RED HERRING PROSPECTUS

Dated July 16, 2010

Please read Section 60B of the Companies Act, 1956

100% Book Building Issue

SKS MICROFINANCE LIMITED (The Company was incorporated as SKS Microfinance Private Limited on September 22, 2003 under the Companies Act, 1956. Pursuant to a resolution of its

shareholders passed on May 2, 2009, the Company was converted into a public limited company and the word ―private‖ was deleted from its name on May 20,

2009. For details of changes in the name and registered office of the Company, see ―History and Certain Corporate Matters‖ on page 101 of this Red Herring

Prospectus)

Registered and Corporate Office: Ashoka Raghupathi Chambers, D No. 1-10-60 to 62, Opposite to Shoppers Stop, Begumpet, Hyderabad 500 016

Tel: (91 40) 4452 6000; Fax: (91 40) 4452 6001

Contact Person: Mr. S.K. Bansal, Company Secretary and Compliance Officer

Website: www.sksindia.com; Email: skscomplianceofficer@sksindia.com

PROMOTERS OF THE COMPANY: Dr. Vikram Akula, SKS Mutual Benefit Trust - Narayankhed, SKS Mutual Benefit Trust - Jogipet,

SKS Mutual Benefit Trust - Medak, SKS Mutual Benefit Trust - Sadasivapet, SKS Mutual Benefit Trust - Sangareddy, Sequoia Capital India II LLC,

Sequoia Capital India Growth Investments I, Kismet Microfinance and Mauritius Unitus Corporation PUBLIC ISSUE OF 16,791,579 EQUITY SHARES OF RS. 10 EACH FOR CASH AT A PRICE OF RS. [] PER EQUITY SHARE (INCLUDING A SHARE

PREMIUM OF RS. [●] PER EQUITY SHARE) AGGREGATING UP TO RS. [●] MILLION (THE “ISSUE”) CONSISTING OF A FRESH ISSUE OF 7,445,323

EQUITY SHARES (“FRESH ISSUE”) BY SKS MICROFINANCE LIMITED (“SKS” OR THE “COMPANY” OR THE “ISSUER”) AND AN OFFER FOR

SALE OF 9,346,256 EQUITY SHARES (“OFFER FOR SALE”) BY SEQUOIA CAPITAL INDIA II LLC, SKS MUTUAL BENEFIT TRUST -

NARAYANKHED, SKS MUTUAL BENEFIT TRUST - JOGIPET, SKS MUTUAL BENEFIT TRUST - MEDAK, SKS MUTUAL BENEFIT TRUST -

SADASIVAPET, SKS MUTUAL BENEFIT TRUST - SANGAREDDY, KISMET MICROFINANCE AND MAURITIUS UNITUS CORPORATION (THE

“SELLING SHAREHOLDERS”). THE FRESH ISSUE AND THE OFFER FOR SALE ARE JOINTLY REFERRED TO HEREIN AS THE “ISSUE”. THE

ISSUE WILL CONSTITUTE 21.6% OF THE FULLY DILUTED POST ISSUE PAID-UP CAPITAL OF THE COMPANY#.

# A discount of Rs. [●] to the Issue Price determined pursuant to completion of the Book Buildng Process has been offered to Retail Individual Bidders (the “Retail Discount”).

THE FACE VALUE OF THE EQUITY SHARES IS RS. 10 EACH.

THE PRICE BAND, RETAIL DISCOUNT AND THE MINIMUM BID LOT WILL BE DECIDED BY THE COMPANY AND THE SELLING

SHAREHOLDERS IN CONSULTATION WITH THE BOOK RUNNING LEAD MANAGERS AND ADVERTISED AT LEAST TWO(2) WORKING DAYS

PRIOR TO THE BID/ ISSUE OPENING DATE.

In case of revision in the Price Band, the Bid/Issue Period will be extended for three additional working days after revision of the Price Band, subject to the Bid/Issue Period

not exceeding 10 working days. Any revision in the Price Band and the revised Bid/Issue Period, if applicable, will be widely disseminated by notification to National Stock

Exchange of India Limited (―NSE‖) and Bombay Stock Exchange Limited (―BSE‖), by issuing a press release, and also by indicating the change on the website of the Book

Running Lead Managers (―BRLMs‖) and at the terminals of the Syndicate Members.

In terms of Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (―SCRR‖), this being an issue for less than 25% of the post-Issue capital of the Company, the

Issue is being made through the 100% Book Building Process wherein at least 60% of the Issue shall be allocated on a proportionate basis to Qualified Institutional Buyers

(QIB). 5% of the QIB Portion (excluding the Anchor Investor Portion) shall be available for allocation on a proportionate basis to Mutual Funds only, and the remainder of

the QIB Portion shall be available for allocation on a proportionate basis to all QIB Bidders, including Mutual Funds, subject to valid Bids being received at or above the

Issue Price. Further, not less than 10% of the Issue shall be available for allocation on a proportionate basis to Non-Institutional Bidders and not less than 30% of the Issue

shall be available for allocation on a proportionate basis to Retail Individual Bidders, subject to valid Bids being received at or above the Issue Price. If at least 60% of the

Issue cannot be allotted to QIBs, then the entire application money shall be refunded forthwith. Potential investors may participate in this Issue through an Application

Supported by Blocked Amount (―ASBA‖) process providing details about the bank account which will be blocked by the Self Certified Syndicate Banks (―SCSBs‖) for the

same. All investors other than QIBs can participate through the ASBA process. For details see ―Issue Procedure‖ on page 280 of this Red Herring Prospectus.

RISKS IN RELATION TO FIRST ISSUE

This being the first issue of Equity Shares of the Company, there has been no formal market for the Equity Shares of the Company. The face value of the Equity Shares is

Rs. 10 each and the Issue Price is [●] times of the face value. The Issue Price (has been determined and justified by the Company, the Selling Shareholders and the BRLMs

as stated under the paragraph on ―Basis for Issue Price‖) should not be taken to be indicative of the market price of the Equity Shares after the Equity Shares are listed. No

assurance can be given regarding an active and/or sustained trading in the Equity Shares or regarding the price at which the Equity Shares will be traded after listing.

IPO GRADING

This Issue has been graded by CARE as CARE IPO Grade 4 indicating above average fundamentals through its letter dated June 23, 2010. The IPO grade is assigned on a

scale of Grade 5 to Grade 1, with Grade 1 indicating poor fundamentals and Grade 5 indicating strong fundamentals. For details see ―General Information‖ on page 18 of

this Red Herring Prospectus.

GENERAL RISKS

Investments in equity and equity-related securities involve a degree of risk and investors should not invest any funds in this Issue unless they can afford to take the risk of

losing their investment. Investors are advised to read the Risk Factors carefully before taking an investment decision in this Issue. For taking an investment decision,

investors must rely on their own examination of the Company and the Issue including the risks involved. The Equity Shares offered in the Issue have not been recommended

or approved by the Securities and Exchange Board of India (―SEBI‖), nor does SEBI guarantee the accuracy or adequacy of this Red Herring Prospectus. Specific attention

of the investors is invited to ―Risk Factors‖ on page xiii of this Red Herring Prospectus.

ISSUER‟S AND SELLING SHAREHOLDERS‟ ABSOLUTE RESPONSIBILITY

The Company and the Selling Shareholders, having made all reasonable inquiries, accept responsibility for and confirm that this Red Herring Prospectus contains all

information with regard to the Company and the Issue, which is material in the context of the Issue, that the information contained in this Red Herring Prospectus is true and

correct in all material aspects and is not misleading in any material respect, that the opinions and intentions expressed herein are honestly held and that there are no other

facts, the omission of which will make this Red Herring Prospectus as a whole or any of such information or the expression of any such opinions or intentions misleading in

any material respect.

LISTING

The Equity Shares offered through this Red Herring Prospectus are proposed to be listed on the NSE and BSE. The Company has received an ‗in-principle‘ approval from

the NSE and the BSE, for the listing of the Equity Shares pursuant to letters dated May 26, 2010 and April 28, 2010, respectively. For the purposes of the Issue, the

Designated Stock Exchange shall be BSE.

