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Draft Letter of OfferDated October 15, 2010

For Equity Shareholders of our Bank only

The Karnataka Bank LimitedOur Bank was incorporated on February 18, 1924 as The Karnataka Bank Limited under the Indian Companies Act, 1913. The

certificate to commence business was obtained on May 23, 1924. Our Bank received its license to carry on the banking business inIndia under the Banking Regulation Act, 1949, from the Reserve Bank of India on April 04, 1966. Our Bank has been allotted CIN

L85110KA1924PLC001128 under the Companies Act, 1956.Registered Office: P.B. No. 599, Mahaveera Circle, Kankanady, Mangalore - 575 002

Tel: +91 (0824) 2228222 Fax: +91 (0824) 2225588Contact Person: Mr. Y V Balachandra, Company Secretary and Compliance Officer

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

FOR PRIVATE CIRCULATION TO THE EQUITY SHAREHOLDERS OF OUR BANK ONLY

ISSUE OF [] EQUITY SHARES WITH A FACE VALUE OF RS. 10 EACH (EQUITY SHARES) FOR CASH AT A

REMIUM OF RS. [] PER EQUITY SHARE AGGREGATING TO AN AMOUNT NOT EXCEEDING RS. [] CRORES

BY THE KARNATAKA BANK LIMITED (THE BANK OR THE ISSUER) TO THE EXISTING EQUITY

SHAREHODERS OF THE BANK ON A RIGHTS BASIS IN THE RATIO OF 2 EQUITY SHARES FOR EVERY 5 EQUITY

SHARES HELD ON THE RECORD DATE, I.E. [], 2010 (THE RIGHTS ISSUE). THE ISSUE PRICE FOR THE

EQUITY SHARES IS [] TIMES OF THE FACE VALUE OF THE EQUITY SHARES.

GENERAL RISK

Investments in equity and equity related securities involve a degree of risk and investors should not invest any funds in this RightsIssue 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 Rights Issue. For taking an investment decision, investors must rely on their own examination ofour Bank and the Rights Issue including the risks involved. The securities being offered in the Rights Issue have not beenrecommended or approved by Securities and Exchange Board of India (SEBI) nor does SEBI guarantee the accuracy or adequacy ofthis Draft Letter of Offer. Investors are advised to refer Risk Factors on page 8 before making an investment in this Rights

Issue.

ISSUERS ABSOLUTE RESPONSIBILITY

Our Bank, having made all reasonable inquiries, accepts responsibility for and confirms that this Draft Letter of Offer contains allinformation with regard to our Bank and the Rights Issue, which is material in the context of the Rights Issue, that the informationcontained in the Draft Letter of Offer 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 make this DraftLetter of Offer as a whole or any of such information or the expression of any such opinions or intentions misleading in any material

respect.LISTING

Our existing Equity Shares are listed on the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange ofIndia Limited (NSE). The Equity Shares offered through this Draft Letter of Offer are proposed to be listed on the BSE and theNSE. We have received "in-principle" approvals from the BSE and the NSE for listing the Equity Shares to be allotted pursuant to

this Rights Issue vide their letter dated [] and [], respectively. For the purposes of the Rights Issue, the Designated StockExchange is [].

LEAD MANAGER TO THE ISSUE REGISTRAR TO THE ISSUE

Edelweiss Capital Limited14

thFloor, Express Towers,

Nariman Point, Mumbai 400 021Telephone: +91 22 4086 3535Facsimile: +91 22 4086 3610

E-mail: [email protected]

Investor Grievance E-mail: [email protected]

Website: www.edelcap.comContact Person: Mr. Sumeet Lath/Mr. Jibi JacobSEBI Registration No. INM0000010650

Integrated Enterprises India LimitedNo 30 Ramana Residency 4th Cross,Sampige Road, Malleswaram,Bangalore 560 003Telephone: + 91 80 23460815-818

Facsimile: + 91 80 23460189E-mail: [email protected] Grievance E-mail: [email protected]:www.iepindia.comContact Person: Mr. S. VijayagopalSEBI Registration No: INR 000000544

ISSUE PROGRAMME

ISSUE OPENS ONLAST DATE FOR REQUEST FOR

SPLIT APPLICATION FORMS ISSUE CLOSES ON

[] [] []


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TABLE OF CONTENTS

PRESENTATION OF FINANCIAL INFORMATION..................................................................... ............... 3

ABBREVIATIONS AND TECHNICAL TERMS.................................................................... ......................... 4

RISK FACTORS ........................................................... ............................................................... ........................ 8

SUMMARY OF THE ISSUE ............................................................................................................................26

SUMMARY FINANCIAL INFORMATION...................................................................................................27

GENERAL INFORMATION............................................................................................................................32

CAPITAL STRUCTURE...................................................................................................................................35

OBJECTS OF THE ISSUE................................................................................................................................42

STATEMENT OF TAX BENEFITS.................................................................................................................43

REGULATIONS AND POLICIES............................................................. ...................................................... 51

HISTORY OF OUR BANK AND OTHER CORPORATE MATTERS....................................................... 52OUR MANAGEMENT........................................................... ............................................................... ............ 55

FINANCIAL STATEMENTS ...........................................................................................................................61

STOCK MARKET DATA FOR EQUITY SHARES OF OUR BANK ......................................................... 62

LEGAL AND OTHER INFORMATION.........................................................................................................64

LICENSES AND APPROVALS .......................................................................................................................73

STATUTORY AND OTHER INFORMATION............................... ............................................................... 74

TERMS AND PROCEDURE OF THE ISSUE................................................................................................85

MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION..................................................... 117

DECLARATION........................................................ ................................................................... ................... 118


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PRESENTATION OF FINANCIAL INFORMATION

Unless stated otherwise, the financial information used in this Draft Letter of Offer is derived from our Banksfinancial statements as of fiscal 2010 and Reviewed financial statements for the six months ended on September30, 2010 prepared in accordance with Indian GAAP and in accordance with the SEBI ICDR Regulations, asstated in the report of our Statutory Auditors for the fiscal 2010, M/s Vishnu Daya & Co, Chartered Accountantsand M/s R.K Kumar & Co., Chartered Accountants, included in this Draft Letter of Offer. The current Auditorsof our Bank are M/s Vishnu Daya & Co, Chartered Accountants and M/s R.K Kumar & Co., CharteredAccountants.

Our fiscal year commences on April 1 and ends on March 31 of the next year. Unless stated otherwise,references herein to a fiscal year are to the fiscal year ended March 31 of a particular year.

In this Draft Letter of Offer, any discrepancies in any table between the total and the sum of the amounts listedmay be due to rounding off.

Unless otherwise stated, throughout this Draft Letter of Offer all figures have been expressed in INR.


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ABBREVIATIONS AND TECHNICAL TERMS

In this Draft Letter of Offer, all references to Rupees, Rs. , Re or INR refer to Indian Rupees, theofficial currency of India; references to the singular also refer to the plural and reference to a gender also refersto any other gender, wherever applicable, and the words Lakh or Lac mean 100 thousand and the wordmillion means 10 lakh and the word crores means 10 million or 100 lakhs and the word billionmeans 1,000 million or 100 crores.

CONVENTIONAL/ GENERAL TERMS

Act The Companies Act, 1956, as amended

Articles or AOA Articles of Association of our Bank

Board The Board of Directors of our Bank or the Committee authorized to acton its behalf

Equity Shares The Issued, Subscribed and Paid Up Equity Share Capital of our Bankand the additional equity shares of our Bank offered pursuant to the

Rights IssueDepository A depository registered with SEBI under the SEBI (Depository and

Participant) Regulations, 1996, as amended from time to time.

