POWER FINANCE CORPORATION LIMITED · (Incorporated on July 16, 1986 under the Companies Act, 1956 as a public limited company) ... (“RBI”), any registrar of companies or any stock

SHELF PROSPECTUSDated February 21, 2011

(Incorporated on July 16, 1986 under the Companies Act, 1956 as a public limited company)Registered Office and Corporate Office: Urja Nidhi, 1, Barakhamba Lane, Connaught Place, New Delhi 110 001, India.

Tel: +91 11 2345 6000. Fax: +91 11 2341 2545.Compliance Officer & Company Secretary: Mr. J.S. Amitabh, Tel: +91 11 2345 6740 Fax: +91 11 2345 6786.

E-mail: [email protected]. Website: www.pfcindia.com.

POWER FINANCE CORPORATION LIMITED

PUBLIC ISSUE BY POWER FINANCE CORPORATION LIMITED ("COMPANY" OR "ISSUER") OF 'LONG TERMINFRASTRUCTURE BONDS' OF FACE VALUE OF ` 5000 EACH, IN THE NATURE OF SECURED, REDEEMABLE,NON-CONVERTIBLE DEBENTURES, HAVING BENEFITS UNDER SECTION 80CCF OF THE INCOME TAX ACT, 1961, AS AMENDED,("BONDS"), UP TO ` 5,300 CRORES* ("ISSUE"). THE BONDS WILL BE ISSUED AT PAR IN ONE OR MORE TRANCHES UP TO` 5300 CRORES*, ON THE TERMS AND CONDITIONS SET OUT IN THIS SHELF PROSPECTUS AND SEPERATE TRANCHEPROSPECTUSES FOR EACH SUCH TRANCHE.The Issue is being made under the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 ("SEBI DebtRegulations"). This document is for distribution only in India.

*The Issue shall not exceed 25% of the incremental infrastructure investment made by the Company during Fiscal 2010

LEAD MANAGERS TO THE ISSUE

ICICI SECURITIES LIMITEDICICI Centre, H.T. Parekh Marg,Churchgate, Mumbai 400 020Tel: +91 (22) 2288 2460/ 70Fax: +91 (22) 2282 6580Email: [email protected] Grievance Email:[email protected]: www.icicisecurities.comContact person: Mr. Mahesh NatarajanCompliance Officer: Mr. Subir SahaSEBI Registration No.:INM000011179

DEBENTURE TRUSTEE FORTHE BONDHOLDERS

GDA TRUSTEE &CONSULTANCY LTD.Shri NiwasApte Road,1202/29, Shivaji Nagar,Pune - 411004Tel: 91-20-25510401(3 lines)Fax: 91-20-25532567Email: [email protected] Person: Mr. YogiWebsite: www.gdatc.comSEBI Registration No: IND000000034

ISSUE PROGRAMME

ISSUE OPENS ON : [] ISSUE CLOSES ON : []

SBI CAPITAL MARKETS LIMITED202, Maker Tower E, Cuffe Parade,Mumbai 400 005Tel: +91 (22) 2217 8300Fax: +91 (22) 2218 8332Email: [email protected] Grievance Email:[email protected]: www.sbicaps.comContact person: Mr. Puneet DeshpandeCompliance Officer: Mr. Bhaskar ChakrabortySEBI Registration No.: INM000003531

KARVY COMPUTERSHAREPRIVATE LIMITEDKarvy House 46, Avenue 4,Street No. 1, Banjara Hills,Hyderabad- 500 034, IndiaTel: +91-1600-3454001Fax: +91-40-23431551Email: [email protected] Grievance Email:[email protected]: www.karvy.comContact Person: Murali KrishnaSEBI Registration No: INR000000221

REGISTRAR TO THE ISSUE

The subscription list for the Issue shall remain open for subscription during banking hours for the period indicated above, except that the Issue may close on such earlierdate as may be decided by the board of directors of the Company. In the event of early closure of the subscription list of the Issue for any reason other than full subscriptionfor the Bonds, the Company shall ensure that notice is provided to the prospective investors through newspaper advertisements at least three days prior to such earlier dateof Issue closure.Power Finance Corporation Limited is proposing, subject to receipt of requisite approvals, market conditions and other considerations, a further public offer of its equityshares and to file a draft red herring prospectus with the Securities and Exchange Board of India.This document is not, and should not be construed as, an offer of any securities of the Company for sale in the United States or elsewhere. The securities of the Companyare not being registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), and may not be offered or sold within the United States orto, or for the account or benefit of, U.S. persons (as defined in Regulation S under the U.S. Securities Act), except pursuant to an exemption from, or in a transaction notsubject to, the registration requirements of the U.S. Securities Act and applicable U.S. state securities laws.

GENERAL RISKS

Investors are advised to read the Risk Factors carefully before taking an investment decision in relation to this Issue. For taking an investmentdecision, investors must rely on their own examination of the Issuer and the Issue, including the risks involved. Specific attention of theinvestors is invited to Risk Factors on page 8 .This document has not been and will not be approved by any regulatory authority in India,including the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), any registrar of companies or any stockexchange in India. The Bonds are subject to a statutory lock-in for a minimum period of five years from the Deemed Date of Allotment andno trading market would exist or be established for the Bonds for this period, despite the Bonds being listed.

ISSUERS ABSOLUTE RESPONSIBILITY

The Issuer, having made all reasonable inquiries, accepts responsibility for and confirms that this Shelf Prospectus contains all informationwith regard to the Issuer and the Issue, which is material in the context of this Issue, that the information contained in this Shelf Prospectusis true and correct in all material respects and is not misleading in any material respect, that the opinions and intentions expressed herein arehonestly held and that there are no other material facts, the omission of which makes this Shelf Prospectus as a whole or any such informationor the expression of any such opinions or intentions misleading in any material respect.

CREDIT RATING

CRISIL Limited (CRISIL) has, by its letter no. SM/FSR/PFC/2010-11/1601 dated February 04, 2011 assigned a rating of AAA/Stable to theBonds. Further, ICRA Limited has, by its letter no. D/RAT/2010-2011/P3/8 dated February 04, 2011, assigned a rating of LAAA to the Bonds.These ratings are not a recommendation to buy, sell or hold securities and investors should take their own decision. These ratings are subjectto revision or withdrawal at any time by the assigning rating agency(ies) and should be evaluated independently of any other ratings. For therationale for these ratings, see Annexure II.

PUBLIC COMMENTS

The Draft Shelf Prospectus dated February 07, 2011 was filed with the Designated Stock Exchange, pursuant to the provisions of the SEBIDebt Regulations and was open for public comments for a period of seven Working Days, i.e., until 5 p.m. on February 17, 2011.

LISTING

The Bonds are proposed to be listed on the Bombay Stock Exchange Limited (BSE). BSE have given its in-principle listing approval by itsletter dated February 18, 2011. The Designated Stock Exchange for the Issue is BSE.

