Sitaram Rao and Mr. Shekhar Iyer have resigned from the Board w.e.f. 1st November, 2008 and 10th November, 2008 respectively. Mauritius Unitus Corporation has withdrawn the nomination of Mr. Geoff Woolley on the Board of the Company as their investor nominee Director w.e.f. 6th May, 2009.

On satisfying the "fit and proper" criteria as stipulated by RBI vide its Master Circular on Corporate Governance, Mr. Paresh Patel representing Sandstone Investment Partners I and Mr. Ashish Lakhanpal representing SKS Capital and Kismet SKS II have been appointed as Additional Directors subsequent to the resignation of Mr. Shekhar Iyer and Mr. V. Sitaram Rao from the Board in November, 2008. The Directors place on record their appreciation of the services rendered by Mr. Shekhar Iyer and Mr. V. Sitaram Rao during their respective tenure as Directors on the Board of the Company. Mr. Suresh Gurumani was appointed as Additional Director, Managing Director and CEO of the Company w.e.f. 8th December, 2008.

Mr. Geoff Woolley has been inducted into the Board as an "Independent Director" of the Company w.e.f. 6th May, 2009 as the Board felt that it would be immensely beneficial to the Company to have Mr. Geoff Woolley on the Board of the Company, because of his nonprofit experience and numerous works with foundations to empower the less fortunate.

Mr. Paresh Patel has been appointed as regular Director in the Extraordinary General Meeting of the Company held on 25th March, 2009. Mr. Ashish Lakhanpal, Mr. Suresh Gurumani and Mr. Geoff Woolley being Additional Directors, appointed under Section 260 of the Companies Act, 1956, hold their respective offices up to the date of the ensuing Annual General Meeting. The Company has received notice together with deposit as required under Section 257 of the Companies Act, 1956 proposing their appointment as Director of the Company.

Mr. Gurcharan Das, Dr. Tarun Khanna and Mr. Sumir Chadha retire by rotation and being eligible offer themselves for re-appointment. A brief profile of these Directors is given in the Notice of the Sixth Annual General Meeting.

Your Directors have, subject to approval of the shareholders at the ensuing Annual General Meeting and further, subject to such other approvals as may be required, appointed Mr. Vikram Akula as Executive Chairman w.e.f. 29th July, 2009 and re-appointed Mr. Suresh Gurumani as Managing Director and CEO w.e.f. 1st April, 2009. The details of the proposed terms and remuneration in respect of the foregoing executive directors are provided in the notice and the explanatory statement for the ensuing Annual General Meeting.

Your Company mourned the sudden demise of Mr. V. Sitaram Rao, who suffered a heart attack and passed away on 10th July, 2009 in Hyderabad. Mr. V. Sitaram Rao was associated with the Company as a CEO, then as a member of the Board and thereafter as an Advisor and was instrumental in making the Companys strong presence in the sector.

Increase in Authorized Share Capital of the Company and consequent amendment in Memorandum and Articles of Association of the Company

The current Authorized Share Capital of the Company as increased pursuant to the resolution passed by the shareholder of the Company at the extra-ordinary general meeting of the Company dated 8th October, 2008 is Rs. 95 Crore divided into 82,000,000 (Eight Crore Twenty Lakh) equity shares of Rs. 10 (Rupees Ten only) each, and 13,000,000 (One Crore Thirty Lakh) Preference shares of Rs. 10 (Rupees Ten only) each, whether convertible or non-convertible.

The Company proposes to further increase the above mentioned Authorized Share Capital of the Company to accommodate the proposed issue of Bonus Shares. It is proposed to increase the Authorized Share Capital to Rs. 163 Crore divided into 150,000,000 (Fifteen Crore) Equity shares of Rs. 10 (Rupees Ten only) each and 13,000,000 (One Crore Thirty Lakh) Preference shares of Rs. 10 (Rupees Ten only) each, whether convertible or non-convertible, by creation of 68,000,000 (Six Crore Eighty Lakh) equity shares of Rs. 10 (Rupees Ten only) each. The proposed increase in the Authorized Share Capital and consequent amendment in Memorandum and Articles of Association of the Company shall be subject to the approval of the members of the Company at the forthcoming Annual General Meeting.

Auditors

The Statutory Auditors of the Company, M/s. S. R. Batliboi & Associates, Chartered Accountants, Mumbai, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office of the Auditors, if appointed. The Audit committee and the Board of Directors recommend reappointment of M/s. S. R. Batliboi & Associates as Statutory Auditors of the Company for the financial year 2009-10 for shareholders approval.

Corporate Governance

Your Company adopts best corporate practices and is committed to conducting its business in accordance with applicable laws, rules and regulations and the highest standards of business ethics and ethical conduct. A report on Corporate Governance pursuant to RBI Guidelines is provided separately in the Annual Report.

Employee Share Purchase Scheme and Employee Stock Option Plan

Your Company has introduced employee share purchase plan and stock option plans for its employees.