Rights Equity Shares The equity shares of our Bank offered pursuant to the Rights Issue

SEBI ICDR Regulations Securities and Exchange Board of India (Issue of Capital and DisclosureRequirements) Regulations, 2009 as amended

ISIN International Securities Identification Number allotted by the depository

Memorandum or MOA Memorandum of Association of our Bank

ISSUE RELATED TERMS

Abridged Letter of Offer The abridged letter of offer to be sent to Eligible Equity Shareholders ofour Bank with respect to this Issue in accordance with SEBI ICDR

RegulationsAllotment Unless the context otherwise requires, the allotment of Rights Equity

Shares pursuant to the Issue.

Application Unless the context otherwise requires, refers to an application for

allotment of the Rights Equity Shares in the Issue.

Allottee(s) Unless the context otherwise requires, an Investor(s) to whom RightsEquity Shares are allotted.

ASBA/ApplicationSupported by BlockedAmount

The application (whether physical or electronic) used by an Investors tomake an application authorizing the SCSB to block the amount payableon application in their specified bank account

ASBA Investor An applicant who;a) holds the shares of our Bank in dematerialized form as on the recorddate and has applied for entitlements and / or additional shares indematerialized form;

b) has not renounced his/her entitlements in full or in part;c) is not a renouncee;

d) is applying through a bank account maintained with SCSBs.

Bankers To The Issue The Karnataka Bank Limited

CAF / Composite ApplicationForm

The form used by an Investor to make an application for the Allotment ofEquity Shares in the Issue

Controlling Branches Such branches of the SCSBs which coordinate applications under theIssue by the ASBA Investors with the Registrar to the Issue and the StockExchanges and a list of which is available at http://www.sebi.gov.in

Designated Branches Such branches of the SCSBs which shall collect CAF from ASBAinvestor and a list of which is available on http:// www.sebi.gov.in

Designated StockExchange/DSE The Designated Stock Exchange shall be [

]


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DLOF / Draft Letter Of Offer Draft Letter of Offer of our Bank for the rights issue of [] equity sharesof Rs. 10 each at a premium of Rs. [] per share

Equity Shareholders/EligibleEquity Shareholders

Means a holder/beneficial owner of equity shares of The Karnataka BankLimited as on the record date i.e. [].

Investors The Eligible Equity Shareholders of our Bank as on the Record Date and

the Renouncees who have submitted an Application to subscribe to the

Issue.Issue/Rights Issue Issue of []equity shares with a face value of Rs. 10/- each (Rights

Equity Shares) for cash at a price of Rs. [] including a premium of Rs.[] aggregating upto Rs. [] crores to the existing equity shareholders ofour Bank on rights basis in the ratio of 2 Rights Equity Shares for every 5Equity Shares held on the record date i.e. []

Issue Price Rs. []/- per Rights Equity Share

Issue Closing Date []

Issue Opening Date []

Issue Proceeds The proceeds of this Issue that is available to our Bank.

Lead Manager/ Edelweiss Edelweiss Capital Limited 14th

floor, Express Towers, Nariman Point,Mumbai- 400021

Letter of Offer The letter of offer to be filed with the Stock Exchanges afterincorporating SEBI comments on the Draft Letter of Offer dated []

Record Date []

Renouncee(s) Any person(s) who has / have acquired Rights Entitlements from theEligible Equity Shareholders.

Rights Entitlement The number of Equity Shares that an Eligible Equity Shareholder isentitled to in proportion to his / her shareholding in our Bank as on theRecord Date.

Registrar To The Issue Integrated Enterprises India Limited

Self Certified Syndicate Bankor SCSB

The Banks which are registered with SEBI under SEBI (Bankers to anIssue) Regulations, 1994 and offers services of ASBA, including blocking

of bank account and a list of which is available onhttp://www.sebi.gov.in/pmd/scsb/pdf

Stock Exchanges BSE and NSE

BANK/INDUSTRY RELATED TERMS

We, us, our, the Issuer,the Bank, our Bank, The

Karnataka Bank Limited orKarnataka Bank

Unless the context otherwise indicates or implies, refers to TheKarnataka Bank Limited

Auditors The statutory auditors of our Bank M/s Vishnu Daya & Co, CharteredAccountants and R K Kumar & Co.

Chairman The Chairman of Board of Directors our Bank

Repatriation Investment on repatriation basis means an investment the sale proceeds

of which are, net of taxes, eligible to be repatriated out of India, and theexpression Investment on non-repatriation basis, shall be construed

accordingly.The BR Act The Banking Regulation Act, 1949 and subsequent amendments thereto

ABBREVIATIONS

AY Assessment Year

AGM Annual General Meeting

AS Accounting Standard As Issued By The Institute Of CharteredAccountants Of India

BPLR Benchmark Prime Lending Rate

BG Bank Guarantee

BSE Bombay Stock Exchange Limited

CAGR Compounded Annual Growth Rate

CDSL Central Depository Services (India) Limited

DEMAT Dematerialized (Electronic/Depository as the context may be)

DIN Director Identification Number


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DP Depository Participant

EGM Extra-Ordinary General Meeting

EPS Earnings Per Share

FCNR Foreign Currency Non Resident

FDI Foreign Direct Investment

FEMA Foreign Exchange Management Act, 1999 and the subsequent

amendments theretoFERA Foreign Exchange Regulation Act, 1973

FII Foreign Institutional Investors (as defined under the Securities andExchange Board of India (Foreign Institutional Investors) Regulations,1995) registered with SEBI.

FIPB Foreign Investment Promotion Board

FINANCIAL YEAR / FY Financial Year

GOI / Government Government Of India

HUF Hindu Undivided Family

IT Income-Tax Act, 1961

ITAT Income Tax Appellate Tribunal

DLOF Draft Letter of Offer

NR Non ResidentNRE ACCOUNT Non Resident External Account

NRI Non Resident Indian

NRO ACCOUNT Non Resident Ordinary Account

NSDL National Securities Depository Limited

NSE National Stock Exchange of India Limited

OCB Overseas Corporate Bodies

PAN/GIR No. Income Tax Permanent Account Number/General Index ReferenceNumber

RBI Reserve Bank Of India

SAF Split Application Form

SEBI Securities And Exchange Board of India

SEBI (SAST) Regulations, 1997 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

1997 and subsequent amendments theretoST Service Tax

TAN Tax Deduction Account Number

TECHNICAL AND INDUSTRY TERMS AND ABBREVIATIONS

AFS Available for sale

ALCO Asset Liability Management Committee

ATMs Automated Teller Machines

Bps Basis points

CAIIB Certified Associate of Indian Institute of Bankers

CAR Capital Adequacy Ratio

CBS Core Banking Solutions

CDR Corporate Debt RestructuringCRAR Capital to Risk Weighted Assets Ratio

CRR Cash Reserve Ratio

DBOD Department of Banking Operations and Development

DRS Disaster Recovery Site

DRT Debts Recovery Tribunal

ECGC Export Credit and Guarantee Corporation of India Ltd

ECS Electronic Clearing Services

EPS Earnings Per Share

FBT Fringe Benefit Tax

GAAP Generally Accepted Accounting Principles

HFT Held for trading

HTM Held to Maturity

IRDA Insurance Regulatory and Development Authority

IT Income Tax


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KYC Know Your Customer Norms as stipulated by the Reserve Bank of India

LIC Life Insurance Corporation of India

FCNR (Account) Foreign Currency Non Resident (Account)

FCNR (Banks) Foreign Currency Non Resident (Banks)

NAV Net Asset Value

NPA Non-Performing Asset

NEFT National Electronic Fund TransferNSLR Non- Statutory Liquidity Ratio

MSME Micro Small and Medium Enterprises. Micro Enterprise shall mean wherethe investment in plant and machinery does not exceed twenty-five lakhrupees. Small Enterprise shall mean where the investment in plant andmachinery is more than twenty-five lakh rupees but does not exceed fivecrore rupees, and Medium Enterprise shall mean where the investment inplant and machinery is more than five crore rupees but does not exceed

ten crore rupees

PAT Profit after Tax

PBIT Profit before Interest and Tax

RIDF Rural Infrastructure Development Fund

RTGS Real Time Gross Settlement

SARFAESI Act2002/Securitisation Act

Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interests Act, 2002, as amended

SGL Subsidiary General Ledger

SLR Statutory Liquidity Ratio

Tier I Capital The core capital of a bank, which provides the most permanent andreadily available support against unexpected losses. It comprises paid-up

capital and reserves consisting of any statutory reserves, free reserves andcapital reserves as reduced by equity investments in subsidiaries,

intangible assets, and losses in the current period and those broughtforward from the previous period

Tier II Capital The undisclosed reserves and cumulative perpetual preference shares,revaluation reserves, general provisions and loss reserves, hybrid debt

capital instruments, investment fluctuation reserves and subordinateddebt.