TABLE OF CONTENTS

SECTION I - GENERAL...............................................................................................................................2

DEFINITIONS AND ABBREVIATIONS ........................................................................................................2 CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA AND CURRENCY

OF PRESENTATON........................................................................................................................................6 FORWARD LOOKING STATEMENTS..........................................................................................................7

SECTION II - RISK FACTORS....................................................................................................................8

SECTION III - INTRODUCTION ..............................................................................................................22

THE ISSUE ...................................................................................................................................................22 SELECTED FINANCIAL INFORMATION...................................................................................................24 SUMMARY OF BUSINESS ..........................................................................................................................35 CAPITAL STRUCTURE ...............................................................................................................................41 OBJECTS OF THE ISSUE...........................................................................................................................125 STATEMENT OF TAX BENEFITS.............................................................................................................126

SECTION IV - ABOUT THE COMPANY................................................................................................129

INDUSTRY OVERVIEW............................................................................................................................129 BUSINESS ..................................................................................................................................................133 REGULATIONS AND POLICIES ...............................................................................................................150 HISTORY AND CERTAIN CORPORATE MATTERS ...............................................................................156 MANAGEMENT.........................................................................................................................................163 STOCK MARKET DATA FOR OUR EQUITY SHARES/DEBENTURES..................................................173 FINANCIAL INDEBTEDNESS...................................................................................................................175

SECTION V LEGAL AND OTHER INFORMATION..........................................................................191

OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS......................................................191 OTHER REGULATORY AND STATUTORY DISCLOSURES..................................................................195

SECTION VI ISSUE RELATED INFORMATION...............................................................................198

ISSUE STRUCTURE...................................................................................................................................198 TERMS OF THE ISSUE ..............................................................................................................................200 PROCEDURE FOR APPLICATION............................................................................................................214

SECTION VII - MAIN PROVISIONS OF ARTICLES OF ASSOCIATION OF THE COMPANY ......222

SECTION VIII OTHER INFORMATION.............................................................................................238

MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION ........................................................238 DECLARATION .........................................................................................................................................240

Annexure I.........FINANCIAL STATEMENTS

Annexure IICREDIT RATINGS

Annexure IIISTOCK MARKET DATA FOR DEBENTURES

2

SECTION I - GENERAL

DEFINITIONS AND ABBREVIATIONS

This Shelf Prospectus uses certain definitions and abbreviations which, unless the context indicates or implies

otherwise, have the meaning as provided below. References to statutes, rules, regulations, guidelines and

policies will be deemed to include all amendments and modifications notified thereto.

Company Related Terms

Term Description

Issuer, PFC, our

Company, or the Company,

or the Corporation

Power Finance Corporation Limited, a public limited company incorporated

under the Companies Act, 1956.

We, or us, our or

Group

Power Finance Corporation Limited and its Subsidiaries, PFC Consulting

Ltd., Chhattisgarh Surguja Power Ltd., Coastal Karnataka Power Limited,

Coastal Maharashtra Mega Power Limited, Orissa Integrated Power Limited,

Coastal Tamil Nadu Power Limited, Sakhigopal Integrated Power Company Limited, Ghogarpalli Integrated Power Company Limited, Tatiya Andhra

Mega Power Ltd., Jabalpur Transmission Company Limited, Bhopal Dhule

Transmission Company Limited.

Articles/ Articles of

Association/AoA

Articles of Association of our Company

BDTCL Bhopal Dhule Transmission Company Limited

PFCCL PFC Consulting Limited

Board/ Board of Directors Board of Directors of our Company

Equity Shares Equity Shares of our Company of face value ` 10 each

JTCL Jabalpur Transmission Company Limited

Memorandum/Memorandum

of Association/MoA

Memorandum of Association of our Company

Registered Office and

Corporate Office

The registered office and corporate office of our Company, situated at

Urjanidhi, 1, Barakhamba Lane, Connaught Place, New Delhi- 110 001

RoC Registrar of Companies, National Capital Territory of Delhi and Haryana

Statutory Auditors/Auditors Raj Har Gopal & Co., Mehra Goel & Co., the statutory auditors of our

Company

Subsidiaries PFC Consulting Ltd., Chhattisgarh Surguja Power Ltd., Coastal Karnataka

Power Limited, Coastal Maharashtra Mega Power Limited, Orissa Integrated

Power Limited, Coastal Tamil Nadu Power Limited, Sakhigopal Integrated

Power Company Limited, Ghogarpalli Integrated Power Company Limited,

Tatiya Andhra Mega Power Ltd., Jabalpur Transmission Company Limited,

Bhopal Dhule Transmission Company Limited.

Issue Related Terms

Term Description

Allotment/ Allot/ Allotted The Issue and allotment of the Bonds to the successful Applicants,

pursuant to the Issue.

Allottee A successful Applicant to whom the Bonds are allotted pursuant to the Issue

Applicant A Resident Individual or an HUF who applies for issuance of Bonds

pursuant to the terms of the prospectus and Application Form

Application Amount The aggregate value of the Bonds applied for, as indicated in the

Application Form

Application Form The form in terms of which the Applicant shall make an offer to subscribe to

the Bonds and which will be considered as the application for Allotment of

Bonds in terms of the prospectus

Application Interest Interest paid on application money in a manner as more particularly

detailed in Terms of the Issue on page 200

Banker(s) to the Issue/ Escrow

Collection Bank(s)

The banks which are clearing members and registered with SEBI with whom

the Escrow Account will be opened and in this case being IndusInd Bank,

3

ING Vysya Bank Limited and Dhanlaxmi Bank Limited

Bond Certificate(s) Certificate issued to the Bondholder(s) pursuant to Allotment

Bondholder(s) Any person holding the Bonds and whose name appears on the beneficial

owners list provided by the Depositories or whose name appears in the

Register of Bondholders maintained by the Issuer

Bonds Long term infrastructure bonds, in the nature of secured, redeemable,

non- convertible debentures of the Company of face value of ` 5,000

each, having benefits under section 80CCF of the Income Tax Act

BSE Bombay Stock Exchange Limited

Buyback Amount The amount specified as buyback amount for the Bonds under Terms of the

Issue on page 200

Buyback Date The date falling five years and one day after the Deemed Date of Allotment

for Series 1 and Series 2 Bonds, and the date falling seven years and one day after the Deemed Date of Allotment for Series 3 and Series 4 Bonds on

which dates the Company shall complete the buyback of the Bonds, as

described under Terms of the Issue on page 200

Buyback Intimation Period The period beginning not more than nine months prior to the Buyback Date

and

ending not later than six months prior to the Buyback Date

Consolidated Bond Certificate In case of rematerialized Bonds held in physical form, the certificate

issued by the Issuer to the Bondholder for the aggregate amount of the

Bonds that are rematerialized and held by such Bondholder

CRISIL CRISIL Limited

Debenture Trust Deed Trust deed to be entered into between the Debenture Trustee and the

Company, within three months from the Deemed Date of Allotment

Debenture Trustee/ Trustee Trustee for the Bondholders in this case being GDA Trustee & Consultancy

Ltd.

Deemed Date of Allotment The Deemed Date of Allotment shall be the date as may be

determined by the Board of the Company and notified to the Designated

Stock Exchange

Designated Date The date on which Application Amounts are transferred from the

Escrow Account to the Public Issue Account or the Refund Account,

as appropriate, following which the Board of Directors shall Allot the Bonds to the successful Applicants, provided that the sums received in

respect of the Issue will be kept in the Escrow Account up to this date

Designated Stock Exchange BSE

Draft Shelf Prospectus This shelf prospectus dated February 07, 2011 filed by the Company

with the Designated Stock Exchange in accordance with the provisions of

SEBI Debt Regulations for public comments

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

favour the Applicants will issue cheques or drafts or remit the

funds electronically, in respect of the Application Amount when submitting

an Application

Escrow Agreement Agreement to be entered into by the Company, the Registrar to the

Issue, the Lead Managers and the Escrow Collection Bank(s) for

collection of the Application Amounts and where applicable, refunds

of the amounts collected from the Applicants on the terms and conditions

thereof

I-Sec ICICI Securities Limited

ICRA ICRA Limited

Issue Public issue of the Bonds, in one or more tranches, for an amount up

to ` 5,300 crore, subject to not exceeding 25% of the incremental infrastructure investment made by the Company in Fiscal 2010

Issue Closing Date []

Issue Opening Date []

Issue Period The period between the Issue Opening Date and the Issue Closing Date

inclusive of both days, during which prospective Applicants may submit

their Application Forms

4

Lead Managers ICICI Securities Limited and SBI Capital Markets Limited

Lock-in Period Five years from the Deemed Date of Allotment

Market Lot One Bond

Notification Notification No. 77/2010/F.No.178/31/2010-SO(ITA-1) dated October 11,