Your Company on the recommendation of the Compensation Committee of the Board has allotted 517,500 ESPS to the eligible employees of the Company under the "SKS Microfinance Employee Share Purchase Scheme 2007".

The details of the options granted under SKS Microfinance Employee Stock Option Plan - 2007 and SKS Microfinance Employee Stock Option Plan - 2008 and SKS Microfinance Stock Option Plan - 2008 are disclosed in Note 8 of Schedule 17 forming part of the financial statements.

Directors Responsibility Statement

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, your Directors confirm as under:

i) In the preparation of the annual accounts, the applicable accounting standards read with requirements set out under Schedule VI to the Companies Act, 1956 have been followed and there are no material departures from the same.

ii) Your Company has selected such accounting policies and applied them consistently and made judgments 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 2008-09 and of the profit of the Company for that year.

iii) Your Company has 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.

iv) Your Company has prepared the annual accounts of the Company on a going concern basis.

Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo

The particulars required to be furnished under the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are as under:

(1) Part A and B pertaining to conservation of energy and technology absorption are not applicable to the Company.

(2) Foreign Exchange earnings and outgo: Earnings - Nil

Outgo - Rs. 11,866,249

Particulars of Employees

Pursuant to the provisions of Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975 as amended, the names and other particulars of employees are set out in Annexure to the Directors Report.

Response of the Board to the Auditors Comments

In terms of the provisions of Section 217(3) of the Companies Act, 1956, the Board would like to place on record an explanation to the Auditors comments in their Audit Report dated 6th May, 2009.



S No Auditors Comments

1 Undisputed statutory dues including provident fund, investor education and protection fund, employees state insurance, income-tax,sales-tax, wealth-tax, service-tax, customs duty, excise duty, cess have generally been regularly deposited with the appropriate authorities except in the case of dues of employees professional tax which have not been regularly deposited with the appropriate authorities though the delays in deposit have not been serious.

2 Thirty-three cases of embezzlements by employees of the Company aggregating to Rs. 7,079,683 were reported during the year. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. We have been informed that nine of these employees are absconding. The outstanding loan balance (net of recovery) aggregating to Rs. 5,377,428 has been written off.

3 Eighteen cases of loan given to non-existent borrowers on the basis of fictitious documentation created by the employees of the Company aggregating to Rs. 5,645,657 were reported during the year. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. The outstanding loan balance (net of recovery) aggregating to Rs. 4,253,379 has been written off.

4 One case of fraud by an employee of the Company in collusion with vendors has been reported the year. The aggregate value of transactions is Rs. 9,610,755 (including Rs. 3,051,510 in respect of the previous year). The services of the said employee and the arrangements with the said vendors have been terminated. The Company has initiated legal action and criminal proceedings against the employee. The financial effect of the loss incurred by the Company is not currently quantifiable.

Response

There were instances of delay in depositing professional tax due to administrative reasons as the Company was on a fast growth track and has opened 583 new branches in the year 2008-2009. There were procedural delays in obtaining professional tax licenses from the respective state authorities without which tax cannot be remitted. The management has taken a note of this and shall ensure timely deposit of taxes in future.

There is an inherent risk involved in our operations as all the transactions at the field are in cash. The Company has taken legal or remedial action in all the cases of embezzlement of cash and issue of fake loans by employees. The Company has recovered an amount of Rs. 4,218,209 out of cash embezzled.

The Companys Management has taken sufficient and appropriate care for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities. To ensure this, the Company has enhanced internal control systems, consistent with its size and nature of operations, subject to the inherent limitations that should be recognized in weighing the assurance provided by any such system of internal controls. These systems are reviewed and updated on an ongoing basis. Also, the company has initiated action in implementing Online (internet-based) Cash Management System which will facilitate better monitoring of funds and Head Office will be able to do instant fund transfer to and from branches, to ensure optimum balance.

As a remedial measure to safeguard the Companys resources from fraud resulting from collusion of employees with vendors, the Company has identified, initiated and implemented the following process- strengthening steps:

. Enforced 18-point checklist for vendor due diligence and adherence of the same is monitored regularly within the Administration department and at regular intervals by the Internal Audit department;

. Policy on dealing with vendors of national presence has been adopted with the objective of having better control and cost rationalization;

. Increased the manpower in administration to exercise better control and monitoring.

Acknowledgements

Your Directors would like to express their sincere appreciation of the co-operation and assistance received from Reserve Bank of India, Sangam Members, Shareholders, Bankers and other Business constituents during the year under review. Your directors also wish to place on record their deep sense of appreciation for the commitment displayed from all executives, officers and field staff resulting in the successful performance of the Company during the year.



For and on behalf of the Board of Directors

Place : Secunderabad SD/- SD/-

Date : 29th July, 2009 Vikram Akula Suresh Gurumani

Chairman Managing Director