WDV Written down value

YTM Yield to Maturity


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RISK FACTORS

An investment in Equity Shares involves a high degree of risk. You should carefully consider all the information

in this Draft Letter of Offer, including the risks and uncertainties described below, before making an investment

in our Rights Equity Shares. If any of the following risks actually occur, our business, results of operations andfinancial condition could suffer, the price of our Equity Shares could decline, and you may lose all or part of

your investment. The financial and other implications of material impact of risks concerned, wherever

quantifiable, have been disclosed in the risk factors mentioned below. However there are a few risk factors

where the impact is not quantifiable and hence the same has not been disclosed in such risk factors.

The occurrence of any of the following events could have a material adverse effect on our business, results of

operations, financial condition and prospects and cause the market price of our Equity Shares to fall

significantly, and you may lose all or part of your investment. Additionally, our business operations could also

be affected by additional factors that are not presently known to us or that we currently consider as immaterial

to our operations. The following factors have been considered for determining the materiality:

1. Some events may not be material individually but may be found material collectively;

2. Some events may have material impact qualitatively instead of quantitatively;3. Some events may not be material at present but may have material impact in future.

INTERNAL RISK FACTORS AND RISK FACTORS RELATING TO OUR BUSINESS

1. We are involved in certain legal and other proceedings in India. If any of the cases pending is decidedagainst us, it may have a material adverse effect on our businesses, reputation, financial condition and

results of operations.

Our Bank is involved in various civil, consumer and tax related litigations which are at different stages ofadjudications before various forums. We are involved in litigations for a variety of reasons, which generallyarise in the normal course of business, when we seek to recover our dues from borrowers who default in

payment of the loans or when customers seek claims against us during the process of recovery of our dues or for

other service related issues.

Litigation against our Bank as of September 30, 2010:

Sl.

No.

Brief Description No. of Cases Amount Involved

(Rs. in crores)

1. Proceedings filed against our Bank on disputed taxclaims

31 213.33

2. Suits involving our Bank which are not acknowledgedas debts.

73 31.26

3. Criminal proceedings against our Bank 10 Not quantifiable

4. Labour cases against our Bank 25 0.016

Litigation by our Bank as of September 30, 2010:

Sl.

No.

Brief Description No. of Cases Amount Involved

(Rs. in crores)

1. Suits filed by our Bank against defaulting borrowers. 4304 223.53

2. Proceedings filed by our Bank on disputed tax claims. 14 18.23

If any of the cases pending is decided against us or our officers, it may have a material adverse effect on ourbusinesses, reputation, financial condition and results of operations.

2. Our results of operations depend to a great extent on our net interest income which to a great extentdepend on the interest rate movements. Volatility in interest rates and other market conditions could

adversely impact our business and financial results.


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Interest rates are sensitive to many factors beyond our control, including RBIs monetary policy, de-regulationof the financial sector in India, domestic and international economic and political conditions and other factors.

Volatility and changes in market interest rates could disproportionately affect the interest we earn on our assets

as compared to the interest we pay on our liabilities. The difference could result in an increase in interestexpense relative to interest income leading to a reduction in net interest income. Unstable interest rates may also

adversely affect the rate of growth of important sectors of the Indian economy such as the corporate, retail andagricultural sectors, which may adversely impact our business.

Also, under the regulations of the RBI, we are required to maintain a minimum specified percentage in the formof SLR, currently 25%, of our net demand and time liabilities in Government or other approved securities or incash. Yields on these investments are dependent to a large extent on interest rates. In a rising interest rate

environment, especially if the increase was sudden or sharp, we could be adversely affected by the decline in themarket value of our Government securities portfolio and other fixed income securities and may be required to

further provide for depreciation in the Available for Sale (AFS) and Held For Trading (HFT) categories,which may adversely impact our business and financial performance of our Bank.

3. Our failure to meet the priority sector lending norms in India may subject us to appropriate actions bythe RBI and also contribution to Rural Infrastructure Development Fund, (RIDF) which offers lower

rate of interest, which may adversely affect our business prospects, financial condition and results ofoperations.

The priority sector lending norms of the RBI require all banks in India to extend at least 40.00% of theiradjusted net bank credit (ANBC) (net bank credit plus investments made by banks in non-SLR bonds held inHeld to Maturity (HTM) category) to specified sectors, including agriculture, export credit and small scaleindustries, which are known as priority sectors. In accordance with these norms, at least 18.00% of our ANBCmust be extended to the agricultural sector and at least 10.00% to the weaker sections.

As on March 31, 2010 and September 30, 2010, the total credit extended by us to priority sectors constituted

45.80 % and 41.33 %, respectively of our ANBC; and the credit extended to the agriculture sector constituted11.97% and 13.51% , respectively of our ANBC. As on March 31, 2010, our total advances made to the prioritysector stood at 45.80% of the ANBC. Though we have met the target in relation to aggregate lending required to

be made to the priority sector for the year ended March 31, 2010, we have not been able to meet the sub targetsthat have been set with respect to separate sectors under it.

Failure to meet the targets/sub targets that are set with respect to priority sector lending have in past made us /and in future may require us to contribute to the Rural Infrastructure Development Fund, (RIDF), or such

other investments as determined by the RBI which offer lower rates of return which may impact our net intrestincome. This may adversely affect our business prospects, financial condition and results of operations.

4. Our business could suffer if we are unable to manage our risks and control the level of our NPAs. If weare not able to control and reduce our NPAs, it could adversely affect our business and future financial

performance

From Fiscal 2009 to 2010, the total value of our net NPAs have moved from Rs. 116.10 crore to Rs.188.61crore,

which represents 0.98% of our net advances as of March 31, 2009 and 1.31% % of our net advances as of March31, 2010. The value of our net NPAs as at September 30, 2010 was Rs. 172.74 crore which represents 1.1 % ofour net advances as of September 30, 2010. Various factors, like a rise in unemployment, slowdown in the Indiaand world economy, a sharp and sustained rise in the interest rates, developments in the Indian economy,movements in global commodity markets and exchange rates may cause an increase in the level of our NPAs

and have an adverse impact on the quality of our loan portfolio. The inability of the borrowers to repay loansdue to inadequate money supply in the economy may translate into mounting NPAs. In addition to the above,

under the directed lending norms of RBI, we are required to extend 40.00% of our adjusted net bank credit tocertain eligible sectors, which are categorised as priority sectors. We may experience an increase in NPAs in

our lending to priority sectors, particularly with regard to loans that are granted to the agriculture and small-scale industries sectors, where the borrowers are most vulnerable to economic difficulties.