BOOK RUNNING LEAD MANAGERS REGISTRAR TO THE ISSUE

Kotak Mahindra Capital Company

Limited

1st Floor, Bakhtawar

229 Nariman Point

Mumbai 400 021

Tel: (91 22) 6634 1100

Fax: (91 22) 2283 7517

Email: sks.ipo@kotak.com

Investor Grievance Id:

kmcceredressal@kotak.com

Website: www.kotak.com

SEBI Registration No.:

INM000008704

Contact Person: Mr. Chandrakant

Bhole

Citigroup Global Markets India

Private Limited

12th Floor, Bakhtawar

Nariman Point

Mumbai 400 021

Tel: (91 22) 6631 9999

Fax: (91 22) 6646 6056

Email: sks.ipo@citi.com

Investor Grievance Id:

investors.cgmib@citi.com

Website:

www.online.citibank.co.in/rhtm/citigrou

pglobalscreen1.htm

SEBI Registration No.: INM000010718

Contact Person: Mr. Shashank Pandey

Credit Suisse Securities (India)

Private Limited

9th Floor, Ceejay House

Plot F, Shivsagar Estate

Dr. Annie Besant Road, Worli

Mumbai 400 018

Tel: (91 22) 6777 3777

Fax: (91 22) 6777 3820

E-mail: list.project-kuber@credit-

suisse.com

Investor Grievance Id: list.igcellmer-

bnkg@credit-suisse.com

Website: https://www.credit-

suisse.com/in/ipo/

SEBI Registration No.:

INM000011161

Contact Person: Mr. Devesh Pandey

Karvy Computershare Private

Limited

Plot No 17-24

Vithal Rao Nagar

Madhapur

Hyderabad 500 081

Telephone: (91 40) 2342 0815

Facsimile: (91 40) 2343 1551

Email: sksmicro.ipo@karvy.com

Website: http:\\karisma.karvy.com

SEBI Registration No. INR00000221

Contact Person: Mr. M. Murali Krishna

BID/ISSUE PROGRAMME

BID/ISSUE OPENS ON: JULY 28, 2010* BID/ISSUE CLOSES ON (EXCEPT QIB BIDDERS): AUGUST 2, 2010

BID/ISSUE CLOSES ON (FOR QIB BIDDERS): JULY 30, 2010 * The Company may consider participation by Anchor Investors. The Anchor Investor Bid/ Issue Period shall be one day prior to the Bid/ Issue Opening Date.

http://www.sksindia.com/mailto:skscomplianceofficer@sksindia.comhttp://www.kotak.com/../Application%20Data/Microsoft/Application%20Data/Microsoft/Application%20Data/Microsoft/Application%20Data/Microsoft/Local%20Settings/Temp/Local%20Settings/Local%20Settings/Application%20Data/Microsoft/Local%20Settings/Temp/Local%20Settings/Temporary%20Internet%20Files/Content.Outlook/Local%20Settings/Temp/Local%20Settings/Temporary%20Internet%20Files/Content.Outlook/Application%20Data/Microsoft/Local%20Settings/Temporary%20Internet%20Files/Content.Outlook/Local%20Settings/Local%20Settings/Local%20Settings/Temp/www.online.citibank.co.in/rhtm/citigroupglobalscreen1.htm../Application%20Data/Microsoft/Application%20Data/Microsoft/Application%20Data/Microsoft/Application%20Data/Microsoft/Local%20Settings/Temp/Local%20Settings/Local%20Settings/Application%20Data/Microsoft/Local%20Settings/Temp/Local%20Settings/Temporary%20Internet%20Files/Content.Outlook/Local%20Settings/Temp/Local%20Settings/Temporary%20Internet%20Files/Content.Outlook/Application%20Data/Microsoft/Local%20Settings/Temporary%20Internet%20Files/Content.Outlook/Local%20Settings/Local%20Settings/Local%20Settings/Temp/www.online.citibank.co.in/rhtm/citigroupglobalscreen1.htmmailto:list.igcellmer-bnkg@credit-suisse.commailto:list.igcellmer-bnkg@credit-suisse.comhttps://www.credit-suisse.com/in/ipo/https://www.credit-suisse.com/in/ipo/mailto:sksmicro.ipo@karvy.com

TABLE OF CONTENTS

SECTION I: GENERAL i

DEFINITIONS AND ABBREVIATIONS i PRESENTATION OF FINANCIAL, INDUSTRY AND MARKET DATA x NOTICE TO INVESTORS xi FORWARD-LOOKING STATEMENTS xii

SECTION II: RISK FACTORS xiii

SECTION III: INTRODUCTION 1

SUMMARY OF INDUSTRY 1 SUMMARY OF BUSINESS 2 SUMMARY FINANCIAL INFORMATION 9 THE ISSUE 17 GENERAL INFORMATION 18 CAPITAL STRUCTURE 28 OBJECTS OF THE ISSUE 52 BASIS FOR ISSUE PRICE 54 STATEMENT OF TAX BENEFITS 56

SECTION IV: ABOUT THE COMPANY 66

THE MICROFINANCE INDUSTRY 66 BUSINESS 75 REGULATIONS AND POLICIES 92 HISTORY AND CERTAIN CORPORATE MATTERS 101 OUR MANAGEMENT 111 OUR PROMOTERS AND GROUP COMPANIES 130 RELATED PARTY TRANSACTIONS 140 DIVIDEND POLICY 141 INDEBTEDNESS 142

SECTION V: FINANCIAL INFORMATION 143

AUDITORS‘ REPORT 143 FINANCIAL STATEMENTS 146 MANAGEMENT‘S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 208 SELECTED STATISTICAL INFORMATION 240

SECTION VI: LEGAL AND OTHER INFORMATION 244

OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS 244 GOVERNMENT AND OTHER APPROVALS 257 OTHER REGULATORY AND STATUTORY DISCLOSURES 260

SECTION VII: ISSUE INFORMATION 273

TERMS OF THE ISSUE 273 ISSUE STRUCTURE 276 ISSUE PROCEDURE 280 RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES 309

SECTION VIII: MAIN PROVISIONS OF ARTICLES OF ASSOCIATION 310

SECTION IX: OTHER INFORMATION 332

MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION 332 DECLARATION 335 ANNEXURE 337

i

SECTION I: GENERAL

DEFINITIONS AND ABBREVIATIONS

Unless the context otherwise requires, the terms and abbreviations stated hereunder shall have the

meanings as assigned therewith.

Term Description

―SKS‖, ―our Company‖,

―we‖, ―us‖, ―our‖, ―the

Company‖, or ―the Issuer‖

SKS Microfinance Limited

Company Related Terms

Term Description

Articles/Articles of

Association

The articles of association of the Company

AMAPL Aspiring Minds Assessments Private Limited

Auditors The statutory auditors of the Company, S.R. Batliboi & Co., Chartered

Accountants

BALICL Bajaj Allianz Life Insurance Company Limited

Board of Directors/Board The board of directors of the Company or a committee constituted

thereof

Catamaran Together, Catamaran Fund 1-A and Catamaran Fund 1-B

CoR Certificate of Registration

Director(s) The Director(s) of the Company, unless otherwise specified

Employee Stock Option

Plan

Collectively ESOP 2007, ESOP 2008, ESOP 2008(ID), ESOP 2009 and

ESOP 2010

ESOP 2007 SKS Microfinance Employees Stock Option Plan 2007

ESOP 2008 SKS Microfinance Employees Stock Option Plan 2008

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

Directors)

ESOP 2009 SKS Microfinance Employees Stock Option Plan 2009

ESOP 2010 SKS Microfinance Employees Stock Option Plan 2010

ESPS 2007 Employees Stock Purchase Scheme 2007

EWT SKS Microfinance Employee Welfare Trust

Group Companies Includes those companies, firms and ventures promoted by our

Promoters, irrespective of whether such entities are covered under section

370(1)(B) of the Companies Act and disclosed in ―Our Promoters and

Group Companies‖ on page 130 of this Red Herring Prospectus

MBT – Jogipet SKS Mutual Benefit Trust – Jogipet

MBT – Medak SKS Mutual Benefit Trust – Medak

MBT – Narayankhed SKS Mutual Benefit Trust – Narayankhed

MBT – Sadasivapet SKS Mutual Benefit Trust – Sadasivapet

MBT – Sangareddy SKS Mutual Benefit Trust – Sangareddy

Memorandum/

Memorandum of

Association

The memorandum of association of the Company

MUC Mauritius Unitus Corporation

Promoter Group Includes such persons and entities constituting our promoter group in

terms of Regulation 2(zb) of the SEBI Regulations

Promoters Our promoters being Dr. Vikram Akula, SKS Mutual Benefit Trusts, SCI

II, SCIGI I, Kismet Microfinance (formerly known as SKS Capital) and

MUC

Registered Office of the

Company

Ashoka Raghupathi Chambers, D No. 1-10-60 to 62, Opposite to

Shoppers Stop, Begumpet, Hyderabad 500 016

Restated Shareholders‘

Agreement

Restated shareholders‘ agreement dated October 20, 2008 between the

Company and Dr. Vikram Akula, ICP Holdings, SIP I, Kismet SKS II,

ii

Term Description

SKS Mutual Benefit Trusts, SIDBI, MUC, Mr. Vinod Khosla, Kismet

Microfinance, SCI II, SCIGI I, Tejas Ventures, Yatish Trading Company

Private Limited, Infocom Ventures, and Columbia Pacific Opportunity

SCI II Sequoia Capital India II LLC

SCIGI I Sequoia Capital India Growth Investments I

Selling Shareholders SCI II, SKS Mutual Benefit Trusts, Kismet Microfinance (formerly

known as SKS Capital) and MUC

SIDBI Small Industries Development Bank of India

SIP I Sandstone Investment Partners I

SKS Mutual Benefit

Trusts or SKS MBTs

Collectively MBT – Jogipet, MBT – Medak, MBT – Narayankhed, MBT

– Sadasivapet and MBT – Sangareddy

SKS Society or Swayam

Krishi Sangam

Swayam Krishi Sangam, a society registered under the Andhra Pradesh

(Telangana Areas) Public Societies Registration Act, 1350 Fasli (Act I of

1350 F.)

STAPL SKS Trust Advisors Private Limited

Tree Line Tree Line Asia Master Fund (Singapore) Pte. Limited

Yatish Trading Yatish Trading Company Private Limited

Issue Related Terms

Term Description

Allotment/Allot/Allotted Unless the context otherwise requires, means the allotment and transfer of