2010 issued by the Central Board of Direct Taxes, MoF

NSE National Stock Exchange of India Limited

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

from the Escrow Accounts for the Issue on the Designated Date

Record Date Date falling 15 days prior to the date on which interest or the

Maturity Amount is due and payable

Refund Account The account opened with the Refund Bank(s), from which refunds, if any, of

the whole or part of the Application Amount shall be made

Refund Bank ING Vysya Bank Limited

Refund Interest Interest paid on Application Amount in a manner as more particularly

detailed in Terms of the Issue Refund Interest on page 204

Register of Bondholders The register of Bondholders maintained by the Issuer in accordance

with the provisions of the Companies Act and as more particularly

detailed in Terms of the Issue Register of Bondholders on page 202

Registrar Appointment Letter Appointment letter dated February 03, 2011 issued by the Company

to the Registrar to the Issue, under the terms of which the Registrar has

agreed to act as the Registrar to the Issue

Registrar to the Issue or

Registrar

Karvy Computershare Private Limited

Resident Individual An individual who is a person resident in India as defined under the

Foreign Exchange Management Act, 1999

SBI Caps SBI Capital Markets Limited

Series 1 Bonds The ` 5,000, []percent, non-cumulative Bonds with buyback facility after expiry of the Lock-in Period

Series 2 Bonds The ` 5,000, []percent, cumulative Bonds due with buyback facility after

expiry of the Lock-in Period

Series 3 Bonds The ` 5,000, []percent, non-cumulative Bonds with buyback facility

after expiry of the Lock-in Period

Series 4 Bonds The ` 5,000, []percent, cumulative Bonds with buyback facility after

expiry of the Lock-in Period

Shelf Prospectus This Shelf Prospectus dated February 21, 2011 filed by the Company with the

RoC in accordance with the provisions of the SEBI Debt Regulations

Stock Exchanges BSE

Trading Lot One Bond

Tranche Prospectus / Tranche I

- Prospectus The Tranche Prospectus dated February 21, 2011 containing inter alia the

coupon rate for the Bonds and certain other information filed with the ROC in

accordance with the provisions of the Act and the Debt Regulations

Working Days All days excluding Saturdays, Sundays or a public holiday in India or

at any other payment centre notified in terms of the Negotiable Instruments

Act, 1881

Conventional and General Terms or Abbreviations

Term/Abbreviation Description/ Full Form

Act/ Companies Act Companies Act, 1956

ADB Asian Development Bank

AGM Annual General Meeting

AS Accounting Standards as notified under Companies Act

BSE Bombay Stock Exchange Limited


CDSL Central Depository Services (India) Limited

DoEA Department of Economic Affairs, Ministry of Finance, Government of India

DoFS Department of Financial Services, Ministry of Finance, Government of India

5

Depository(ies) CDSL and NSDL

Depositories Act Depositories Act, 1996

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

DRR Debenture Redemption Reserve

DTC Direct Tax Code

FDI Foreign Direct Investment

FEMA Foreign Exchange Management Act, 1999

FII Foreign Institutional Investor (as defined under the SEBI (Foreign

Institutional Investors) Regulations, 1995), registered with the SEBI under

applicable laws in India

FIMMDA Fixed Income Money Markets and Derivatives Association of India

Financial Year/ Fiscal/ FY Period of 12 months ended March 31 of that particular year

GDP Gross Domestic Product

CRAR Capital to Risk Assets Ratio

GoI or Government Government of India

ICAI Institute of Chartered Accountants of India

IFRS International Financial Reporting Standards

Income Tax Act Income Tax Act, 1961


India Republic of India

Indian GAAP Generally accepted accounting principles followed in India

IT Information technology

LIBOR London Inter-Bank Offer Rate

MoF Ministry of Finance, GoI

MCA Ministry of Corporate Affairs, GoI

NBFC Non Banking Finance Company, as defined under applicable RBI guidelines

NECS National Electronic Clearing System

NEFT National Electronic Fund Transfer

NSDL National Securities Depository Limited


p.a. Per annum

PAN Permanent Account Number

PAT Profit After Tax

PFI Public Financial Institution, as defined under Section 4A of the Companies

Act

PMDO Pooled Municipal Debt Obligation

PPP Public Private Partnership

RBI Reserve Bank of India

` or Rupees or Indian Rupees The lawful currency of India

RTGS Real Time Gross Settlement

SARFAESI Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002

SEBI Securities and Exchange Board of India

SEBI Act SEBI Act, 1992

SEBI Debt Regulations SEBI (Issue and Listing of Debt Securities) Regulations, 2008

Technical and Industry Related Terms


Yield Ratio of interest income to the daily average of interest earning assets

6

CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA AND

CURRENCY OF PRESENTATON

Certain Conventions

All references in this Shelf Prospectus to India are to the Republic of India and its territories and possessions.

Financial Data

Unless stated otherwise, the financial data in this Shelf Prospectusis derived from (i) our audited standalone

financial statements, prepared in accordance with Indian GAAP and the Companies Act for the nine months

ended December 31, 2010, Fiscal 2010, 2009, 2008, 2007 and 2006; and/or (ii) our consolidated financial

statements, prepared in accordance with Indian GAAP and the Companies Act for the Fiscal 2010, 2009, 2008

and the nine months ended December 31, 2010. In this Shelf Prospectus, any discrepancies in any table between

the total and the sums of the amounts listed are due to rounding off. All decimals have been rounded off to one

decimal point.

The current financial year of the Company commences on April 1 and ends on March 31 of the next year, so all

references to particular financial year, fiscal year and Fiscal or FY, unless stated otherwise, are to the

12 months period ended on March 31 of that year.

The degree to which the Indian GAAP financial statements included in this Shelf Prospectuswill provide

meaningful information is entirely dependent on the readers level of familiarity with Indian accounting

practices. Any reliance by persons not familiar with Indian accounting practices on the financial disclosures

presented in this Shelf Prospectusshould accordingly be limited.

Currency and Unit of Presentation

In this Shelf Prospectus, references to Rs., Indian Rupees, INR and Rupees are to the legal currency of

India and references to US$, USD, and U.S. dollars are to the legal currency of the United States of

America, references to Euro and are to the legal currency of the European Union and references to Yen

and JPY are to the legal currency of Japan.

Industry and Market Data

Any industry and market data used in this Shelf Prospectusconsists of estimates based on data reports compiled

by government bodies, professional organizations and analysts, data from other external sources and knowledge

of the markets in which we compete. These publications generally state that the information contained therein

has been obtained from publicly available documents from various sources believed to be reliable but it has not

been independently verified by us or its accuracy and completeness is not guaranteed and its reliability cannot be assured. Although we believe the industry and market data used in this Shelf Prospectusis reliable, it has not

been independently verified by us. The data used in these sources may have been reclassified by us for purposes

of presentation. Data from these sources may also not be comparable. The extent to which the industry and

market data is presented in this Shelf Prospectus is meaningful depends on the readers familiarity with and

understanding of the methodologies used in compiling such data. There are no standard data gathering

methodologies in the industry in which we conduct our business and methodologies and assumptions may vary

widely among different market and industry sources.

Exchange Rates

The exchange rates (in Rs) of the US$, JPY and as for last five years and September 30, 2010 are provided below:

Source: SBI TT Selling rates

Currency 31-Mar-2006 31-Mar-2007 31-Mar-2008 31-Mar-2009 31-Mar-2010 30-Sep-2010

USD 44.86 43.77 40.11 51.45 45.58 45.35

JPY 0.383 0.3724 0.4029 0.5265 0.4900 0.5440

Euro 54.73 58.34 63.47 68.43 61.31 61.79

7

FORWARD LOOKING STATEMENTS

Certain statements contained in this Shelf Prospectus that are not statements of historical fact constitute

forward-looking statements. Investors can generally identify forward-looking statements by terminology such

as aim, anticipate, believe, continue, could, estimate, expect, intend, may, objective,

plan, potential, project, pursue, shall, seek, should, will, would, or other words or phrases of

similar import. Similarly, statements that describe our strategies, objectives, plans or goals are also forward-

looking statements. All statements regarding our expected financial conditions, results of operations, business

plans and prospects are forward-looking statements. These forward-looking statements include statements as to

our business strategy, revenue and profitability, new business and other matters discussed in this Shelf

Prospectus that are not historical facts. 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. Important factors that could cause actual results to differ materially from our

expectations include, among others:

growth prospects of the Indian infrastructure sector and related policy developments; general, political, economic, social and business conditions in Indian and other global

markets;

our ability to successfully implement our strategy, growth and expansion plans; competition in the Indian and international markets; availability of adequate debt and equity financing at reasonable

terms;

performance of the Indian debt and equity markets; changes in laws and regulations applicable to companies in India, including foreign exchange control

regulations in India; and

other factors discussed in this Shelf Prospectus, including under Risk Factors on page 8. Additional factors that could cause actual results, performance or achievements to differ materially include, but

are not limited to, those discussed under Business on page 133. The forward-looking statements contained in

this Shelf Prospectus are based on the beliefs of management, as well as the assumptions made by, and

information currently available to, management. Although we believe that the expectations reflected in such

forward-looking statements are reasonable at this time, we cannot assure investors that such expectations will

prove to be correct. Given these uncertainties, investors are cautioned not to place undue reliance on such

forward-looking statements. If any of these risks and uncertainties materialize, or if any of our underlying

assumptions prove to be incorrect, our actual results of operations or financial condition could differ materially

from that described herein as anticipated, believed, estimated or expected. All subsequent forward-looking

statements attributable to us are expressly qualified in their entirety by reference to these cautionary statements.