Although we are increasing our efforts to improve collections, we cannot assure you that we will be successful

in our efforts or that the overall quality of our loan portfolio may not deteriorate in the future. If we are not ableto control and reduce our NPAs, it could adversely affect our business and future financial performance.


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5. We are required to maintain Cash Reserve Ratio (CRR) and SLR and increase in these requirementscould materially and adversely affect our business, financial condition and results of operations.

As a result of the statutory reserve requirements stipulated by the RBI, we may be more exposed structurally to

interest rate risk than banks in many other countries. Under the RBIs regulations, we are subject to a CRRrequirement under which we are currently required to keep 6.00% of our net demand and time liabilities in

current account with the RBI. We do not earn interest on cash reserves maintained with the RBI. The RBI mayfurther increase the CRR requirement as a monetary policy measure and has done so on numerous occasions.Increases in the CRR requirement would reduce funds availability for lending, thereby resulting in reduction ininterest income and hence could materially and adversely affect our business, results of operations and financialcondition. In addition, under the RBIs regulations, we are required to maintain a SLR, according to which25.00% of our net demand and time liabilities need to be invested in Government securities, state government

securities and other securities approved by the RBI from time to time. In our experience, these securitiesgenerally carry fixed coupons. When the interest rate rises, the value of these fixed coupon securities depreciates

thereby having an impact adverse impact on our interest income. Hence any increase in the CRR and the SLRrequirements could materially and adversely affect our business, financial condition and results of operations.

6. In order to grow our business, we are required to maintain our capital adequacy ratio at the minimumlevel required by the RBI. There is no guarantee that we will be able to access capital as and when it is

needed for growth.If we fail to meet capital adequacy requirements, the RBI may take certain actions,including restricting our lending and investment activities, and the payment of dividends by us. These

actions could materially and adversely affect our reputation and financial results.

We are required by the RBI to maintain a minimum capital adequacy ratio of 9.00% in relation to our total risk-weighted assets. We must maintain this minimum capital adequacy level to support our growth. Our capitaladequacy ratio was 11.41% (Basel I) and 11.71% (Basel II) as of September 30, 2010. We are exposed to therisk of the RBI increasing the applicable risk weightage for different asset classes from time to time. Although

we currently meet the applicable capital adequacy requirements, certain adverse developments could affect ourability to continue to satisfy the capital adequacy requirements, including deterioration in our asset quality,

decline in the values of our investments and changes in the minimum capital adequacy requirements.Furthermore, our ability to support and grow our business could be limited by a declining capital adequacy ratioif we are unable to access or have difficulty accessing the capital markets or have difficulty in obtaining capital

in any other manner. If we fail to meet capital adequacy requirements, the RBI may take certain actions,including restricting our lending and investment activities and the payment of dividends by us. These actionscould materially and adversely affect our reputation, results of operations and financial condition. The Basel IIguidelines for the capital adequacy framework also require maintenance of Tier-1 capital at 6.00%. Theimplementation of Basel II norms which became effective from March 31, 2009 and which introduces the

concept of capital for operational risk as well as Risk rating based approach for Credit risk may increase ourcapital requirement. There can be no assurance that we will be able to raise adequate additional capital in thefuture on terms favourable to us.

7. The value of our collateral may decrease or we may experience delays in enforcing our collateral ifborrowers default on their obligations, which may result in failure to recover the expected value of

collateral security exposing us to a potential loss. This can adversely affect our business and the

financial performance of our Bank.

A substantial portion of our loans are secured by collateral, including real estate assets such as property, plant,equipment, inventory, receivables, current assets and pledges of financial assets such as marketable securitiesand corporate guarantees. The loans to corporate customers also include working capital credit facilities that aretypically secured by a first lien on inventory, receivables and other current assets. In certain cases, we may have

taken further security of a first or second lien on fixed assets and a pledge of financial assets like marketablesecurities, corporate guarantees and personal guarantees. In the event of our borrowers defaulting on the

repayment of the loans, we may not be able to realize the full value of the collateral due to various reasons,including a possible decline in the realisable value of the collateral, defective title, prolonged legal proceedings

and fraudulent actions by borrowers.

Foreclosure on collateral generally requires a written petition to an Indian court or tribunal. An application,when made, may be subject to delays and administrative requirements that may result, or be accompanied by, a

decrease in the value of the collateral. In the event a corporate borrower makes a reference to a specialisedquasi-judicial authority called the Board for Industrial and Financial Reconstruction (BIFR), foreclosure and


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enforceability of collateral is stayed. The Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 (SARFAESI Act), has strengthened the ability of lenders to resolveNPAs by granting them greater rights as to enforcement of security and recovery of dues from corporateborrowers. There can be no assurance that the legislation will have a favourable impact on our efforts to resolve

NPAs. There can be no assurance that we will be able to realize the full value on the collateral, as a result of,among other factors, delays in bankruptcy and foreclosure proceedings, defects in the perfection of collateral

and fraudulent transfers by borrowers. A failure to recover the expected value of collateral security could exposeus to a potential loss. Any unexpected losses could adversely impact our business, financial condition and theprice of the Equity Shares.

In addition, the RBIs guidelines on corporate debt restructuring specify that for debt amounts of Rs. 10 croresand above, 60% of the creditors by number and 75% of creditors by value can decide to restructure the debt and

that such a decision would be binding on the remaining creditors. If we own 25% or less of the debt of aborrower, we could be forced to agree to an extended restructuring of debt which may not be in our interests.

Such difficulties in realizing our collateral fully or at all, including if we are instead compelled to restructure ourloans, could adversely affect our business and financial results.

8. Our risk management policies and procedures may not adequately address unanticipated risks. Inabilityto develop and implement effective risk management policies may adversely affect our business,prospects, financial condition and results of operations.

We have devoted significant resources to developing our risk management policies and procedures and expect tocontinue to do so in the future. Despite this, our policies and procedures to identify, monitor and manage risksmay not be fully effective. Some of our methods of managing risk are based upon the use of observed historicalmarket behaviour. As a result, these methods may not accurately predict future risk exposures which could besignificantly greater than indicated by the historical measures. As we seek to expand the scope of our operations,

we also face the risk of inability to develop risk management policies and procedures that are properly designedfor those new business areas. Implementation and monitoring may prove particularly challenging with respect to

businesses that we have recently initiated. Inability to develop and implement effective risk managementpolicies may adversely affect our business, prospects, financial condition and results of operations.

9. There are operational risks associated with the banking industry, including the risk of fraud or othermisconduct by employees etc., which when realised may have an adverse impact on our results.

We are exposed to many types of operational risk, including the risk of fraud or other misconduct by employeesor outsiders, unauthorized transactions by employees or operational errors, including clerical or recordkeeping

errors or errors resulting from faulty computer or telecommunications systems. Though we carefully recruit allour employees, we have in the past been held liable for the fraudulent acts committed by our employees. Wecannot guarantee you that such events will not recur in the future. Any such event could adversely affect ourreputation, operations, or otherwise have a material adverse effect on our business, financial condition or resultsof operation. Given the high volume of transactions, certain errors may be repeated or compounded before theyare discovered and successfully rectified. In addition, our dependence upon automated systems to record andprocess 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. We may also be subject to

disruptions of our operating systems, arising from events that are wholly or partially beyond its control(including, for example, computer viruses or electrical or telecommunication outages), which may lead to adeterioration in customer service and to loss or liability. We also face the risk that the design of our controls andprocedures prove to be inadequate, or may be circumvented, thereby causing delays in detection of errors ininformation. Although we maintain a system of controls designed to keep operational risk at appropriate levels,

there can be no assurance that we will not suffer losses from operational risks in the future.

10. We do not own the trademark and logo and our ability to use the trademark and logo may beimpaired, which may materially and adversely affect our goodwill and business.