Equity Shares pursuant to this Issue to the successful Bidders

Allottee A successful Bidder to whom the Equity Shares are Allotted

Anchor Investor A Qualified Institutional Buyer, applying under the Anchor Investor

Portion, with a minimum Bid of Rs. 100 million

Anchor Investor Bid/Issue

Period

The day, one working day prior to the Bid/Issue Opening Date, on which

Bids by Anchor Investors shall be submitted and allocation to Anchor

Investors shall be completed

Anchor Investor Issue

Price

The final price at which Equity Shares will be issued and Allotted to

Anchor Investors in terms of the Red Herring Prospectus and the

Prospectus, which price will be equal to or higher than the Issue Price but

not higher than the Cap Price. The Anchor Investor Issue Price will be

decided by the Company and the Selling Shareholders in consultation

with the BRLMs

Anchor Investor Portion Up to 30% of the QIB Portion which may be allocated by the Company to

Anchor Investors on a discretionary basis. One-third of the Anchor

Investor Portion shall be reserved for domestic Mutual Funds, subject to

valid Bids being received from domestic Mutual Funds at or above the

price at which allocation is being done to other Anchor Investors

Application Supported by

Blocked Amount/ ASBA

An application, whether physical or electronic, used by all Bidders to

make a Bid authorising an SCSB to block the Bid Amount in their

specified bank account maintained with the SCSB

ASBA Account An account maintained by the ASBA Bidders with the SCSB and

specified in the ASBA Bid cum Application Form for blocking an amount

mentioned in the ASBA Bid cum Application Form

ASBA Bidder Any Bidder intending to apply through ASBA

ASBA Bid cum

Application Form

The form, whether physical or electronic, used by an ASBA Bidder to

make a Bid, which will be considered as the application for Allotment for

the purposes of the Red Herring Prospectus and the Prospectus.

ASBA Revision Form The form used by the ASBA Bidders to modify the quantity of Equity

Shares or the Bid Amount in any of their ASBA Bid cum Application

Forms or any previous ASBA Revision Form(s)

Banker(s) to the Issue/

Escrow Collection

Bank(s)

The banks which are clearing members and registered with SEBI as

Bankers to the Issue with whom the Escrow Account will be opened and

in this case being Axis Bank Limited, IndusInd Bank Limited, ICICI

Bank Limited, Kotak Mahindra Bank Limited, HDFC Bank Limited, Yes

Bank Limited, Standard Chartered Bank and Citibank N.A.

iii

Term Description

Basis of Allotment The basis on which the Equity Shares will be Allotted to successful

Bidders under the Issue and which is described in the section entitled

―Issue Procedure – Basis of Allotment‖ on page 302 of this Red Herring

Prospectus

Bid An indication to make an offer during the Bidding/Issue Period by a

Bidder, or during the Anchor Investor Bid/ Issue Period by the Anchor

Investors, to subscribe to the Equity Shares of the Company at a price

within the Price Band, including all revisions and modifications thereto

For the purpose of ASBA Bidders, it means an indication to make an

offer during the Bidding/ Issue Period by an ASBA Bidder pursuant to the

submission of ASBA Bid cum Application Form to subscribe to the

Equity Shares

Bid Amount The highest value of the optional Bids indicated in the Bid cum

Application Form

Bid /Issue Closing Date The date after which the Syndicate and the SCSBs will not accept any

Bids for this Issue, which shall be notified in an English national

newspaper, a Hindi national newspaper and a Telugu newspaper, each

with wide circulation

Bid /Issue Opening Date The date on which the Syndicate and the SCSBs shall start accepting Bids

for the Issue, which shall be the date notified in an English national

newspaper, a Hindi national newspaper and a Telugu newspaper, each

with wide circulation

Bid cum Application

Form

The form used by a Bidder to make a Bid and which will be considered as

the application for Allotment for the purposes of the Red Herring

Prospectus and the Prospectus including the ASBA Bid cum Application

Form (if applicable)

Bidder Any prospective investor who makes a Bid pursuant to the terms of the

Red Herring Prospectus and the Bid cum Application Form

Bidding/Issue Period The period between the Bid/Issue Opening Date and the Bid/Issue

Closing Date inclusive of both days and during which prospective

Bidders (except Anchor Investors) and the ASBA Bidders can submit

their Bids

Book Building

Process/Method

Book building process as provided under Schedule XI of the SEBI

Regulations, in terms of which the Issue is being made

BRLMs/Book Running

Lead Managers

The Book Running Lead Managers to the Issue, in this case being Kotak,

Citi, Credit Suisse

Business Day Any day on which commercial banks in Mumbai are open for business

CAN/Confirmation of

Allocation Note

Notice or intimation of allocation of Equity Shares sent to Anchor

Investors who have been allocated Equity Shares after discovery of the

Issue Price if the Issue Price is higher than the Anchor Investor Issue

Price

Cap Price The higher end of the Price Band, above which the Issue Price will not be

finalised and above which no Bids will be accepted

Citi Citigroup Global Markets India Private Limited

Controlling Branches Such branches of the SCSBs which coordinate with the BRLMs, the

Registrar to the Issue and the Stock Exchanges

Credit Suisse Credit Suisse Securities (India) Private Limited

Cut-off Price Issue Price (net of Retail Discount, as applicable), finalised by the

Company and the Selling Shareholders in consultation with the BRLMs.

Only Retail Individual Bidders whose Bid Amount does not exceed Rs.

100,000 (net of Retail Discount) are entitled to Bid at the Cut-off Price.

No other category of Bidders are entitled to Bid at the Cut-off Price

Designated Branches Such branches of the SCSBs which shall collect the ASBA Bid cum

Application Forms used by the ASBA Bidders and a list of which is

available on http://www.sebi.gov.in/pmd/scsb.pdf

Designated Date The date on which funds are transferred from the Escrow Account to the

Public Issue Account or the Refund Account, as appropriate, or the

http://www.sebi.gov.in/pmd/scsb.pdf

iv

Term Description

amount blocked by the SCSB is transferred from the bank account of the

ASBA Bidder to the Public Issue Account, as the case may be, after the

Prospectus is filed with the RoC, following which the Board of Directors

shall Allot Equity Shares to successful Bidders

Designated Stock

Exchange

Bombay Stock Exchange Limited

Draft Red Herring

Prospectus

The Draft Red Herring Prospectus dated March 25, 2010 issued in

accordance with Section 60B of the Companies Act and the SEBI

Regulations, filed with SEBI and which does not contain complete

particulars of the price at which the Equity Shares are offered and the size

of the Issue

Eligible NRI NRIs from jurisdictions outside India where it is not unlawful to make an

issue or invitation under the Issue and in relation to whom the Red

Herring Prospectus constitutes an invitation to subscribe to the Equity

Shares offered herein

Equity Shares Equity shares of the Company of Rs. 10 each, unless otherwise specified

Escrow Account Account opened with the Escrow Collection Bank(s) and in whose favour

the Bidder (excluding the ASBA Bidders) will issue cheques or drafts in

respect of the Bid Amount when submitting a Bid

Escrow Agreement The agreement dated [●] to be entered into by the Company, Selling

Shareholders, the Registrar to the Issue, the BRLMs, the Syndicate

Members and the Escrow Collection Bank(s) for collection of the Bid

Amounts and where applicable, refunds of the amounts collected to the

Bidders (excluding the ASBA Bidders) on the terms and conditions

thereof

First Bidder The Bidder whose name appears first in the Bid cum Application Form or

Revision Form or the ASBA Bid cum Application Form or ASBA

Revision Form

Floor Price The lower end of the Price Band, at or above which the Issue Price will be

finalised and below which no Bids will be accepted

Fresh Issue The issue of 7,445,323 Equity Shares at the Issue Price by the Company

IPO Initial Public Offering

Issue Collectively, the Fresh Issue and the Offer for Sale

Issue Agreement The agreement dated March 22, 2010 entered into among the Company,

the Selling Shareholders and the BRLMs, pursuant to which certain

arrangements are agreed to in relation to the Issue

Issue Price The final price at which the Equity Shares will be issued and Allotted in

terms of the Red Herring Prospectus. The Issue Price will be decided by

the Company and the Selling Shareholders in consultation with the

BRLMs on the Pricing Date

Issue Proceeds The proceeds of the Issue that are available to the Company and the

Selling Shareholders

Kotak Kotak Mahindra Capital Company Limited

Monitoring Agency Axis Bank Limited

Mutual Funds A mutual fund registered with SEBI under the SEBI (Mutual Funds)

Regulations, 1996

Mutual Funds Portion 5% of the QIB Portion (excluding the Anchor Investor Portion), or

503,748 Equity Shares available for allocation to Mutual Funds only, out

of the QIB Portion (excluding the Anchor Investor Portion)

Net Proceeds The Fresh Issue Proceeds that are available to the Company excluding the

proceeds of the Offer for Sale and the Issue related expenses.

