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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:
[email protected]
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: [email protected]
Investor Grievance Id:
[email protected]
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: [email protected]
Investor Grievance Id:
[email protected]
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-
[email protected]
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: [email protected]
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:[email protected]://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:[email protected]:[email protected]://www.credit-suisse.com/in/ipo/https://www.credit-suisse.com/in/ipo/mailto:[email protected]
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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
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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,
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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.
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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
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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
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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
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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
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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.
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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.
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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.
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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:
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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
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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.
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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
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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
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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
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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.
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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