We have not registered the trademark and logo and our ability to use the trademark and logo may beimpaired.

We are in a business where customer trust is critical and if the customers no longer identify us, it may affect ourfinancial condition and result of operation. We also operate in a competitive environment where retention and


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recognition will be a significant element of our business strategy. Further, in the event we lose our right to usethe trademark and our logo, our business could be adversely affected.Any legal proceedings which result in afinding that we have breached third parties intellectual property rights may require us to give financialcompensation to such third parties and/or to make changes to our marketing strategies or to the brand names of

our products, which could have a material adverse effect on our business, prospects, financial condition andresults of operations. No legal proceedings have been initiated till date against our Bank with regard to breach of

intellectual property rights of third parties. However, there cannot be any assurance that in future any such legalproceedings will not be initiated against our bank and any such proceedings, if initiated, could require us toincur additional costs and may adversely impact our reputation, business, financial condition and results ofoperations.

11. We are exposed to various industry sectors. Deterioration in the performance of any of the industrysectors where we have significant exposure may adversely impact our business.

Our credit exposure to borrowers is dispersed across various sectors including, cotton and jute, infrastructure,gems and jewellery, iron and steel, food and food product, chemicals and chemical products, construction andother industries. Our credit exposure in the textile industry is the largest wherein we have lent Rs. 549.07 croreas on September 30, 2010 which constituted 15.27% of our total funded industry exposure. Any significantdeterioration in the performance of a particular sector, including due to regulatory action or policy

announcements by Government or State government authorities, could adversely impact the ability of borrowersin that industry to service their debt obligations owed to us. As a result, we would experience increased

delinquency risk which may adversely impact our business, prospects, financial condition and results ofoperations, and the market price of our Equity Shares.

12. We have previously been penalized for not being in compliance with the RBI circulars and may facefurther penalties from the RBI and/or other regulatory bodies that govern us in cases of non-compliance

in future.

In FY 2010 we have been penalized by the RBI with penalty of Rs 4400/- on account of certain deficiencies

noticed by RBI on account of discrepancies detected while processing soiled notes remittances received fromcurrency chest in their CVPS/ during inspection of the currency chests for non compliance with operationalguidelines. We cannot assure you that we will not be subject to such penalties in the future.

13. Expansion of our fee based earning is dependent on our arrangements with third parties includinginsurance companies and mutual funds. Termination of these arrangements may adversely impact our

results of operations.

We intend to increase our fee-based income by expanding our third party product offerings and by increasingour fee-based services. We have entered into an agreement with Franklin Templeton (I) Private Ltd, TATAMutual Fund and ICICI Prudential Asset Management Company Limited for the distribution of mutual fundproducts. We also market and sell the life insurance products of MetLife India Insurance Company PrivateLimited and general insurance products of Universal Sompo General Insurance Company Ltd in conjunctionwith certain of our savings account and term deposit products. We earn fees and commissions for thedistribution and sale of these products. However, termination of these agencies or distribution agreements with

such third party business associates or any weakening of our relationship with these third party associates may

have an adverse impact on our fee based revenues and results of operations.

14. The Government of India (GoI) has in the past and may in the future direct us to implement certainschemes that are aimed at serving the interest of farmers and/or a cross section of the public. Such

schemes may not necessarily be aimed at maximizing our profits and may adversely affect our business,

financial condition and results of operations.

In year 2010, the GoI implemented the Coffee Debt Relief Package 2010 under which waiver of 50% of thetotal liability subject to a maximum benefit of Rs.5 lakhs per farmer will be borne by Government of India and

an additional 25% shall be waived by the banks and balance shall be rescheduled. In view of this scheme, theloan amounting to Rs. 19.98 Crore may be waived off by our Bank. This may have a negative effect on ourprofits and financial condition. In future, the GoI may further require us to waive off or reduce the outstandingamount due on loans provided to customers in certain sectors, in particular the agricultural sector, to serve the

larger interests of India which could adversely affect our business and financial condition.


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We also provide special schemes under which credit facilities and loans are extended to persons belonging toweaker sections, which is aimed at facilitating the GoIs initiative to empower them. Such schemes and creditfacilities provided to members of the weaker sections may not be as profitable as compared to lending in thenon-priority sector. This is because historically, NPAs are higher in the priority sector lending compared with

non-priority sector lending and due to above reasons, our profitability and financial condition gets affectedadversely.

15. Most of our branches are located on leased premises. We may not be able to renew the lease agreementsfor our branches upon favourable terms or at all which could have a material adverse affect on our

business and results of operations.

As of September 30, 2010, we have 465 branches and 227 ATMs, of which except 23 branches and six ATMs,

all our branches are housed on leased premises and are not owned by us. If any of the owners of these premisesdo not renew the agreements under which we occupy the premises, or if they seek to renew such agreements on

terms and conditions unfavourable to us, we may suffer a disruption in our operations or increased costs, orboth, which may adversely affect our business and results of operations.

Additionally, as of September 30, 2010, 12 of our leases for our branches and other office premises had expired.All or any of the leases may not be renewed on similar terms or at all, or we may be evicted from all or a

number of these premises and be required to pay damages to the landlord. This may adversely impact ourbusiness and financial condition

16. Our Regional Offices may have weak control over our branches which may adversely affect ourreputation, operations, or otherwise have a material adverse effect on our business, financial condition

or results of operation.

Our Regional Offices may have weak control over the branches especially in areas such as transgression of

delegated powers, prevention and follow up of frauds, monitoring adherence to KYC norms etc. which may leadto increase in incidences of frauds in our branch offices which may adversely affect our reputation, operations,

or otherwise have a material adverse effect on our business, financial condition or results of operation.

17. We may undertake mergers or acquisitions which may pose management and integration challenges. Wealso could experience difficulty in combining operations and cultures and may not realise the anticipatedsynergies or efficiencies from such transactions which may have an adverse impact on the business of

our Bank in the long run.

We may make acquisitions and investments to expand our customer base, acquire new service or product

offerings or enhance our technical capabilities. Our future acquisitions or investments may not necessarilycontribute to our profitability and may, in some cases, require us to assume operational and financial problemsof the acquired entity, including high levels of NPAs. We also could experience difficulty in combiningoperations and cultures and may not realise the anticipated synergies or efficiencies from such transactions.

18. Any downgrading in our credit rating could adversely affect our business, financial condition and resultsof operations.

The rating agencies ICRA and CARE have reaffirmed LA + and A+ ratings respectively for Rs 350 croresLower Tier II Subordinated debt instruments and CARE has given A1+ rating for certificate of Depositsprogramme of Rs. 2,000 crores. Credit rating is considered as an assessment of our ability to honour ourfinancial commitments and obligations as and when they become due. A downgrade in our credit rating mayadversely affect our ability to obtain funds and may increase financing costs by increasing the interest rates of

our outstanding debt or the interest rates at which we will be able to refinance existing debt or incur new debt,which will adversely affect our business, financial condition and results of operations.

19. Significant security breaches and failure in our computer systems, and calamities could materially andadversely impact our business.

We depend on our computer systems to process a large number of transactions on an accurate and timely basis,and to store and process substantially all of our business and operating data. We seek to protect our computer

systems and network infrastructure from physical break-ins as well as security breaches and other disruptive


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problems. These concerns could intensify with our increased use of technology, internet based resources andadvanced internet banking platform.