Non-Institutional Bidders All Bidders that are not QIBs or Retail Individual Bidders and who have

Bid for Equity Shares for an amount of more than Rs. 100,000 (but not

including NRIs other than eligible NRIs)

Non-Institutional Portion The portion of the Issue being not less than 1,679,157 Equity Shares

available for allocation to Non-Institutional Bidders

Non-Resident A person resident outside India, as defined under FEMA and includes a

Non Resident Indian

v

Term Description

Offer for Sale The offer for sale by the Selling Shareholders of 9,346,256 Equity Shares

of Rs. 10 each at the Issue Price

Pay-in Date Bid/Issue Closing Date or the last date specified in the CAN sent to the

Bidders for payment of the balance amount, as applicable

Pay-in-Period The period commencing on the Bid/Issue Opening Date and extending

until the closure of the Pay-in Date.

With respect to Anchor Investors, it shall be the Anchor Investor Bid/

Issue Period and extending until two working days after the Bid/ Issue

Closing Date

Price Band Price Band of a minimum price of Rs. [●] (Floor Price) and the maximum

price of Rs. [●] (Cap Price) and include revisions thereof. The Price Band

and the minimum Bid lot size for the Issue will be decided by the

Company and the Selling Shareholders in consultation with the BRLMs

and advertised, at least two working days prior to the Bid/ Issue Opening

Date, in [●] edition of [●] in the English language, [●] edition of [●] in

the Hindi language and [●] edition of [●] in the Telugu language

Pricing Date

The date on which the Company and the Selling Shareholders, in

consultation with the BRLMs, finalises the Issue Price

Prospectus The Prospectus to be filed with the RoC in accordance with Section 60 of

the Companies Act, containing, inter alia, the Issue Price that is

determined at the end of the Book Building Process, the size of the Issue

and certain other information

Public Issue Account(s) An account(s) opened with the Bankers to the Issue to receive monies

from the Escrow Account and from the SCSBs from the bank accounts of

the ASBA Bidders on the Designated Date

QIB Portion The portion of the Issue being at least 10,074,948 Equity Shares of Rs. 10

each to be Allotted to QIBs

Qualified Institutional

Buyers or QIBs

Public financial institutions as specified in Section 4A of the Companies

Act, scheduled commercial banks, mutual fund registered with SEBI, FII

and sub-account registered with SEBI, other than a sub-account which is

a foreign corporate or foreign individual, multilateral and bilateral

development financial institution, venture capital fund registered with

SEBI, foreign venture capital investor registered with SEBI, state

industrial development corporation, insurance company registered with

IRDA, provident fund with minimum corpus of Rs. 250 million, pension

fund with minimum corpus of Rs. 250 million and National Investment

Fund set up by Government of India and insurance funds set up and

managed by the army, navy or air force of the Union of India.

Red Herring Prospectus or

RHP

The Red Herring Prospectus issued in accordance with Section 60B of the

Companies Act, which does not have complete particulars of the price at

which the Equity Shares are offered and the size of the Issue. The Red

Herring Prospectus will be filed with the RoC at least three days before

the Bid/Issue Opening Date and will become a Prospectus upon filing

with the RoC after the Pricing Date

Refund Account(s) The account opened with Escrow Collection Bank(s), from which refunds

(excluding refunds to ASBA Bidders), if any, of the whole or part of the

Bid Amount shall be made

Refund Banker(s) Kotak Mahindra Bank Limited and Citibank N.A

Refunds through

electronic transfer of

funds

Refunds through ECS, Direct Credit, NEFT, RTGS or the ASBA process,

as applicable

Registrar /Registrar to the

Issue

Registrar to the issue, in this case being Karvy Computershare Private

Limited

Retail Discount The difference of Rs. [●] between the Issue Price and the differential

lower price at which our Company has decided to allot the Equity Shares

to Retail Individual Bidders

Retail Individual Bidders Individual Bidders (including HUFs applying through their karta, and

vi

Term Description

Eligible NRIs) who have not Bid for Equity Shares for an amount of more

than Rs. 100,000 (net of Retail Discount) in any of the bidding options in

the Issue

Retail Portion The portion of the Issue being not less than 5,037,474 Equity Shares of

Rs. 10 each available for allocation to Retail Individual Bidder(s)

Revision Form The form used by the Bidders, excluding ASBA Bidders, to modify the

quantity of Equity Shares or the Bid Amount in any of their Bid cum

Application Forms or any previous Revision Form(s)

SEBI Regulations Securities and Exchange Board of India (Issue of Capital and Disclosure

Requirements) Regulations, 2009 as amended from time to time

Self Certified Syndicate

Bank(s) or SCSB(s)

A banker to the Issue registered with SEBI, which offers the facility of

ASBA and a list of which is available on http://www.sebi.gov.in

Stock Exchanges The BSE and the NSE

Syndicate The BRLMs and the Syndicate Members

Syndicate Agreement The agreement to be entered into between the Syndicate, the Company

and the Selling Shareholders in relation to the collection of Bids in this

Issue (excluding Bids from the ASBA Bidders)

Syndicate Members Kotak Securities Limited

TRS or Transaction

Registration Slip

The slip or document issued by a member of the Syndicate or the SCSB

(only on demand), as the case may be, to the Bidder as proof of

registration of the Bid

Underwriters The BRLMs and the Syndicate Members

Underwriting Agreement The agreement among the Underwriters, the Company and the Selling

Shareholders to be entered into on or after the Pricing Date

Working Day All days other than a Sunday or a public holiday (except during the

Bid/Issue Period where a working day means all days other than a

Saturday, Sunday or a public holiday), on which commercial banks in

Mumbai are open for business

Technical and Industry Terms

Term Description

ALCO Asset Liability Committee

ALM Asset Liability Management

CARE Credit Analysis & Research Limited

CGAP Consultative Group to Assist the Poor

CGT Compulsory Group Training

CMS Cash Management Services

CRAR Capital Risk to Asset Ratio

CRISIL Credit Rating and Information Services of India Limited

FMCG Fast Moving Consumer Goods

HDFC Housing Development Finance Corporation Limited

ICRA Formerly known as Investment Information and Credit Rating Agency

of India Limited

JLG Joint Liability Group

Kirana stores Local retail shops being operated by our members at their place of

business

KYC Know Your Customer

LUC Loan Utilization Check

M-CRIL Micro Credit Rating International Limited

MFI Microfinance Institution

MFIN Microfinance Institutions Network

MIS Management Information Systems

NBFC Non Banking Financial Company

NBFC-ND Non Banking Financial Company- Non Deposit Taking

NBFC-ND-SI Non Banking Financial Company- Non Deposit Taking-Systemically

Important

vii

Term Description

NGO Non- government organization

NPA Non Performing Asset

PDI Perpetual Debt Instruments

PFIC Passive Foreign Investment Company

PMLA Prevention of Money Laundering Act

PPP Purchasing Power Parity

RRB Regional Rural Banks

SBLP Self Help Group Bank Linkage Programme

SHG Self Help Group

Conventional/General Terms

Term Description

Act or Companies Act Companies Act, 1956, as amended from time to time

AGM Annual General Meeting

A.P. Andhra Pradesh

AS Accounting Standards issued by the Institute of Chartered Accountants

of India

AY Assessment Year

BOI Body of Individuals

BSE Bombay Stock Exchange Limited

CAGR Compounded Annual Growth Rate

CCPS Compulsory Convertible Preference Shares

CDSL Central Depository Services (India) Limited

CEO Chief Executive Officer

CFO Chief Financial Officer

COO Chief Operating Officer

DDT Dividend Distribution Tax

Depositories NSDL and CDSL

Depositories Act The Depositories Act, 1996 as amended from time to time

DER Debt Equity Ratio

DP ID Depository Participant‘s Identity

DP/Depository Participant A depository participant as defined under the Depositories Act, 1996

DTAA Double Tax Avoidance Agreement

ECS Electronic Clearing Service

EGM Extraordinary General Meeting

EEA European Economic Area

EPS Unless otherwise specified, Earnings Per Share, i.e., profit after tax for

a fiscal year divided by the weighted average outstanding number of

equity shares during that fiscal year

ESI Employee‘s State Insurance Scheme

ESOP Employee Stock Option Plan

ESPS Employee Stock Purchase Scheme

FCNR Account Foreign Currency Non-Resident Account

FDI Foreign Direct Investment

FEMA

Foreign Exchange Management Act, 1999 read with rules and

regulations thereunder and amendments thereto

FEMA Regulations FEMA (Transfer or Issue of Security by a Person Resident Outside

India) Regulations, 2000 and amendments thereto

FII(s) Foreign Institutional Investors as defined under SEBI (Foreign

Institutional Investor) Regulations, 1995 registered with SEBI under

applicable laws in India

Financial Year/ fiscal/ FY Period of twelve months ended March 31 of that particular year

FIPB Foreign Investment Promotion Board

FVCI Foreign Venture Capital Investor registered under the Securities and

viii

Term Description

Exchange Board of India (Foreign Venture Capital Investor)