8

SECTION II - RISK FACTORS

You should carefully consider all the information in this Shelf Prospectus, including the risks and uncertainties

described below, and under Business on page 133 and Financial Statements, before making an investment

in the Bonds. The risks and uncertainties described in this section are not the only risks that we currently face.

Additional risks and uncertainties not known to us or that we currently believe to be immaterial may also have

an adverse effect on our business, prospects, results of operations and financial condition. If any of the

following or any other risks actually occur, our business, prospects, results of operations and financial condition

could be adversely affected and the price of, and the value of your investment in the Bonds could decline and

you may lose all or part of your investment.

The financial and other related implications of risks concerned, wherever quantifiable, have been disclosed in

the risk factors mentioned below. However, there are certain risk factors where the effect is not quantifiable and

hence has not been disclosed in such risk factors. The numbering of risk factors has been done to facilitate ease of reading and reference, and does not in any manner indicate the importance of one risk factor over another.

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

1. We have significant exposure to certain borrowers and if these exposures become non-performing, the quality of our asset portfolio may be adversely affected.

We are a power sector specific public financial institution. This sector has a limited number of borrowers and

our past and future exposure to these borrowers is anticipated to be large. In addition, many of these borrowers

are public sector utilities that are loss making.

As of September 30, 2010, our ten largest single borrowers in the aggregate accounted for 53.19 % of our total

outstanding exposure. Any negative trends or financial difficulties particularly among our large borrowers could

increase the level of non-performing assets in our portfolio and adversely affect our business and financial

performance. For the foreseeable future, we expect to continue to have a significant concentration of loans to

certain borrowers. Credit losses on our significant single borrowers and borrower group exposures could

adversely affect our business and financial performance.

2. We may not be able to recover, or there may be a delay in recovering, the expected value from our securities and collaterals which may affect our financial condition.

We have granted certain loans to our borrowers where partial security has been created or disbursements have

been made pending security or loans have been granted without security. As of September 30, 2010, out of our

total loans outstanding of Rs. 87,906.41 crore, Rs.53,771.33 crore, or 61.17% of our outstanding loans are

secured by charges on project assets, Rs. 15,385.71, or 17.50% of our outstanding loans are unsecured but have

a state government guarantee as collateral and Rs. 18,749.37 crore, or 21.33% of our outstanding loans are

unsecured. These unsecured loans include Rs. 4,245.74 crore or 4.82% of our outstanding loans that have been

issued to the NTPC and PGCIL.

Although, legislation has been introduced, which may strengthen the rights of creditors for faster realization of collateral in the event of default, we cannot guarantee that we will be able to realize the full value of our

collateral, on account of certain factors including delays due to the fact that certain loans have been granted by

us as a part of consortium of lenders or delays in taking immediate action in bankruptcy foreclosure

proceedings, stock market downturns and defects in the perfection of collateral and fraudulent transfers by

borrowers. Further, in the event that a specialized regulatory agency gains jurisdiction over the borrower,

actions on behalf of the creditors may be further delayed. Any failure to recover the expected value of collateral

security could expose us to a potential loss.

In addition, the RBI has devised a corporate debt restructuring system to put in place an institutional mechanism

for timely and transparent restructuring of corporate debt. The applicable RBI guidelines envisage that in case of

debts amounting to Rs. 720 crore and above, lenders holding more than 75% of such debt can decide to restructure the debt and such a decision would be binding on the remaining lenders. In situations where other

lenders own more than 75% of the debt of a borrower, we could be required by the other lenders to agree to

restructure the debt, regardless of our preferred method of settlement. Apart from the applicable RBI guidelines,

9

we may be a part of a syndicate of lenders wherein the majority elects to pursue a different course of action than

the course of action chosen by us. Any such unexpected loss could adversely affect our business and financial

performance.

3. Our borrowers insurance of assets may not be adequate to protect them against all potential losses to which they may be subject, which could affect our ability to recover the loan amounts due to us.

Under our loan agreements, where loans are extended on the basis of charge on assets, our borrowers are

required to create a charge on their assets in our favour in the form of hypothecation or mortgage or both. In

addition, terms and conditions of the loan agreements require our borrowers to maintain insurance against

damage caused by any disasters including floods, fires and earthquakes or theft on their charged assets as

collateral against the loan granted by us. However, in most cases our borrowers may not have the required

insurance coverage, or they have not renewed the insurance policies or the amount of insurance coverage may

be less than the replacement costs of all covered property and is therefore insufficient to cover all financial

losses that our borrowers may suffer. In the event the assets charged in our favour are damaged, it may affect

our ability to recover the loan amounts due to us.

4. We will be impacted by volatility in interest rates in our operations, which could cause our net interest margins to decline and adversely affect our profitability.

We will be impacted by volatility in interest rates in our operations. Interest rates are highly sensitive due to

many factors beyond our control, including the monetary policies of the RBI, deregulation of the financial sector

in India, domestic and international economic and political conditions and other factors. Due to these factors,

interest rates in India have historically experienced a relatively high degree of volatility.

When interest rates decline, we are subject to greater re-pricing and prepayment risks as borrowers take

advantage of the attractive interest rate environment. In periods of low interest rates and high competition

among lenders, borrowers may seek to reduce their borrowing cost by asking lenders to re-price loans. If we are

required to restructure loans, it could adversely affect our profitability. If borrowers prepay loans, the return on

our capital may be impaired as any prepayment premium we receive may not fully compensate us for the costs

of utilizing funds elsewhere. If interest rates rise we may have greater difficulty in maintaining a low effective cost of funds compared to our competitors, who may have access to lower cost funds.

5. Our interest income and profitability is dependant on the continued growth of our asset portfolio.

Our average net interest margin has increased from 3.98% in fiscal 2009-10, to 4.13% (Annualised) for six

months ending September 30, 2010.

6. Our contingent liabilities could adversely affect our financial condition.

As of September 30, 2010, we have contingent liabilities of Rs. 5,873.68 crore including non- funded contingent

exposure of Rs. 476.09 crore in the form of guarantees and Rs. 5,389.19 crore in the form of letters of comfort

issued to borrowers banks in connection with letters of credit. These contingent non-funded exposures form

8.11% of our total exposure. Other contingent liabilities are Rs. 8.40 crore, which are claims against our

Company. If these contingent liabilities were to fully materialize, our financial condition could be adversely affected. For further details on our contingent liabilities, see Financial Statements in the Annexure I of this Shelf

Prospectus.

7. If the level of non-performing assets in our loan portfolio were to increase, our financial condition would be adversely affected.

As of September 30, 2010, we had gross NPAs of Rs. 14.19 crores, which forms 0.016% of our loan assets against

which we have made provision of Rs. 7.95 crores. The provisioning has been made in terms of prudential norms

laid down internally by us. We are currently exempt from certain RBI provisioning norms. If the entire gamut of

RBI provisioning norms were to become applicable to us our level of non-performing assets and provisions with

respect thereto could be significantly higher. If we are not able to prevent increases in our level of non-

performing assets, our business and our future financial performance could be adversely affected.