Computer break-ins and power disruptions could affect the security of information stored in and transmitted

through these computer systems and network infrastructure. Our Banks computer systems and networkinfrastructure have only been recently migrated to Core Banking Solution (CBS). Certain parts of the system

may not be properly protected from security breaches and other attacks. Our Bank employs security systemsincluding firewalls and password encryption, designed to minimise the risk of security breaches. Although ourBank intends to continue to implement security technology and establish operational procedures to preventbreak-ins, damage and failures, there can be no assurance that these security measures will be adequate orsuccessful. A failure of security measures could have a material adverse effect on our Banks business, its futurefinancial performance and the trading price of the Equity Shares. We may also be subject to disruptions of our

operating systems, arising from events that are wholly or partially beyond our control (including, for example,computer viruses or electrical or telecommunication outages), which may give rise to deterioration in customer

service and to loss or liability to us.

20. Non Compliance with RBI inspection/observations may have a material adverse effect on our business,financial condition or results of operation

We are subject to annual financial inspection by RBI. In the pastcertain observations were made by RBI duringthe inspection regarding our business and operations. In case we are not able to meet the requirements suggested

by RBI, RBI may impose strict enforcement of its observations on us which may have a material adverse effecton our business, financial condition or results of operation.

21. As on September 30, 2010, we had a contingent liability amounting to Rs. 9,286.60 crores includingderivatives. Any crystallization of our significant contingent liabilities could materially and adversely

affect our business, financial conditions, result of operations and prospects.

As on September 30, 2010, we had a contingent liability amounting to Rs. 9,286.60 crores. Most of the

liabilities have been incurred during the normal course of business, in the event of there being a crystallizationof any of the above liabilities, we may be required to honour the demands raised. This may materially andadversely impact our business, financial conditions, result of operations and prospects.

Contingent Liabilities As on March 31,

2010

Rs. in crore

As on September 30,

2010

Rs. in crore

Claims against the Bank not acknowledged as debts 28.33 28.03

Liability on account of outstanding Forward ExchangeContacts*

7,163.96 6,163.67

Guarantees given on behalf of constituents

a) In India 1,030.37 1024.34

b) Outside India 0 0

Acceptances, Endorsements & other Obligations 673.61 724.95

Other items for which the bank is contingently liable 1,222.97 1345.61

Total 10,119.24 9,286.60

* Includes derivatives

Note: In the past the Bank had entered into certain derivative transactions, back to back with other banks on

behalf of our Clients. As on September 30, 2010, there were three outstanding transactions with a balance of Rs.

174.98 crore. Mark to market value (negative to the clients) relating to the above transactions was Rs. 273.05

crore as of September 30, 2010. In future if our clients do not honor their commitments to bear the losses, we

may have to bear such losses which would have a material adverse effect on our business, financial condition

and results of operations.

22. Our business and financial performance are dependent on increasing our area coverage through thebranch network, any failure to do so, will affect our future growth, thereby having a material adverse

impact on the business operations of our Bank


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As on September 30, 2010, we have 465 branches across India. Scheduled Commercial Banks in India arerequired to obtain RBI approval before opening a branch office office in Tier 1 and Tier 2 centres (centres withpopulation of 50,000 and above as per 2001 census), except in the case of North Eastern States and Sikkimwhere the general permission would cover semi-urban and urban centres also. We had obtained permission from

the RBI by a letter dated September 09, 2009 to open 30 additional branches, in order to expand our coverage.We opened 17 new branches in Fiscal 2010. Any hindrance in obtaining such approval from RBI for opening

branch office in Tier 1 and Tier 2 centres in the future could delay/prevent us from opening new branches. Thiswould affect our future growth, thereby having a material adverse impact on the business operations of ourBank.

23. A major part of our branch network is concentrated in southern India and thereby exposing us toregional risks.

As of September 30, 2010, out of our 465 branches, 358 branches are located in the southern states of India. 66

% of our business (advances + deposits) is conducted in the southern states of India as of September 30, 2010.Our concentration in the southern states exposes us to any adverse geological, ecological, economic and/orpolitical circumstances in that region as compared to other public and private sector banks that have diversifiednational presence. Any disruption, disturbance or breakdown in the economy of southern India could adverselyaffect the result of our business and operations.

24. We may face labour disruptions that could interfere with our operations.Any such disruption in futuremay have a material adverse effect on our business, financial condition or results of operation.

We are exposed to the risk of strikes and other industrial actions. As of September 30, 2010, we employed 5,844employees. Majority of our employees are members of Karnataka Bank Employees Association and KarnatakaBank Officers Organization. We cannot guarantee that our employees will not undertake or participate in strikes,work stoppage or other industrial action in the future. Any such event could disrupt our operations, possibly for

a significant period of time, result in increased wages and other benefits or otherwise have a material adverseeffect on our business, financial condition or results of operation.

25. We operate in a regulated industry and any changes in the regulations or enforcement initiatives mayadversely affect our business, financial condition or results of operation.

We are subject to a wide variety of banking and financial services laws and regulations and a large number ofregulatory and enforcement authorities in each of the jurisdictions in which we operate. The laws andregulations or the regulatory or enforcement environment in any of those jurisdictions may change at any timeand that may have an adverse effect on the products or services we offer, the value of our assets or our business

in general. Also, the laws and regulations governing the banking and financial services industry have becomeincreasingly complex governing a wide variety of issues, including interest rates, liquidity, capital adequacy,securitisation, investments, ethical issues, money laundering, privacy, record keeping, marketing and sellingpractices, with sometimes overlapping jurisdictional or enforcement authorities. Any change in RBI policy,including directed lending norms, may result in our inability to meet the priority sector lending requirements aswell as require us to increase our lending to relatively riskier segments and may result in an increase in NPAs inthe directed lending portfolio. Future changes in laws and regulations and failure or the apparent failure to

address any regulatory changes or enforcement initiatives could have an adverse impact on our business, our

future financial performance and our shareholders funds, harm our reputation, subject us to penalties, fines,disciplinary actions or suspensions of any kind or increase our litigation risks and have an adverse effect on theprice of our Equity Shares.

There are a number of restrictions under the Banking Regulation Act, which impede our operating flexibility

and affect or restrict investors rights. These include the following:

Section 12(2) of the Banking Regulation Act states that no person holding shares in a bankingcompany shall exercise voting rights on poll in excess of 10.00% of the total voting rights of all theshareholders of the banking company.

Section 15(1) of the Banking Regulation Act states that no banking company shall pay any dividendon its shares until all its capitalised expenses (including preliminary expenses, organization expenses,

share-selling commission, brokerage, amounts of losses incurred and any other item of expenditure notrepresented by tangible assets) have been completely written off.


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Section 17(1) of the Banking Regulation Act requires every banking company to create a reserve fundand to transfer out of the balance of the profit of each year as disclosed in the profit and loss account a

sum equivalent to not less than 20.00% (the RBI circular dated September 23, 2000 has fixed this limitat 25.00%) of such profit before paying any dividend.

Section 19 of the Banking Regulation Act restricts the forming of subsidiaries by banks, which mayprevent us from exploiting emerging business opportunities. Similarly, Section 23 of the BankingRegulation Act contains certain restrictions on banking companies regarding the opening of new placesof business and transfers of existing places of business, which may hamper our operational flexibility.

Section 25 of the Banking Regulation Act requires each banking company to maintain assets in Indiaequivalent to not less than 75.00% of its demand and time liabilities in India, which in turn may restrictus from building overseas asset portfolios and exploiting overseas business opportunities.

We are required to obtain approval of RBI for the appointment and remuneration of our part timechairman and other whole time directors. RBI has powers to remove managerial and other personsfrom office, and to appoint additional directors. We are also required to obtain approval of the RBI forthe creation of floating charges on our borrowings, thereby hampering leverage. The Banking

Regulation Act also contains provisions regarding production of documents and availability of recordsfor inspection.