Regulations, 2000, as amended from time to time

GDP Gross Domestic Product

GIR General Index Register

GoI/Government Government of India

HNI High Net worth Individual

HUF Hindu Undivided Family

ICAI Institute of Chartered Accountants of India

IFRS International Financial Reporting Standards

Income Tax Act/ I.T. Act The Income Tax Act, 1961, as amended from time to time

Indian GAAP Generally Accepted Accounting Principles in India

IRDA Insurance Regulatory and Development Authority

ITDA Integrated Tribal Development Agency

MAT Minimum Alternate Tax

Mn Million

MoU Memorandum of Understanding

NAV Net Asset Value

NCD Non Convertible Debentures

NEFT National Electronic Funds Transfer

NR Non Resident

NRE Account Non Resident External Account

NRI Non Resident Indian, is a person resident outside India, who is a citizen

of India or a person of Indian origin and shall have the same meaning as

ascribed to such term in the Foreign Exchange Management (Deposit)

Regulations, 2000, as amended from time to time

NRO Account Non Resident Ordinary Account

NSDL National Securities Depository Limited

NSE The National Stock Exchange of India Limited

OCB A company, partnership, society or other corporate body owned directly

or indirectly to the extent of up to 60% by NRIs including overseas

trusts in which not less than 60% of beneficial interest is irrevocably

held by NRIs directly or indirectly and which was in existence on

October 3, 2003 and immediately before such date was eligible to

undertake transactions pursuant to the general permission granted to

OCBs under the FEMA. OCBs are not allowed to invest in this Issue

p.a. per annum

P/E Ratio Price/Earnings Ratio

PAN Permanent Account Number

PAT Profit After Tax

PBT Profit Before Tax

PLR Prime Lending Rate

RBI The Reserve Bank of India

RBI Act The Reserve Bank of India Act, 1934

Re. One Indian Rupee

RoC The Registrar of Companies, Andhra Pradesh situated at 2nd Floor,

CPWD Building, Kendriya Sadan, Sultan Bazar, Koti, Hyderabad

500195, Andhra Pradesh

RONW Return on Net Worth

Rs./ INR Indian Rupees

RTGS Real Time Gross Settlement

SAT Securities Appellate Tribunal

SBAR State Bank of India Benchmark Advance Rate

SCRA Securities Contracts (Regulation) Act, 1956, as amended from time to

ix

Term Description

time

SCRR Securities Contracts (Regulation) Rules, 1957, as amended from time to

time

SEBI The Securities and Exchange Board of India constituted under the SEBI

Act

SEBI Act Securities and Exchange Board of India Act, as amended from time to

time

SICA Sick Industrial Companies (Special Provisions) Act, 1985, as amended

from time to time

Stamp Act The Indian Stamp Act, 1899, as amended from time to time

State Government The Government of a State of India

Stock Exchange(s) BSE and/or NSE as the context may refer to

Takeover Code SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

1997, as amended

U.S. GAAP Generally Accepted Accounting Principles in the United States of

America

U.S./USA United States of America

USD/US$ United States Dollars

VCFs Venture Capital Funds as defined and registered with SEBI under the

SEBI (Venture Capital Fund) Regulations, 1996, as amended from time

to time

x

PRESENTATION OF FINANCIAL, INDUSTRY AND MARKET DATA

Certain Conventions

All references to ―India‖ contained in this Red Herring Prospectus are to the Republic of India and all

references to the ―U.S.‖, ―USA‖, or the ―United States‖ are to the United States of America.

In this Red Herring Prospectus, the Company has presented certain numerical information in ―million‖

units. One million represents 1,000,000. For definitions, see ―Definitions and Abbreviations‖ on page i

of this Red Herring Prospectus. In the section ―Main Provisions of Articles of Association‖ on page

310 of this Red Herring Prospectus, defined terms have the meaning given to such terms in the

Articles.

Financial Data

Unless stated otherwise, the financial data in this Red Herring Prospectus is derived from our restated

financial statements prepared in accordance with Indian GAAP and the Companies Act, and restated in

accordance with the SEBI Regulations and Indian GAAP. Our current fiscal year commences on April

1 and ends on March 31 of next year. In this Red Herring Prospectus, any discrepancies in any table

between the total and the sums of the amounts listed are due to rounding-off.

There are significant differences between Indian GAAP, IFRS and U.S. GAAP. This Red Herring

Prospectus does not contain a reconciliation of our financial statements to IFRS or U.S. GAAP nor

does it include any information in relation to the differences between Indian GAAP, IFRS and U.S.

GAAP.

Accordingly, the degree to which the Indian GAAP financial statements included in this Red Herring

Prospectus will provide meaningful information is entirely dependent on the reader‘s level of

familiarity with Indian accounting practices, Indian GAAP and the Companies Act. Any reliance by

persons not familiar with Indian accounting practices, Indian GAAP and the Companies Act on the

financial disclosures presented in this Red Herring Prospectus should accordingly be limited. In

making an investment decision, investors must rely upon their own examination of the Company, the

terms of the Issue and the financial information relating to the Company. We have not attempted to

explain the differences between Indian GAAP, IFRS and U.S. GAAP herein or quantify their impact on

the financial data included herein, and we urge you to consult your own advisors regarding such

differences and their impact on our financial data.

Any percentage amounts, as set forth in ―Risk Factors‖, ―Business‖, ―Management‘s Discussion and

Analysis of Financial Condition and Results of Operations‖ and elsewhere in this Red Herring

Prospectus, unless otherwise indicated, have been calculated on the basis of our restated financial

statements.

Currency and units of presentation

All references to ―Rupees‖ or ―Rs.‖ are to Indian Rupees, the official currency of the Republic of India.

All references to ―US$‖, ―USD‖ or ―U.S Dollars‖ are to United States Dollars, the official currency of

the United States of America. Based on the RBI reference rate, the exchange rate as on December 31,

2009 was USD 1 = Rs. 46.68, March 31, 2010 was USD 1 = Rs. 45.14 and on June 30, 2010 was USD

1= Rs. 46.60.

Industry and Market data

Unless stated otherwise, industry and market data used throughout this Red Herring Prospectus has

been obtained from industry publications. Industry publications generally state that the information

contained in those publications has been obtained from sources believed to be reliable but that their

accuracy and completeness are not guaranteed and their reliability cannot be assured. Although we

believe that industry and market data used in this Red Herring Prospectus is reliable, it has not been

independently verified. To the extent to which the industry and market data used in this Red Herring

Prospectus is meaningful depends on the reader‘s familiarity with and understanding of the

methodologies used in compiling such data.

xi

NOTICE TO INVESTORS

The Equity Shares have not been recommended by any U.S. federal or state securities commission or

regulatory authority. Further, the foregoing authorities have not confirmed the accuracy or determined

the adequacy of this Red Herring Prospectus. Any representation to the contrary is a criminal offence in

the United States.

The Equity Shares have not been and will not be registered under the US Securities Act of 1933, as

amended (the ―Securities Act‖), and, unless so registered, may not be offered or sold within the United

States except pursuant to an exemption from, or in a transaction not subject to, the registration

requirements of the Securities Act. Accordingly, the Equity Shares are being offered and sold (a) in the

United States only to persons reasonably believed to be ―qualified institutional buyers‖ (as defined in

Rule 144A under the Securities Act and referred to in this Red Herring Prospectus as ―U.S. QIBs‖, for

the avoidance of doubt, the term U.S. QIBs does not refer to a category of institutional investor defined

under applicable Indian regulations and referred to in the Red Herring Prospectus as ―QIBs‖) in

transactions exempt from the registration requirements of the Securities Act and (b) outside the United

States in compliance with Regulation S and the applicable laws of the jurisdiction where those offers

and sales occur.

This Red Herring Prospectus has been prepared on the basis that all offers of Equity Shares will be

made pursuant to an exemption under the Prospectus Directive, as implemented in member States of

the European Economic Area (―EEA‖), from the requirement to produce a prospectus for offers of

Equity Shares. The expression ―Prospectus Directive‖ means Directive 2003/71/EC of the European

Parliament and Council and includes any relevant implementing measure in each Relevant Member

State (as defined below). Accordingly, any person making or intending to make an offer within the

EEA, of Equity Shares which are the subject of the placement contemplated in this Red Herring

Prospectus should only do so in circumstances in which no obligation arises for the Company or any of

the Underwriters to produce a prospectus for such offer. None of the Company and the Underwriters

has authorised, nor do they authorise, the making of any offer of Equity Shares through any financial

intermediary, other than the offers made by the Underwriters which constitute the final placement of

Equity Shares contemplated in this Red Herring Prospectus.

xii

FORWARD-LOOKING STATEMENTS

All statements contained in this Red Herring Prospectus that are not statements of historical fact

constitute ―forward-looking statements.‖ All statements regarding our expected financial condition and

results of operations, business, plans and prospects are forward-looking statements. These forward-

looking statements include statements as to our business strategy, our revenue and profitability,

planned projects and other matters discussed in this Red Herring Prospectus regarding matters that are

not historical facts. These forward-looking statements and any other projections contained in this Red

Herring Prospectus (whether made by us or any third party) are predictions and involve known and

unknown risks, uncertainties and other factors that may cause our actual results, performance or

achievements to be materially different from any future results, performance or achievements

expressed or implied by such forward-looking statements or other projections. Investors can generally

identify forward-looking statements by the use of terminology such as ―aim‖, ―anticipate‖, ―believe‖,

―expect‖, ―estimate‖, ―intend‖, ―objective‖, ―plan‖, ―project‖, ―shall‖, ―will‖, ―will continue‖, ―will

pursue‖ ―contemplate‖, ―future‖, ―goal‖, ―propose‖, ―may‖, ―seek‖, ―should‖, ―will likely result‖, ―will

seek to‖ or other words or phrases of similar import. All forward looking statements are subject to

risks, uncertainties and assumptions about us that could cause actual results to differ materially from

those contemplated by the relevant forward-looking statement.