8. We currently engage in foreign currency borrowing and lending and we are likely to continue to do so in the future, which will expose us to fluctuations in foreign exchange rates, which could adversely

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affect our financial condition.

As of September 30, 2010, we had foreign currency borrowings outstanding of US$ 541.73 million, Japanese

Yen 22,053.96 million and Euro 27.63 million, the total of which was equivalent to Rs. 3,827.21 crores, or

5.20% of our total borrowings. We may continue to be involved in foreign currency borrowing and lending in

the future, which will further expose us to fluctuations in foreign currency rates. Volatility in foreign exchange

rates could adversely affect our business and financial performance. We are also affected by adverse movements

in foreign exchange rates to the extent they impact our borrowers negatively, which may in turn impact the

quality of our exposure to these borrowers. Foreign lenders may also impose conditions more onerous than

domestic lenders

9. We are involved in a number of legal proceedings that, if determined against us, could adversely impact our business and financial condition.

We are involved in a number of legal proceedings that, if determined against us, could adversely impact our

business and financial condition.

We are involved in thirteen proceedings with the Income Tax Department that are currently before various

judicial forums in India. These cases pertain to appeals we have filed in relation to demands raised on us by the

Income Tax Department for various assessment years. We have deposited these demands with the Income Tax

Department from time to time. However, we have also filed appeals against the demands. In relation to cases pertaining to the assessment years 2000-2001, 2001-2002, 2005-2006 and 2006-2007, the Income Tax

Department has appealed against the refunds of Rs. 50.36 crores granted to us in relation to the aforesaid

assessment years.

In addition, we have filed two Original Applications (OA) before the Debts Recovery Tribunal, Delhi against

Bihar State Hydroelectric Power Corporation Limited (BSHPCL), now the matter has been referred to High

Power Committee comprising of Cabinet Secretary & others. Being aggrieved of this BSHPCL has filed four set

of appeals before Debts Recovery Appellate Tribunal against the order of the Debts Recovery Tribunal. The

provisions for the same has already been entered in our financials,. A employee from the Corporation has filed a

writ petition against us. For more details please refer Outstanding Lititgation and Material Developments

on page 191.

There is a case pending before the under Consumer Dispute Redressal Forum and few miscellaneous cases

which do not have any significant impact on the financial position of our company. For further details, see the

section titled Outstanding Litigation and Material Developments beginning on page 191 of this Shelf

Prospectus.

10. We may incur shortfalls in the advance subsidy received under the Accelerated Generation and Supply Programme (AG&SP) of the GoI, which may affect our financial condition.

In fiscal 1998, the GoI started the AG&SP, a scheme for providing interest subsidies for various projects. We

oversee and operate this scheme on behalf of the GoI. The scheme subsidises our normal lending rates on loans

to state power utilities. The subsidy is paid in advance directly to us from the central government budget and is

to be passed on to the borrowers against their interest liability arising in future under the AG&SP.

We maintain an interest subsidy fund account on account of the subsidy claimed from the GoI at net present

value which is calculated at certain pre-determined and indicative discount rates, irrespective of the actual

repayment schedule, moratorium period and duration of repayment. The impact of the difference between the

indicative discount rate and period considered at the time of drawal and the actual can be ascertained only after

the end of the respective repayment period in relation to that particular loan. There might be instances where

there is a shortfall or a surplus in the subsidy received from the GoI. In the event of there being a shortfall, we shall have to bear the difference, which may affect our financial condition.

11. If we are unable to manage our growth effectively, our business and financial results could be adversely affected.

Our business has grown since we began operations in March 1988. From March 31, 2006 to March 31, 2010,

our disbursements increased at a compounded annual growth rate of 22%. We intend to continue to grow our

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business, which could place significant demands on our operational, credit, financial and other internal risk

controls. It may also exert pressure on the adequacy of our capitalization, making management of asset quality

increasingly important.

Our asset growth will be primarily funded by the issuance of new debt. We may have difficulty in obtaining

funding on attractive terms. Adverse developments in the Indian credit markets, such as the recent increase in

interest rates, may significantly increase our debt service costs and the overall cost of our funds.

Any inability to manage our growth effectively on favourable terms could have a material adverse effect on our

business and financial performance. Because of our growth and the long gestation period for power sector

investments, our historical financial statements may not be an accurate indicator of our future financial

performance.

12. We might not be able to develop or recover costs incurred on our Ultra Mega Power Projects and our failure to do so may have an adverse effect on our profitability.

We are the nodal agency on the initiative of the GoI to facilitate development of UMPPs having a capacity of

4,000 MW each and have incorporated eleven subsidiary companies to act as Special Purpose Vehicles

(SPVs) for these projects. It is proposed to transfer these SPVs to successful bidders, through a tariff based international competitive bidding process, who will then implement these projects, on payment of development

costs incurred by each company. These SPVs have been set up to facilitate the tie-up of inputs, linkages and

clearances for these projects to facilitate development of the UMPPs. It is proposed that these SPVs shall

undertake preliminary studies and shall obtain necessary clearances and tie-ups including water, land and power

selling arrangements, prior to award of these projects to successful bidders. We have and are likely to continue

to incur expenses in connection with these UMPPs on account of proposed pre-feasibility studies, establishment

costs including costs on account of obtaining fuel linkages, water supply, clearances, acquisition of land, pre-bid

conferences, advertisements and publicity. It may be possible that we are unable to develop these UMPPs on

account of various factors including lack of environmental clearances, resistance by local residents or our

inability to find a developer. Further, there might be instances where we may also not be able to fully recover

our expenses from the successful bidder, which may result in financial loss to us and to that extent it would adversely affect our financial condition.

13. We may make equity investments in power sector in the future and such investments may not be recovered.

We may make equity investments in the power sector either directly or indirectly. As of September 30, 2010,

our investments in equity and equity linked instruments were Rs. 30.56 crores. The value of these investments

depends on the success and continued viability of these businesses. In addition to the project-specific risks

described in the above risk factors, we have limited control over the operations or management of these

businesses. Therefore, our ability to realize expected gains as a result of our equity interest in a business is

highly dependent on factors outside our control. Write-offs or write-downs in respect of our equity investments

may adversely affect our financial performance.

14. The GoI holds a majority of our Equity Shares and can therefore determine the outcome of shareholder voting and influence our operations.

Our principal shareholder, GoI, holding 89.78% of our Equity Shares, exercises a significant degree of influence

over us and will be able to control the outcome of any proposal that can be passed with a majority shareholder

vote. In addition, the GoI significantly influences our operations through its various departments and policies.

15. We are subject to restrictive covenants under our credit facilities that could limit our flexibility in managing our business.

There are restrictive covenants in the agreements we have entered into with certain banks and financial

institutions for our short term borrowings, medium term borrowings, long term borrowings and bonds trust

deeds. These restrictive covenants require us to maintain certain financial ratios and seek the prior permission of

these banks/financial institutions for various activities, including, amongst others, selling, leasing, transferring

or otherwise disposing of any part of our business or revenues, effecting any scheme of amalgamation or reconstitution, implementing a new scheme of expansion or taking up an allied line of business. Such restrictive

covenants in our loan and bond documents may restrict our operations or ability to expand and may adversely

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affect our business. These restrictive covenants may also affect some of the rights of our shareholders, including

the payment of the dividends in case of any default in debt to such lenders. For details of these restrictive

covenants, see the section titled Financial Indebtedness beginning on page 175 of this Shelf Prospectus.

16. Our success depends in large part upon our management team and skilled personnel and our ability to attract and retain such persons.

Our future performance depends on the continued service of our management team and skilled personnel. We

also face a continuous challenge to recruit and retain a sufficient number of suitably skilled personnel,

particularly as we continue to grow. There is significant competition for management and other skilled

personnel in our industry, and it may be difficult to attract and retain the personnel we need in the future. The

loss of key personnel may have an adverse affect on our business, results of operations, financial condition and

ability to grow.