Subject to and on account of laws governing banking companies, the financial disclosures in the offerdocument may not be available to the investors on a continuous basis after listing

A compromise or arrangement between us and our creditors or any class of them or between us and ourshareholders or any modification in such arrangement or compromise will not be sanctioned by anyHigh Court unless such compromise or arrangement or modification, as the case may be, is certified byRBI in writing as capable of being implemented and as not being detrimental to the interests of ourdepositors. Our amalgamation with any other banking company will require the sanction of RBI andshall be in accordance with the provisions of the Banking Regulation Act. The provisions for winding-

up of banking companies as specified in the Banking Regulation Act are at variance with the provisionsof the Companies Act. Further, RBI can also apply for winding up of a banking company in certaincircumstances and can also be appointed as the liquidator and the GoI could acquire the undertakingsof banking companies in certain cases.

The forms of business in which we may engage are specified and regulated by the Banking RegulationAct. Pursuant to the provisions of section 8 of Banking Regulation Act, we cannot directly or indirectlydeal in the buying, selling or bartering of goods by itself or for others, except in connection with therealisation of security given to us or held by us, or in connection with bills of exchange received forcollection or negotiation, or in connection with the administration of estates as executor, trustee orotherwise, or in connection with any business specified under section 6(1)(o) of the BankingRegulation Act. Goods for this purpose means every kind of movable property, other than actionable

claims, stocks, shares, money, bullion and specie and all instruments referred to in section 6(1)(a) ofBanking Regulation Act. Unlike a company incorporated under the Companies Act, which may amend

the objects clause of its Memorandum of Association to commence a new business activity, bankingcompanies may only carry on business activities permitted by Section 6 of the Banking Regulation Actor specifically permitted by the Reserve Bank of India. This may restrict our ability to pursue profitablebusiness opportunities as they arise.

26. We may face maturity mismatch between assets and liabilities which may result in an adverse impact onour business and operations.

Most of our funding requirements are met through short-term and medium-term funding sources, primarily inthe form of deposits. A portion of our assets have long-term maturities, creating a possibility for fundingmismatches. In our experience, a substantial portion of our customer deposits have been rolled over on maturityand have been, over time, a stable source of funding. However, in the event that a substantial number of our

depositors do not roll over deposits on maturity, our liquidity position and business could be adversely affected.If the depositors do not renew deposits or our Bank is unable to raise new deposits, our Bank may face a


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liquidity problem and may be required to pay higher interest rates to attract deposits, which may have an adverseimpact on our Banks business and operations.

27. If we are unable to adapt to rapid technological changes, our business, future financial performancecould suffer.

Our future success and ability to compete with other banks will depend, in part, on our ability to respond totechnological advances and emerging banking industry standards and practices on a cost-effective and timelybasis. The development and implementation of such technology entails significant technical and business risks.There can be no assurance that our Bank will successfully upgrade or implement new technologies effectively oradapt its transaction processing systems to customer requirements or emerging industry standards. If our Bank isunable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing

market/technological conditions, customer requirements or technological changes, our business, the futurefinancial performance of our Bank could be materially affected.

28. We rely on the accuracy and completeness of information provided to us about our customers andcounterparties which if not accurate and complete may have a negative impact on our financial

condition.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we mayrely on information furnished to us by or on behalf of customers and counterparties, including financial

statements and other financial information. We may also rely upon certain representations as to the accuracy andcompleteness of that information and, with respect to financial statements, on reports of independent auditors.For example, in deciding whether to extend credit, we may assume that a customers audited financialstatements conform to generally accepted accounting principles and present fairly, in all material respects, thefinancial condition, results of operations and cash flows of the customer. Our financial condition and results ofoperations could be negatively affected by relying on financial statements that do not comply with generally

accepted accounting principles or other information that is materially misleading or by relying on informationfurnished to us by or on behalf of our customers and counterparties.

29. If we are not able to renew or maintain our statutory and regulatory permits and approvals and licensesrequired to operate our business, it may have a material and adverse effect on our business, financial

condition and results of operations.

We require certain statutory and regulatory permits and approvals and licenses to operate our business.Applicaion dated August 11, 2010 addressed to the Chief General Manager, Department of Banking Operationsand Development, Reserve Bank of India for opening 35 new branches in terms of Section 23 of the Banking

Regulation Act, 1949 has been made and is pending approval:

Further, in the future, we will be required to renew our permits and approvals and obtain new permits andapprovals for our proposed operations. While we believe that we will be able to renew or obtain such permitsand approvals as and when required, there can be no assurance that the relevant authorities will issue any ofsuch permits or approvals in the time-frame anticipated by us or at all. Our failure to renew, maintain or obtainthe required permits or approvals, including those set forth above, may result in the interruption of our

operations or delay or prevent our expansion plans and may have a material and adverse effect on our business,

financial condition and results of operations.

30. New product/services offered by us may not be successful and we may not grow in any new business areawhich may have a material adverse effect on our business, financial condition or results of operation

We introduce new products/services to explore new business opportunities on a regular basis. We cannot assureyou that all our new products/services will gain customer acceptance and this may result in our incurring pre-

operative expenses and launch costs without any assurance that such products will be successful or may failmarket penetration. Further, our inability to grow in any new business areas could adversely affect our business

and financial performance.

31. We may not maintain historical dividends in the future as the same depends upon, among other factors,our earnings, financial position, cash requirements and availability of profits, as well as the provisions ofrelevant laws in India from time to time.


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While we have paid dividends in the past, there can be no assurance as to whether we will pay dividends in thefuture and, if so, the level of such future dividends. The declaration, payment and amount of any futuredividends is subject to the discretion of the Board and will depend upon, among other factors, our earnings,

financial position, cash requirements and availability of profits, as well as the provisions of relevant laws inIndia from time to time.

32. Any inability to attract and retain talented professionals may materially and adversely impact ourbusiness.

Our performance and success depends largely on our ability to nurture and retain the continued service of ourmanagement team and skilled personnel. There is significant competition for management and other skilled

personnel in the banking industry. We are dependent on our key personnel. Further, we do not have a key-maninsurance policy to cover for loss of our skilled personnel. We are dependent on our key personnel for smooth

operations of our business activities. Attracting and retaining talented professionals is a key element of ourstrategy and we believe it to be a significant source of competitive advantage. Our inability to attract and retaintalented professionals or the loss of key management personnel could have a material and adverse impact on ourbusiness, our future financial performance and the price of our Equity Shares.

33. Your holdings may be diluted by additional issuances of equity and any dilution may adversely affect themarket price of our Equity Shares.We may be required to finance our growth through additional equity offerings. Any future issuance of ourequity shares could dilute the holdings of investors in our Bank and could adversely affect the market price ofour Equity Shares.

We established an Employees Stock Option Scheme 2006 for our employees (ESOS). Pursuant to the ESOS, as

at October 15, 2010, 609,865 options were outstanding to our employees. During Fiscal 2009 and Fiscal 2010,we have not granted any options. The exercise of these options will increase our equity share capital and will

dilute our earnings per share (EPS). This may affect the price of the Equity Shares.

34. The base rate system is a new method for pricing loans, and its impact on the future results of our Bankis unclear.

As of July 1, 2010, RBI guidelines replacing the benchmark prime lending rate regime with a base rate regimebecame effective. The Bank plans to implement the new base rate regime and has declared that its initial baserate, the minimum benchmark lending rate that banks can charge customers, is to be set at 8.75% per annum.