Actual results may differ materially from those suggested by the forward looking statements due to

risks or uncertainties associated with our expectations with respect to, but not limited to, regulatory

changes pertaining to the industries in India in which we have our businesses and our ability to respond

to them, our ability to successfully implement our strategy, our growth and expansion, technological

changes, our exposure to market risks, general economic and political conditions in India, which have

an impact on our business activities or investments, the monetary and fiscal policies of India, inflation,

deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates

or prices, the performance of the financial markets in India and globally, changes in domestic laws,

regulations and taxes and changes in competition in our industry. Important factors that could cause

actual results to differ materially from our expectations include, but are not limited to, the following:

Limited operating history;

Ability to manage growth effectively;

Success of new loans and services introduced by us;

Competition from banks and financial institutions;

Ability to secure additional capital at terms favourable to us;

Changes in laws and regulations that apply to us; and

General economic and business conditions in India.

For further discussion of factors that could cause our actual results to differ, see ―Risk Factors‖,

―Business‖ and ―Management Discussion and Analysis of Financial Condition and Results of

Operations‖ on pages xiii, 75 and 208 of this Red Herring Prospectus, respectively.

By their nature, certain market risk disclosures are only estimates and could be materially different

from what actually occurs in the future. As a result, actual future gains or losses could materially differ

from those that have been estimated. Forward looking statements speak only as of the date of this Red

Herring Prospectus. We, the Selling Shareholders, the members of the Syndicate and their respective

affiliates do not have any obligation to, and do not intend to, update or otherwise revise any statements

reflecting circumstances arising after the date hereof or to reflect the occurrence of underlying events,

even if the underlying assumptions do not come to fruition. In accordance with SEBI requirements, we

and the Selling Shareholders will ensure that investors in India are informed of material developments

until such time as the grant of listing and trading approvals by the Stock Exchanges.

xiii

SECTION II: RISK FACTORS

An investment in our Equity Shares involves a high degree of risk. You should carefully consider each

of the following risk factors and all other information set forth in this Red Herring Prospectus,

including the risks and uncertainties described below, before making an investment in our Equity

Shares. The risks and uncertainties described below are not the only risks that the Company currently

faces. Additional risks and uncertainties not presently known to the Company or that the Company

currently believes to be immaterial may also have an adverse effect on the Company‟s business, results

of operations and financial condition. If any or some combination of the following risk, or other risks

that are not currently known or believed to be material, actually occur, our business, financial

condition and results of operations could suffer, the trading price of our Equity Shares could decline

and you may lose all or part of your investment. In making an investment decision with respect to the

Issue contemplated herein, you must rely on your own examination of the Company and the terms of

such Issue, including the merits and risks involved. Unless specified or quantified in the relevant risk

factors below, we are not in a position to quantify the financial or other implications of any of the risks

described in this section.

Internal Risks

Risks Relating to our Business

1. Our limited operating history and our fast growing and rapidly evolving business make it difficult to evaluate our business and future operating results on the basis of our past

performance, and our future results may not meet or exceed our past performance.

We were incorporated in 2003 as a private limited company in India and in 2005, we

registered with the RBI as a NBFC-ND. As a result of our limited operating history, there is

limited historical financial and operating information available to help prospective investors

evaluate our past performance with respect to making an investment in our Equity Shares. Our

business is growing and the results and amounts set forth in our financial statements beginning

on page 146 of this Red Herring Prospectus may not provide a reliable indication of our future

performance. Accordingly, you should evaluate our business and prospects in light of the

risks, uncertainties and difficulties frequently encountered by high growth companies in the

early stages of development. Our failure to address these risks and uncertainties successfully

could adversely affect our business and operating results, and a decline in the trading price of

our Equity Shares.

2. If we are unable to manage our growth effectively, including our financial, accounting, administrative and technology infrastructure, our business and reputation could be adversely

affected.

Our network of branches and members has expanded rapidly from 1,353 branches serving

approximately 3.95 million members located in 18 states across India as of March 31, 2009 to

2,029 branches, serving approximately 6.78 million members located in 19 states across India

as of March 31, 2010. We expect the expansion of our geographic footprint and network of

branches and members to continue which may further constrain our capital resources and

make asset quality management increasingly important. We will need to enhance and improve

our financial, accounting, information technology, administrative and operational

infrastructure and internal capabilities in order to manage the future growth of our business.

We may not be able to implement the necessary improvements in a timely manner, or at all,

and we may encounter deficiencies in existing systems and controls. If we are unable to

manage our future expansion successfully, our ability to provide products and services to our

members would be adversely affected, and, as a result, our reputation could be damaged and

our business and results of operations materially and adversely impacted.

3. Downgrading of our credit ratings would increase our cost of borrowing funds and make our ability to raise new funds in the future or renew maturing debt more difficult.

As on the date of filing the Red Herring Prospectus, we have the following debentures

outstanding, all of which have been rated:

xiv

a. Rs. 500 million of 8.30% secured non convertible debentures originally issued to Yes Bank Limited on a private placement basis which were rated as PR1+ by CARE.

According to CARE, instruments with a PR1 rating would have strong capacity for

timely payment of short-term debt obligations and carry lowest credit risk and within

this category, instruments with relatively better credit characteristics are assigned

PR1+ rating.

b. Rs. 500 million of 9.25% secured non convertible debentures originally issued to BALICL on a private placement basis which were rated as PR1+ by CARE.

Further, assignee payouts in some of our loan assignment transactions are rated A1+(SO) by

ICRA and PR1+(SO) by CARE. According to ICRA, A1 rating indicates highest credit quality

rating to short term debt instruments. The PR1 rating by CARE indicates strong capacity for

timely payment of short-term debt obligations and carries lowest credit risk. And a suffix of

‗SO‘ indicates the instruments with structured obligation.

There has not been any down grading of our debt instruments in the last one year before the

date of filing of the Draft Red Herring Prospectus. Though there has been no such

downgrading in the past, we cannot assure you that downgrading of our debt instruments will

not take place in the future. Downgrading of our credit ratings would increase the cost of

raising funds. In addition, our ability to renew maturing debt may be more difficult and

expensive. A downgrade in our credit ratings and an inability to renew maturing debt may also

adversely affect perception of our financial stability.

4. Our ability to pay dividends in the future will depend upon future earnings, financial condition, cash flows, working capital requirements, capital expenditures and lender consents

and there can be no assurance that we will be able to pay dividends in the future.

We currently intend to invest our future earnings, if any, to fund our growth. The amount of

our future dividend payments, if any, will depend upon our future earnings, financial

condition, cash flows, working capital requirements and capital expenditures. In addition, any

dividend payments we make are subject to the prior consent of our lenders pursuant to the

terms of the agreements we have with them. We have not paid any dividends historically and

there can be no assurance that we will be able to pay dividends in the future.

5. There is outstanding litigation against us and our Directors, any final judgments against us could have a material adverse effect on our business, results of operations, financial condition

and prospects.

There are certain proceedings pending in various courts and authorities at different levels of

adjudication against us and our Directors. The amounts claimed in these proceedings have

been disclosed to the extent ascertainable, excluding contingent liabilities but including

amounts claimed jointly and severally from us and other parties. Should any new

developments arise, such as a change in Indian law or rulings against us by appellate courts or

tribunals, we may need to make provisions in our financial statements that could increase

expenses and current liabilities.

Current significant proceedings and litigation against us and our Directors include:

A civil case has been filed against us in the Court of the Principal Junior Civil Judge at Warangal. The matter seeks a permanent injunction against us to prevent our

Company from retrieving certain sums of money lent and an order as to costs.

A civil case has been filed in the District Consumer Redressal Forum, Jajpur, Orissa against us seeking an extension in the repayment tenor from one week to three

months and reduction of rate of interest charged to the members.

A civil case has been filed before the Authority under Minimum Wages Act and Assistant Commissioner of Labour, Srikakulam, Andhra Pradesh against us stating

xv

that we pay below minimum wages and demanding that wages be paid according to

statutory law.

A writ petition has been filed by Jagabandhu Sahu against certain employees of the Company before the High Court of Orissa for the his alleged forced resignation,

illegal detention and assault.

An insolvency petition has been filed against the Company and others by certain individuals before the Additional Senior Civil Judge, Tirupati to declare them

insolvent.