17. Our trademark or logo has not been registered under the Trade Marks Act, 1999 and our failure to protect our intellectual property rights may adversely affect our business.

We do not have a registered trademark over our name and logo under the Trade Marks Act, 1999 .Any failure to

protect our intellectual property rights may adversely affect our business.

18. The power sector financing industry is becoming increasingly competitive and our growth will depend on our ability to compete effectively and maintain a low effective cost of funds.

We face increasing competition from public and private sector commercial banks in India and from other

financial institutions that provide power sector finance products or services. Many of our competitors have

greater and cheaper resources than we do. Competition in our industry depends on, among other things, the

ongoing evolution of government policies relating to the industry, the entry of new participants into the industry

and the extent to which there is consolidation among banks and financial institutions in India.

Our ability to compete effectively is dependent on our ability to maintain a low effective cost of funds. Our

borrowing costs have been competitive in the past initially due to the sizeable equity contribution by the GoI as

a 100% owner, the availability of tax-free bonds, SLR bonds and loans guaranteed by the GoI and subsequently as a result of our strong credit ratings. With the growth of our business, we are increasingly reliant on funding

from the debt capital markets and commercial borrowings. The market for such funds is competitive and our

ability to obtain funds on acceptable terms will depend on various factors including our ability to maintain our

credit ratings. If we are unable to access funds at an effective cost that is comparable to or lower than our

competitors, we may not be able to offer competitive interest rates to our borrowers, which could adversely

affect our business growth.

19. Power projects carry certain risks, which to the extent they materialize could adversely affect our business and financial performance.

Our business mainly consists of lending to and providing advisory services to power sector projects in India.

Power sector projects carry project-specific as well as general risks. These risks are generally out of our control

and include:

political, regulatory, fiscal, monetary, legal actions and policies that may adversely affect the viability of projects to which we lend;

changes in government and regulatory policies relating to the power sector;

delays in the construction and operation of projects to which we lend;

adverse changes in demand for, or the price of, power generated or distributed by the projects to which we lend;

the willingness and ability of consumers to pay for the power produced by projects to which we lend;

shortages of, or adverse price developments for, raw materials and key inputs for power production such as coal and natural gas;

increased project costs due to environmental challenges and changes in environmental regulations;

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potential defaults under financing arrangements of project companies and their equity investors;

failure of co-lenders with us under consortium lending arrangements to perform on their contractual obligations;

failure of third parties such as contractors, fuel suppliers, sub-contractors and others to perform on their contractual obligations in respect of projects to which we lend;

adverse developments in the overall economic environment in India;

adverse fluctuations in interest rates or currency exchange rates; and

economic, political and social instability or occurrences such as natural disasters, armed conflict and terrorist attacks, particularly where projects are located or in the markets they are intended to serve.

To the extent these or other risks relating to the power projects we finance materialize, the quality of our asset

portfolio and our profitability may be adversely affected.

20. Negative trends in the Indian power sector or the Indian economy could adversely affect our business and financial performance.

We were founded with the objective of extending finance to and promoting Indian power projects and related

activities. For the foreseeable future, we expect to continue to be a sector specific public financial institution

with a focus on the Indian power sector. Any negative trend or financial difficulty in the Indian power sector could adversely affect our business and financial performance.

We believe that the further development of Indias power sector is dependent on regulatory framework, policies

and procedures that facilitate and encourage private and public sector investment in the power sector. Many of

these policies are evolving and their success will depend on whether they properly address the issues faced and

are effectively implemented.

Additionally, these policies will need continued support from stable and experienced regulatory regimes

throughout India that not only stimulate and encourage the continued movement of capital into power

development, but also lead to increased competition, appropriate allocation of risk, transparency and more

efficient power supply and demand management to the end consumer.

The allocation of capital and the continued growth of the power sector are also linked to the continued growth of

the Indian economy. Since much of the power supply in India has historically been provided by the central and

state governments at a relatively low charge to consumers, the growth of the power industry will be impacted by

consumers income levels and the extent to which they would be willing to pay or can be induced to pay for

power.

If the central and state governments initiatives and regulations in the power sector do not proceed to improve

the power sector as intended or if there is any downturn in the macroeconomic environment in India or in the

power sector, our business and financial performance and the price of our Equity Shares could be adversely

affected.

21. Material changes in the regulations that govern us and our borrowers could cause our business to suffer.

We are regulated by the Companies Act and some of our activities are subject to supervision and regulation by

statutory authorities including the MoF, RBI, SEBI and Stock Exchanges. Additionally, our borrowers in the

power sector are subject to supervision and regulation by the CERC and SERC. See the section titled

Regulations and Policies beginning on page 150 of this Shelf Prospectus. Further, we are subject to changes in

Indian law, as well as to changes in regulation and government policies and accounting principles. We also

receive certain benefits and take advantage of certain exemptions available to our classification as a public

financial institution under section 4A the Companies Act and as a NBFC under the RBI Act, 1934. The laws and

regulations governing us could change in the future and any such changes could adversely affect our business,

our future financial performance and the price of our Equity Shares, by requiring a restructuring of our activities, which may impact our results of operations.

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22. We have certain cash credit facilities which can be recalled by our lenders at any time that may affect our financial condition adversely.

We have certain cash credit facilities amounting to Rs. 1,350 crores as on September 30, 2010 which can be

recalled by our respective lenders at any time. In the event any of our lenders recall the cash credit facilities, we

may face adverse liquidity problems and our financial condition may get affected to the extent of the financial

assistance recalled.

23. We are in process of executing a perpetual lease deed for our registered office premises and consequently do not have title to the premises at present.

In accordance with the Memorandum of Agreement dated February 5, 2002 entered into with NDMC, we were

required to execute a perpetual lease deed with the NDMC after completion of construction of the building

where our registered office is located. We are currently awaiting execution of the same, as a result of which, we

presently do not hold title to the premises where our registered office is situated.

24. Our business and our industry are dependent on the policies and support of the Government of India which makes us susceptible to changes to such policies and the level of support we receive.

We are a GoI undertaking operating in a regulated industry. Our business and our industry are dependent,

directly and indirectly, on the policies and support of the GoI in many significant ways, including with respect

to the cost of our capital, the financial strength of our borrowers, the management and growth of our business

and our industry and our overall profitability. Historically, we have been able to reduce our cost of capital and

reliance on commercial borrowings because of various forms of assistance received from GoI. Currently, we

receive tax concessions with respect to certain types of our bonds that enable us to price such bonds at a lower

rate of interest than would otherwise be available to us. We also benefit from direct tax benefits provided by the

GoI.

The GoI also impacts the nature of our business in a number of ways. In particular, the GoI establishes the

schemes in which we and our borrowers participate. Like any other public sector undertaking, the GoI can also

influence or determine key decisions about our Company, including with respect to dividends and the

appointment of members of our Board.

Additionally, the GoI may implement policies that are inconsistent with our business objectives. For example,

although we intend to continue to diversify our asset portfolio and continue to increase generation-related

lending activity, our lending capacity is not unlimited and the GoI could seek refocus of our lending capacity on transmission and distribution projects or rural areas.

Our borrowers are also significantly impacted by the policies and support of the GoI in a variety of ways, as the

GoI regulates the industry in which our borrowers operate. For example, the GoI has established a number of

schemes and provides incentives that provide benefits to power projects that have enhanced the financial

viability of the projects and the financial position of our borrowers. Additionally, the GoI has in the past assisted

us in procuring the repayment of our loans from our borrowers.

Furthermore, the growth of our business is dependent upon the continued growth of the power sector and the

overall Indian economy, which are significantly impacted by the policies of the GoI. Changes in the policies of,

or in the level of direct or indirect support to us provided by, the GoI in these or other areas could have a

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

25. Our ability to borrow from various banks may be restricted by changes in guidelines issued by the RBI imposing restrictions on banks in relation to their exposure on NBFCs, including us, that may adversely affect our growth and margins.

The RBI regulates on a continuous basis, the permitted exposure (both lending and investment, including off

balance sheet exposures) that banks may hold with respect to NBFCs such as ourselves. Accordingly, banks

may assume exposure limits of up to 15% of the bank's capital funds as per its last audited balance sheet for a

NBFC engaged in businesses similar to our Company, provided the exposure in excess of 10%, is on account of

funds on-lent by the NBFC to the infrastructure sector.

Presently, the ceiling on bank credit-linked to Net Owned Fund of NBFCs has been withdrawn in respect of all

NBFCs registered with the RBI and engaged in principal business of loan and investment activities, among

15

others. Accordingly, banks may extend need based working capital facilities as well as term loans to all such

NBFCs.

Furthermore, the RBI has suggested that banks consider fixing internal limits for their aggregate exposure to all

NBFCs and may formulate suitable loan policies with the approval of their boards of directors within the

prudential guidelines and exposure norms prescribed by the RBI to extend various kinds of credit facilities to

NBFCs subject to certain conditions.

Although we do not believe such exposure limits has had any adverse effects on our own liquidity, we believe

that individual lenders from whom we currently borrow may not be able to continue to provide us funds.

As we grow our business and increase our borrowings we may face similar limitations with other lenders, which

could impair our growth and interest margins and could therefore have a material adverse effect on our business,

financial condition and results of operations.

26. We may fail to obtain certain regulatory approvals in the ordinary course of our business in a timely manner or at all, or to comply with the terms and conditions of our existing regulatory approvals and

licenses which may have a material adverse effect on the continuity of our business and may impede our

effective operations in the future.

We require certain regulatory approvals, sanctions, licenses, registrations and permissions (collectively,

approvals) for operating our businesses. We may not receive or be able to renew such approvals in the time

frames anticipated by us or at all, which could adversely affect our business. If we do not receive, renew or

maintain the regulatory approvals required to operate our business it may have a material adverse effect on the

continuity of our business and may impede our effective operations in the future. Additionally, any historical or

future failure to comply with the terms and conditions of our existing regulatory or statutory approvals may

cause us to lose or become unable to renew such approvals. For further details, see the section titled Other

Regulatory and Statutory Disclosures on page 195 of the Shelf Prospectus.

27. We are subject to stringent labour laws, thus making it difficult for us to maintain flexible human resource policies, which could have an adverse affect on our business, financial condition and results of

operations.

India has stringent labour legislation that protects the interests of workers, including legislation that sets forth

detailed procedures for employee removal and dispute resolution and imposes financial obligations on

employers upon employee layoffs. This makes it difficult for us to maintain flexible human resource policies,

discharge employees or downsize, which though not quantifiable, may adversely affect our business and

profitability.

28. Some of the properties taken on lease by us may have certain irregularities in title, as a result of which our operations may be impaired.

We have taken on lease properties for the purposes of our branch offices and for residential purposes for our

employees. Certain of these properties may not have been constructed or developed in accordance with local

planning and building laws and other statutory requirements. In addition, there may be certain irregularities in

title in relation to some of our owned/leased properties. For example, some of the agreements for such

arrangements may not have been duly executed and/or adequately stamped or registered in the land records of

the local authorities or the lease deeds have expired and have not yet been renewed. Our business may be

adversely affected if we are unable to continue to utilize these properties as a result of any irregularity of title or

otherwise.

29. We have not entered into any definitive arrangements to utilise the Net Proceeds towards the object of this Issue.

We intend to utilize the Net Proceeds to augment our capital base to meet the future capital requirements arising

out of growth in our assets, primarily our loan and investment portfolio due to the growth of the Indian economy

and the Indian power sector. Our Company has not entered into any definitive agreements for utilization of the

Net Proceeds towards the object of this Issue. For further details in this regard, see the section titled Objects of

the Issue on page 125 of the Shelf Prospectus.

30. We may become liable for the acts or omissions of external consultants engaged by PFC Consulting

16

Limited (PFCCL).

Our Companys wholly-owned subsidiary, PFCCL, provides consultancy services and may undertake execution

and valuation of projects in the power distribution sector on behalf of its clients. For these purposes, PFCCL

employs external consultants. In the event that any acts or omissions of these external consultants result in

professional negligence or breach of contract, we could become liable to our clients or third parties for the acts

or omissions of such external consultants which could have an adverse affect on our business, financial

condition and results of operations.

31. Any Cross Default of financial indebtedness would trigger payment to all other borrowings made by the corporation thereby adversely affecting the liquidity position of the Company

we have given cross default covenant in few of our borrowings which means that if we default in any of our

obligation under the loan, the loan which has the cross default clause will also become payable even if there is

no breach of covenant or default of payment on this loan. The risk may have impact on the liquidity in case of

happening of such event.

32. Volatility in Foreign Exchange and unhedged foreign currency could adversely affect our financial conditions and results of operations and prices of our equity shares

We have put in place Currency Risk Management (CRM) policy to manage risks associated with foreign

currency borrowings. We enter into hedging transactions to cover exchange rate and interest rate risk through

various instruments like currency forward, option, principal swap, interest rate swap and forward rate

agreements.

We are currently engaged in borrowing from the foreign market in foreign currency. The enhanced level of

borrowing will expose us to fluctuations in foreign exchange rates which may have adverse effects on financial

results of the corporation. As on September 30, 2010 our outstanding foreign currency borrowing is 5.2 % .

Although we have in place currency risk management policy to manage risk associated with foreign currency

borrowing but there is no assurance that it will remain effective over a period of time. We may be exposed to

fluctuations in foreign currency rates with the increased foreign currency borrowings. Volatility in foreign

exchange could adversely affect our financial conditions.

As on September 30, 2010, we had entered into hedging transaction or lent on back-to-back basis to cover 12%

of our foreign currency principal exposure.

33. Significant differences exist between Indian GAAP and IFRS which may be material to investors assessment of our financial condition.

Significant differences exist between the present accounting standards and IFRS which could have a material

effect on the financial results of the company. The Institute of Chartered Accountants of India, the accounting

body that regulates the accounting firms in India has announced the conversion with IFRS with a fiscal period commencing April 1st 2013 for banks and financial institutions. As we transit to IFRS reporting we may

encounter difficulties in implementing the same, there is no assurance that our adoption of IFRS will not

adversely affect our reported results of operations or financial condition.

34. The impact of the introduction of Direct Tax Code Bill

The Honble Finance Minister has presented the Direct Tax Code Bill, 2010 (DTC Bill) on August 30, 2010,

which is proposed to be effective from April 1, 2012. The DTC Bill is likely to be presented before the Indian

Parliament. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the financials of

the Corporation.

35. There is a significant risk due to changes in Environment norms being followed for the thermal power projects with the corporations main focus for financing of thermal projects, it may pose problems in

future.

With the adoption of norms provided for the climate conservation in line with the global parameters there may

be risk for the environmental norms being followed for the thermal power projects which is the PFCs major

focus in financing of the generation projects. This may pose a problem in the future sanctions/ disbursements

17

and also the timely implementation of these Power Projects. Consequently any delay in implementation of these

projects will have adverse impact on the financials of the Corporation.

36. As the Company adopts Information Technology the risk exists for the possibilities of IT frauds

With the computerization of the accounting, payroll, human resource systems and in other areas of PFC, there is

every possibility of fraud related to hacking of internal systems, possibility of manual intervention which may

lead to frauds.

RISKS RELATING TO THE INDIAN ECONOMY

We are an Indian company and all of our assets and customers are located in India. Consequently, our financial

performance will be influenced by political, social and economic developments in India and in particular by the

policies of the GoI.

1. A slowdown in economic growth in India could adversely impact our business.

We are dependent on prevailing economic conditions in India and our results of operations are significantly

affected by factors influencing the Indian economy. Any slowdown in economic growth in India could

adversely affect us, including our ability to grow our loan portfolio, the quality of our assets, and our ability to

implement our strategy.

Any slowdown in the growth or negative growth of sectors where we have a relatively higher exposure could

adversely impact our performance. Any such slowdown could adversely affect our business, prospects, results of

operations and financial condition.

2. Significant shortages in the supply of crude oil, natural gas or coal could adversely affect the Indian economy and the power sector projects to which we have exposure, which could adversely affect us.