An insolvency petition has been filed by Ms. Vyadya Kavitha and one other against the Company and certain other creditors before the Senior Judge, Jagitilal.

An insolvency petition has been filed by Mr. Sardar Basha against the Company and certain other creditors.

Our Chairman of the Board, Dr. Vikram Akula, is involved in certain legal proceedings in India and the U.S. related to the custody of his minor son.

In addition, we have received several notices that may lead to legal proceedings against us.

Further, we have from time to time initiated legal proceedings against various individuals

relating to our business and operations. For further details of outstanding litigation against us

and our Directors see ―Outstanding Litigation and Material Developments‖ on page 244 of the

Red Herring Prospectus

6. All of our loans are unsecured and if we are unable to control the level of non-performing loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, our

financial condition and results of operations may be materially and adversely affected.

All of our loans are unsecured. Non-performing or low credit quality loans can negatively

impact our results of operations.

Our total gross NPAs as a percentage of gross loans outstanding was 0.33% as of March 31,

2010, 0.34% as of March 31, 2009 and 0.20% as of March 31, 2008. Our net NPAs as a

percentage of net loans outstanding were 0.16% as of March 31, 2010, 0.18% as of March 31,

2009 and 0.16% as of March 31, 2008. Our total gross non-performing loans were Rs. 96.06

million as of March 31, 2010, Rs. 47.88 million as of March 31, 2009 and Rs. 15.44 million as

of March 31, 2008. Our total net non-performing loans were Rs. 48.03 million as of March 31,

2010, Rs. 25.22 million as of March 31, 2009 and Rs. 12.32 million as of March 31, 2008.

We cannot assure you that we will be able to effectively control and reduce the level of the

impaired loans in our total loan portfolio. The amount of our reported non-performing loans

may increase in the future as a result of growth in our total loan portfolio, and also due to

factors beyond our control, such as over-extended member credit that we are unaware of. If

we are unable to manage our NPAs or adequately recover our loans, our results of operations

will be adversely affected.

Our current loan loss reserves may not be adequate to cover an increase in the amount of non-

performing loans or any future deterioration in the overall credit quality of our total loan

portfolio. As a result, if the quality of our total loan portfolio deteriorates we may be required

to increase our loan loss reserves, which will adversely affect our financial condition and

results of operations. Our members are poor and, as a result, might be vulnerable if economic

conditions worsen or growth rates decelerate in India, or if there are natural disasters such as

floods and droughts in areas where our members live. Moreover, there is no precise method

for predicting loan and credit losses, and we cannot assure you that our monitoring and risk

management procedures will effectively predict such losses or that loan loss reserves will be

sufficient to cover actual losses. If we are unable to control or reduce the level of our

nonperforming or poor credit quality loans, our financial condition and results of our

operations could be materially and adversely affected.

xvi

7. Our introduction of new products and services may not be successful and, as a result our reputation would be harmed and our market leadership would be at risk.

We may incur substantial costs to expand our range of products and services and cannot

guarantee that such new products will be successful once they are offered due to our own

shortcomings or as a result of circumstances beyond our control, such as general economic

conditions. In addition, we may not correctly anticipate our members‘ needs or desires, which

may change over time, and from time to time we have discontinued unsuccessful or non-

strategic products. For example, in 2008 we discontinued our Individual Loan Product as a

result of high administration costs. In the event that we fail to develop and launch new

products or services successfully, we may lose any or all of the investments that we have

made in promoting them, and our reputation with our members would be harmed and our

market leadership in the microfinance industry would be at risk. If our competitors are better

able to anticipate the needs of those individuals in our target market, our market share could

decrease.

We currently distribute endowment or whole life insurance policies issued and underwritten

by a third party insurance company to our members. Additionally, we have entered into

arrangements with a mobile phone manufacturer, as well as a consumer goods wholesaler, to

facilitate the distribution of their products to our members. We have also piloted from time to

time new products and other third party products and services. In the event that these products

or any new products we introduce in the future do not meet the standards or expectations of

our members or in the event of a default by these third parties from whom such products are

sourced or disputes originating out of such products or distribution, we may be subject to

reputational risk, which may have further impact our member base and our ability to grow our

member base, consequently further adversely affecting our business, results of operations and

financial condition.

8. We have obtained certain loans which may be recalled by our lenders at any time.

Certain of our indebtedness can be recalled at any time. As of March 31, 2010, our total

secured and unsecured indebtedness is Rs. 26,946.72 million, of which 55.8% can be recalled

by our lenders at any time. For details of our loans, please see ―Indebtedness‖ on page 142 of

this Red Herring Prospectus. If our lenders exercise their right to recall a loan, it could have a

material adverse affect on our financial position.

9. Because we handle cash in a high volume of transactions occurring through a dispersed network of branches and Sangam Managers, we are exposed to operational risks, including

fraud, petty theft and embezzlement, which could harm our results of operations and financial

position.

Because we handle a large amount of cash through a high volume of small transactions taking

place in our network, we are exposed to the risk of fraud or other misconduct by employees or

outsiders. These risks are further exaggerated with the high level of delegation of power and

responsibilities our business model requires. For instance, during fiscal 2010, we discovered

82 cases of cash embezzlement by employees in the aggregate amount of Rs. 15.02 million, 61

cases of misrepresentation by employees in the aggregate amount of Rs. 13.65 million and 31

cases of loans taken by certain borrowers in collusion with and under the identity of other

borrowers in the aggregate amount of Rs. 6.03 million. Fraud and other misconduct can be

difficult to detect and deter. For further details, see ―Outstanding Litigation and Material

Developments‖ on page 244 of this Red Herring Prospectus. Given the high volume of

transactions processed by us, certain instances of fraud and misconduct may go unnoticed

before they are discovered and successfully rectified. Even when we discover such instances

of fraud or theft and pursue them to the full extent of the law or with our insurance carriers,

there can be no assurance that we will recover any such amounts. In addition, our dependence

upon automated systems to record and process transactions may further increase the risk that

technical system flaws or employee tampering or manipulation of those systems will result in

losses that are difficult to detect

xvii

10. In the past our Auditors have included certain qualified statements in relation to matters specified in the Companies (Auditors‟ Report) Order, 2003, annexed to the Auditors‟ report in

the audited financial statements.

The report on our audited financial statements as of and for the year ended March 31, 2010

records statements that there were instances of fraud on our Company by our employees and

borrowers, which were in the nature of cash embezzlement, loans to non-existent borrowers

on the basis of fictitious documentation and loans taken by certain borrowers in collusion with

and under the identity of other borrowers.

The report on our audited financial statements as of and for the year ended March 31, 2009

records statements that there were delays in the deposit of undisputed statutory dues to

appropriate authorities and there were instances of fraud on our Company by our employees,

which were in the nature of cash embezzlement, loans to non-existent borrowers on the basis

of fictitious documentation and a case of fraud in collusion with our vendors.

The report on our audited financial statements as of and for the year ended March 31, 2008

records statements that the scope and coverage of our internal audit system was required to be

enlarged; there were delays in the deposit of undisputed statutory dues to appropriate

authorities; and there were instances of fraud on our Company by our employees, which were

in the nature of cash embezzlement and loans to non-existent borrowers on the basis of

fictitious documentation and a case of unauthorized cash collection by a borrower

11. If we cannot secure the additional capital we need to fund our operations on acceptable terms or at all, our business will suffer.

Our business requires significant capital. We have historically relied on significant debt and

equity issuances, as well as cash flow from operations to fund our operations, capital

expenditures and expansion. Expanding our geographic footprint and extending new

proprietary and distributed product and service offerings to our members will have an impact

on our long-term capital requirements, which are expected to increase significantly. Our

ability to obtain additional capital is subject to a variety of uncertainties, including our future

financial position, the continued success of our core loan products, our results of operations

and cash flows, any necessary government regulatory approvals, contractual consents, general

market conditions for capital-raising activities, and economic, political and other conditions in

India and elsewhere. In addition, adverse developments in the Indian and world credit markets

may significantly increase our debt service costs and the overall costs of our borrowings. We

may not be able to secure timely additional financing on favourable terms, or at all. The terms

of any additional financing may place limits on our financial and operating flexibility. Any

new securities we issue could have additional rights, preferences and privileges than those

available to our shareholders. If we are unable to obtain adequate financing or financing on

terms satisfactory to us, if and when we require it, our ability to grow or support our business

and to respond to business challenges could be limited and our business prospects, financial

condition and results of operations would be materially and adversely affected.

12. Certain of our existing shareholders together may be able to exert substantial voting control over us after this Issue, which may limit your ability to influence corporate matters and may

cause us to take actions that are not in our best interest.

Upon completion of this Issue, certain of our existing shareholders representing our five

largest shareholders as mentioned below will beneficially own, in the aggregate,

approximately 53.5% of our outstanding Equity Shares.