India imports approximately 75 % of its requirements of crude oil. Crude oil prices are volatile and are subject

to a number of factors such as the level of global production and political factors such as war and other conflicts,

particularly in the Middle East, where a substantial proportion of the worlds oil and natural gas reserves are

located. Further, in June 2010, the GoI eliminated subsidies on certain petroleum products, and there have been

recent media reports regarding the proposed deregulation of diesel and liquefied petroleum gas in the near

future.

Any significant increase in oil prices could affect the Indian economy, including the power sector, and the

Indian banking and financial system. High oil prices could also add to inflationary pressures in the Indian economy. Additionally, increases in oil prices may have a significant impact on the power sector and related

industries in which we have substantial exposure. This could adversely affect our business including our ability

to grow, the quality of our asset portfolio, our financial performance and our ability to implement our strategy.

In addition, natural gas is a significant input for power projects. India has experienced interruptions in the

availability of natural gas, which has caused difficulties in these projects. Continued difficulties in obtaining

reliable, timely supply of natural gas could adversely affect some of the projects we finance and could impact

the quality of our asset portfolio and our financial performance. Prices of other key raw materials, for example

steel, coal and cement, have also risen in recent years and if the prices of such raw materials approach levels that project developers deem unviable, this will result in a slowdown in the infrastructure sector and thereby reduce

our business opportunities, our financial performance and our ability to implement our strategy.

Continued shortages of fuel could adversely affect some of the projects we finance and could impact the quality

of our asset portfolio and our financial performance.

3. Political instability or changes in the government could delay the liberalization of the Indian economy and adversely affect economic conditions in India generally, which could impact our financial results and prospects.

Since 1991, successive Indian governments have pursued policies of economic liberalization, including

significantly relaxing restrictions on the private sector. Nevertheless, the role of the Indian central and state

governments in the Indian economy as producers, consumers and regulators has remained significant. Although,

the current government has announced policies and taken initiatives that support the economic liberalization

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policies, the rate of economic liberalization could change, and specific laws and policies affecting banking and

finance companies, foreign investment and other matters affecting investment in our securities could change as

well. Any major change in government policies might affect the growth of Indian economy and thereby our

growth prospects. Additionally, as economic liberalization policies have been a major force in encouraging

private funding of power sector development, any change in these policies could have a significant impact on

power sector development, business and economic conditions in India, which could adversely affect our

business and our future financial performance.

4. Difficulties faced by other financial institutions or the Indian financial sector generally could cause our business to suffer.

We are exposed to the risks consequent to being part of the Indian financial sector. This sector in turn may be

affected by financial difficulties and other problems faced by Indian financial institutions. Certain Indian

financial institutions have experienced difficulties during recent years, and some co-operative banks have also

faced serious financial and liquidity difficulties. Any major difficulty or instability experienced by the Indian

financial sector could create adverse market perception, which in turn could adversely affect our business and

financial performance.

5. Terrorist attacks, civil unrest and other acts of violence or war involving India and other countries could adversely affect the financial markets and our business.

Terrorist attacks and other acts of violence or war may negatively affect the Indian markets on which our Equity

Shares trade and also adversely affect the worldwide financial markets. These acts may also result in a loss of

business confidence, make travel and other services more difficult and ultimately adversely affect our business.

In addition, any deterioration in relations between India and Pakistan might result in investor concern about

stability in the region. India has also witnessed civil disturbances in recent years and it is possible that future

civil unrest as well as other adverse social, economic and political events in India could have a negative impact

on us. Such incidents could also create a greater perception that investment in Indian companies involves a

higher degree of risk and could have an adverse impact on our business

6. Natural calamities could have a negative impact on the Indian economy and cause our business to suffer.

India has experienced natural calamities such as earthquakes, floods and drought in the recent past. The extent

and severity of these natural disasters determine their impact on the Indian economy. In previous years, many

parts of India received significantly less than normal rainfall. As a result, the agricultural sector recorded

minimal growth. Prolonged spells of below normal rainfall in the country or other natural calamities could have

a negative impact on the Indian economy, thereby affecting our business, prospects, results of operation and

financial condition.

7. Any downgrading of our debt rating or Indias sovereign rating by a credit rating agency could have a negative impact on our business.

Any adverse revisions to our credit rating or Indias sovereign credit ratings for domestic and international debt

by credit rating agencies may adversely impact our ability to raise additional financing, and the interest rates and

other commercial terms at which such additional financing is available. This could have a material adverse

effect on our business and financial performance, our ability to obtain financing for lending operations.

8. The Indian and global financial sector is very competitive and the ability of banks and financial institutions to grow depends on their ability to compete effectively.

There is heavy competition among Indian public and private sector banks, foreign banks operating in India and

financial institutions to lend to power sector. Some of these institutions are smaller and may be more flexible

and better positioned to take advantage of market opportunities than big banks. In particular, private banks may have operational advantages in implementing new technologies, rationalizing branches and recruiting employees

through incentive-based compensation. Additionally, both the Indian and global financial sector may experience

further consolidation, resulting in fewer banks and financial institutions. The GoI has recently permitted foreign

banks to set up wholly owned subsidiaries in India. These developments are likely to further increase

competition and may stimulate consolidation in the Indian financial sector. These competitive pressures affect

the Indian financial sector and our growth will depend in large part on our ability to respond in an effective and

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timely manner to these competitive pressures.

9. There may be other changes to the regulatory framework that could adversely affect us.

The statutory and regulatory framework for the Indian power sector has changed significantly in recent years

and the impact of these changes is yet to be seen. The Electricity Act, 2003 (the Electricity Act) puts in place

a framework for reforms in the sector, but in many areas the details and timing are yet to be determined. It is

expected that many of these reforms will take time to be implemented. Furthermore, there could be additional

changes in the areas of tariff and other policies, the unbundling of the State Power Utilities, restructuring of

companies in the power sector, open access and parallel distribution, and licensing requirements for, and tax

incentives applicable to companies in the power sector. In 2004, the GoI reviewed the Electricity Act. We

presently do not know what the nature or extent of review in future will be, and cannot assure that such review

will not have an adverse impact on our financial condition and results of operations.

10. Direct capital market access by our borrowers could adversely affect us.

The Indian capital markets are developing and maturing and, as such, there may be a shift in the pattern of

power sector financing. Financially stronger state power utilities might source their fund requirement directly

from the market. We have a large exposure to state power utilities and such changes may have an adverse

impact on our business, financial condition and results of our operations.

11. Recent global economic conditions have been unprecedented and challenging and have had, and continue to have, an adverse effect on the Indian financial markets and the Indian economy in general,

which has had, and may continue to have, a material adverse effect on our business, financial condition

and results of operations.

Recent global market and economic conditions have been unprecedented and challenging with tighter credit

conditions and recession in most major economies continuing into 2009.

Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs,

geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have

contributed to increased market volatility and diminished expectations for western and emerging economies..

These conditions, combined with volatile oil prices, declining business and consumer confidence and increased

unemployment, have contributed to volatility.

As a result of these market conditions, the cost and availability of credit has been and may continue to be

adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets

generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers. These factors have led to a

decrease in spending by businesses and consumers alike and corresponding decreases in global infrastructure

spending and commodity prices. Continued turbulence in the United States and international markets and

economies and prolonged declines in business consumer spending may adversely affect our liquidity and

financial condition, and the liquidity and financial condition of our customers, including our ability to refinance

maturing liabilities and access the capital markets to meet liquidity needs.

These global market and economic conditions have had, and continue to have, an adverse effect on the Indian

financial markets and the Indian economy in general, which may continue have a material adverse effect on our business and our financial performance.

RISKS RELATING TO THE BONDS

1. There has been no prior public market for the Bonds and it may not develop in the future, and the price of the Bonds may be volatile.

The Bonds have no established trading market. Moreover, the Bonds are subject to statutory lock-in

POWER FINANCE CORPORATION LIMITED · (Incorporated on July 16, 1986 under the Companies Act, 1956 as a public limited company) ... (“RBI”), any registrar of companies or any stock

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