S. No. Name of the Shareholders Number of Equity Shares Shareholding (%)

1 SCI II 9,095,550 14.1

2 SIP I 8,341,792 12.9

3 Kismet Microfinance 7,914,205 12.3

4 SCIGI I 4,951,474 7.7

5 Mr. Vinod Khosla 4,238,866 6.6

Total 34,541,887 53.5

xviii

This concentration of ownership could limit your ability to influence corporate matters

requiring shareholder approval. These existing shareholders will be able to exercise

considerable influence over all matters requiring shareholder approval, including the election

of directors, approval of lending and investment policies and the approval of corporate

transactions, such as a merger or other sale of our Company or its assets. In addition, if our

shareholders do not act together, such matters requiring shareholder approval may be delayed

or not occur at all, which could adversely affect our business. Moreover, these shareholders

are not obligated to provide any business opportunities to us. If these shareholders invest in

another company in competition with us, we may lose the support provided to us by them,

which could materially and adversely affect our business, financial condition and results of

operations. For further details, see ―Capital Structure‖ on page 28 of the Red Herring

Prospectus.

13. Certain of our shareholders, including some of our Promoters, are investment entities and accordingly they or their affiliates have invested or may invest in other companies engaged in

similar businesses thereby giving rise to a conflict of interest.

Certain of our shareholders, including some of our Promoters, are investment entities and

currently hold 76.0% of our outstanding Equity Shares. Accordingly, they or their affiliates

have invested or may invest in other companies engaged in similar businesses thereby giving

rise to a conflict of interest. We cannot assure you that they will continue to act in our best

interest and further we may lose the support provided to us by them, which could materially

and adversely affect our business, financial condition and results of operations.

14. Our management will have broad discretion over the use of the Net Proceeds and the Net Proceeds might not be applied in ways that increase the value of your investment.

We intend to use the Net Proceeds for the purposes described in the ―Objects of the Issue‖ on

page 52 of the Red Herring Prospectus. We currently intend to use the Net Proceeds from the

Fresh Issue to augment our capital base to meet our future capital requirements arising out of

growth in our business. Our management will have broad discretion to use the Net Proceeds

and you will be relying on the judgment of our management regarding the application of these

Net Proceeds.

Expenditure of the Net Proceeds in our business may not lead to an increase in the value of

your investment. Various risks and uncertainties, including those set forth in this ―Risk

Factors‖ section, may limit or delay our efforts to use the Net Proceeds to achieve profitable

growth in our business. For example, our expansion plans and any other future plans could be

delayed due to failure to receive regulatory approvals, technical difficulties, human resource,

technological or other resource constraints, or for other unforeseen reasons, events or

circumstances. We may not be able to attract personnel with sufficient skill or sufficiently

train our personnel to manage our expansion plans. Accordingly, use of the Net Proceeds to

meet our future capital requirements, fund our growth and for other purposes identified by our

management may not result in actual growth of our business, increased profitability or an

increase in the value of our business and your investment.

Pending utilization of the Net Proceeds, we intend to invest such Net Proceeds in bank

deposits as approved by our Board of Directors in accordance with our investment policy.

Although the utilization of the Net Proceeds will be monitored by our Board of Directors and

the Monitoring Agency there are no limitations on interim investments that we can make using

such Net Proceeds.

15. Loans due within one year account for all of our interest income, and a significant reduction in short term loans may result in a corresponding decrease in our interest income.

All of the loans we issue are due within one year of disbursement. The relatively short-term

nature of our loans means that our long-term interest income stream is less certain than if a

portion of our loans were for a longer term. In addition, our members may not obtain new

loans from us upon maturity of their existing loans, particularly if competition increases. The

xix

potential instability of our interest income could materially and adversely affect our results of

operations and financial position.

16. Contingent liabilities could adversely affect our financial condition.

As of March 31, 2010, we had contingent liabilities in the following amounts, as disclosed in

our restated financial statements:

Type Amount

(Rs. in million)

Guarantees given for loans assigned 2,409.38

Contingent liability relating to tax matters 24.09

If any time we must recognize a material portion of these contingent liabilities, it would have

a material adverse effect on our business, financial condition and results of operations.

17. We have issued the following Equity Shares during the last year at a price that may be lower than the Issue Price.

In the last one year, we have issued the following Equity Shares at a price that may be lower

than the Issue Price.

Date of

Allotment

Name of Allotee Equity

Shares

Face

Value

(Rs.)

Issue

Price

(Rs.)

August

18, 2009

Dr. Tarun Khanna 8,080 10.00 300.00

Bajaj Allianz Life Insurance Company

Limited

416,666 10.00 300.00

December

8, 2009

SIP I* 6,256,344 10.00 300.00

Kismet SKS II* 2,655,131 10.00 300.00

ICP Holdings I* 244,150 10.00 300.00

Bajaj Allianz Life Insurance Company

Limited**

1,250,000 10.00 300.00

December

24, 2009

Dr. Vikram Akula (pursuant to the

options allotted under ESOP Plan 2007)

945,424 10.00 49.77

December

31, 2009

16 employees (on a preferential basis

pursuant to the offer made to them at the

AGM of the shareholders of the

Company on September 30, 2009)

17,383 10.00 300.00

January

19, 2010

Catamaran Management Services Private

Limited (as trustee for Catamaran)

937,770 10.00 300.00

March 23,

2010

Mr. Suresh Gurumani (pursuant to the

options allotted under ESOP 2008)

225,000 10.00 300.00

* Pursuant to receipt of Rs. 300 for each CCPS from SIP I, Kismet SKS II and ICP

Holdings I on October 20, 2008, the CCPS were allotted on March 26, 2009 and were

converted into Equity Shares of the Company, in the ratio of one Equity Share for every

CCPS held, pursuant to the circular resolution passed by the Board of Directors on

December 8, 2009 and taken on record on January 5, 2010.

**

Pursuant to receipt of Rs. 300 for each CCPS from BALICL on May 21, 2009, the CCPS

were allotted on August 18, 2009 and were converted into Equity Shares of the

Company, in the ratio of one Equity Share for every CCPS held, pursuant to the

circular resolution passed by the Board of Directors on December 8, 2009 and taken on

record on January 5, 2010.

For further details, see ―Capital Structure‖ on page 28 of this Red Herring Prospectus.

xx

18. If we are not able to attract, motivate, integrate or retain qualified personnel at levels of experience that are necessary to maintain our quality and reputation, it will be difficult for us

to manage our business and growth.

We depend on the services of our executive officers, key employees and Sangam Managers

for our continued operations and growth. In particular, our senior management has significant

experience in the microfinance, banking and financial services industries. The loss of any of

our executive officers, key employees or senior managers could negatively affect our ability to

execute our business strategy, including our ability to manage our rapid growth. Our business

is also dependent on our team of Sangam Managers who directly manage our relationships

with our members. Our business and profits would suffer adversely if a substantial number of

our Sangam Managers left us or became ineffective in servicing our members over a period of

time. Our future success will depend in large part on our ability to identify, attract and retain

highly skilled managerial and other personnel. Competition for individuals with such

specialized knowledge and experience is intense in our industry, and we may be unable to

attract, motivate, integrate or retain qualified personnel at levels of experience that are

necessary to maintain our quality and reputation or to sustain or expand our operations. For

fiscal 2008, 2009 and 2010, our attrition rate for all employees was 24.6%, 29.7% and 25.7%,

respectively. We define attrition as the number of employees that have resigned or been

terminated for any reason during the specified period divided by the average number of

employees for that same period times the number of months in the period. The loss of the

services of such personnel or the inability to identify, attract and retain qualified personnel in

the future would make it difficult for us to manage our business and growth and to meet key

objectives.

19. We have applied for, but have not yet received, consent from some of our lenders for certain transactions requiring such consent.

Under our financing agreements with various banks, we are required to seek their consent to,

inter alia, be able to offer new Equity Shares, change our capital structure, change our

shareholding pattern, incur further debt and effectuate changes in the composition of the

Board. Further, we are required to notify our lenders of certain transactions, including

transactions to offer new Equity Shares, change our capital structure, change our shareholding

pattern, incur further debt, etc. In relation to transfer of 300,000 Equity Shares of the

Company by Yatish Trading Company Private Limited to Quantum (M) Limited on July 9,

2010, we are required to obtain prior consent from six banks. We have made applications

seeking consent from our lenders on July 10, 2010 in relation to this transaction.

If we do not receive such consents in a timely manner or at all, we will be in default under the

relevant financing agreements, which would entitle the respective lenders to call a default

against us and enforce remedies under the terms of such financing agreements, including pre-

payment. A default by us under the terms of any financing document may also trigger a cross-

default under our other financing documents, or our other agreements or instruments,

containing cross-default provisions. Any such termination and subsequent action taken by our

lenders may individually or in aggregate, have an adverse effect on our business, results of

operations and financial condition.

20. Our business and results of operations would be adversely affected by strikes, work stoppages or increased wage demands by our employees.

Our business and results of operations are dependent on the efforts of our employees. In

September and October 2009, operations at two of our regional offices in the states of Andhra

Pradesh and Maharashtra were interrupted by strikes by groups of our employees that

organized themselves for this purpose in those regions. These employees demanded higher

wages and attempted to interrupt our operations in each region. Our operations were not

materially affected in either case and we did not agree to their demands. Both groups ceased

their strikes and we resumed operations in the regions. For further information ple