Because the base rate regime is newly implemented, its long-term effects on the lending practices of our Bankand other banks are unclear as of the date of this Draft Letter of Offer. If the base rate regime is successful inpromoting transparency and enhancing competition in the bank lending markets in India, our Bank may losebusiness to its competitors, who may benefit more from the new regime than our Bank does. As banks areunable to lend at rates below their base rate, regardless of the creditworthiness of the borrower, it is possible thatthe Bank will be restricted from making loans that would otherwise result in a profit, thereby adversely affectingthe Banks results of operations. It is also possible that the base rate regime will increase deposit rates, which

would raise our Banks cost of funding, lower the Banks net interest margin and adversely affect its financial

condition and results of operations

35. Renunciation by any shareholder in favour of a non-resident or FII may require prior approval of theRBI. There can be no certainty as to the conditions subject to which the approval will be granted or if the

approval will be granted at all.

Renunciation of rights entitlement in our Bank by any shareholder in favour of a non-resident or a FII may

require prior approval of the RBI. There can be no certainty as to the conditions subject to which the approvalwill be granted or if the approval will be granted at all. For more details on the restrictions applicable to non

residents or FIIs please refer to the Chapter titled Terms and Procedure of the Issue beginning on page 85 ofthis Draft Letter of Offer.

36. A nation-wide credit bureau has become operational in India only recently and may not provideadequate information. Until such time, we may be more susceptible to higher NPAs compared to banksin more developed economies which may have an adverse impact on the financials of our Bank.


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The credit risk of borrowers in India is higher than in more developed countries. A nation-wide credit bureau,Credit Information Bureau (India) Limited (CIBIL), has become operational in India in the year 2000.CIBILs database is in the process of developing which may affect the quality of information available to us

about the credit history of our borrowers, especially individuals and small businesses. Until such time, we maybe more susceptible to higher NPAs compared to banks in more developed economies.

37. We are exposed to certain risks of the Indian financial system and could be impacted by the financialdifficulties of other financial institutions in India.

Along with other banks in India, we are exposed to the risks of the Indian financial system, which in turn maybe affected by financial difficulties, and other problems faced by Indian financial institutions. As an emerging

market system, the Indian financial system faces risks of nature and extent not typically faced in developedcountries. Additionally, the credit risk of borrowers in India is higher than in developed countries. Indias

nationwide credit bureau is still developing, which may affect the quality of information available to us aboutthe credit history of our borrowers, especially individuals and small businesses. The problems faced byindividual Indian financial institutions and any instability in or difficulties faced by the Indian financial systemgenerally could create adverse market perception about Indian financial institutions and banks. This in turncould materially and adversely affect our business, financial condition and results of operations.

EXTERNAL RISK FACTORS

1. The Indian and global banking industry is very competitive and if we are unable to effectively respond tocompetitive pressures it may adversely affect our business and growth.

We compete with public and private sector Indian commercial banks as well as foreign commercial banks. Someof our competitors are large institutions, and may have much larger customer and deposit bases, larger branch

networks and more capital than us. Some of our competitors may be better positioned to take advantage ofmarket opportunities than us. We face competition in some or all of our products and services from Indian and

foreign commercial banks, NBFCs, mutual funds and other entities operating in the Indian financial sector. Inparticular, private banks in India may have operational advantages in implementing new technologies,rationalising branches and recruiting employees through incentive-based compensation. In terms of the

Consolidated FDI Policy, 2010 (FDI Policy), foreign banks are permitted to operate in India through itsbranches or establish wholly-owned subsidiaries in India or invest up to 74% in the equity of Indian privatesector banks, which is likely to further increase competition in the Indian banking industry. The foreign banksthat have established branches in India have aggressively pursued market share.

Additionally, the RBI has recently indicated that it intends to issue new banking licenses in order to expand thebanking sector which would lead to higher competition amongst the banks. In August 2010, RBI released adiscussion paper on Entry of New Banks in the Private Sector which, inter alia, includes discussion on theminimum capital requirements for new banks and promoters contribution, foreign shareholding in the newbanks, whether industrial or business houses should be permitted to promote banks and whether non-bankingfinancial companies should be entitled to convert to banks. Further, the GoI is also encouraging banks and otherfinancial institutions to significantly increase their lending to the agriculture sector, which will make this

segment more competitive.

Increased competitive pressure may have an adverse impact on our earnings, our future financial performanceand the market price of the Equity Shares. Our future success will depend in large part on our ability to respondin an effective and timely manner and our ability to compete effectively.

2. Investing in securities that carry emerging market risks can be affected generally by volatility in theemerging markets.

The markets for securities bearing emerging market risks, such as risks relating to India, are, to varying degrees,

influenced by economic and securities market conditions in other emerging market countries. Althougheconomic conditions differ in each country, investors reactions to developments in one country may affectsecurities of issuers in other countries, including India. Accordingly, the price and liquidity of our Equity Sharesmay be subject to significant fluctuations, which may not necessarily be directly or indirectly related to our

financial performance.


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Indian stock exchanges have, in the past, experienced problems that have affected the market price and liquidityof the securities of Indian companies, such as temporary exchange closures, broker defaults, settlement delaysand strikes by brokers. In addition, the governing bodies of the Indian stock exchanges have from time to timerestricted securities from trading, limited price movements and increased margin requirements. Further, disputes

have occurred on occasion between listed companies and the Indian stock exchanges and other regulatory bodiesthat, in some cases, have had a negative effect on market sentiment. If similar problems occur in the future, the

market price and liquidity of our Equity Shares could be adversely affected. A closure of, or trading stoppageon, either the BSE or the NSE could adversely affect the trading price of our Equity Shares.

3. Conditions in the Indian securities market may affect the price or liquidity of the Equity Shares.The Indian securities markets are smaller and may be more volatile than securities markets in more developedeconomies. The regulation and monitoring of Indian securities markets and the activities of investors, brokersand other participants differ, in some cases significantly, from those in the U.S. and Europe. Indian stockexchanges have in the past experienced substantial fluctuations in the prices of listed securities.

Indian stock exchanges have, in the past, experienced problems that have affected the market price and liquidityof the securities of Indian companies, such as temporary exchange closures, broker defaults, settlement delays

and strikes by brokers. In addition, the governing bodies of the Indian stock exchanges have from time to time

restricted securities from trading, limited price movements and increased margin requirements. Further, disputeshave occurred on occasion between listed companies and the Indian stock exchanges and other regulatory bodiesthat, in some cases, have had a negative effect on market sentiment. If similar problems occur in the future, themarket price and liquidity of the Equity Shares could be adversely affected. A closure of, or trading stoppage on,either the BSE or the NSE could adversely affect the trading price of the Equity Shares. Historical tradingprices, therefore, may not be indicative of the prices at which the Equity Shares will trade in the future.

4. There are restrictions on daily movements in the price of the Equity Shares, which may adversely affect ashareholders ability to sell, or the price at which it can sell Equity Shares at a particular point in time.

We are subject to a daily circuit breaker imposed by all stock exchanges in India, which does not allowtransactions beyond specified increases or decreases in the price of the Equity Shares. This circuit breakeroperates independently of the index-based market-wide circuit breakers generally imposed by SEBI on Indian

stock exchanges. The percentage limit on our circuit breakers is set by the stock exchanges based on thehistorical volatility in the price and trading volume of the Equity Shares. The BSE and NSE halted trading dueto the index-based market-wide circuit breaker on May 18, 2009 after the index crossed the threshold of suchcircuit breaker. A closure of, or trading stoppage on, either the BSE or the NSE could adversely affect thetrading price of the Equity Shares.

The circuit breaker limits the upward and downward movements in the price of the Equity Shares. As a result ofthis circuit breaker, no assurance may be given regarding your ability to sell your Equity Shares or the price atwhich you may be able to sell your Equity Shares at any particular time.

5. There is no guarantee that the Equity Shares issued in this Issue will be listed on the BSE and the NSEin a timely manner.

In accordance with Indian law and practice, permission for listing of the Equity Shares will not be granted until

after those Equity Shares have been issued and allotted. Approval will require all other relevant documentsauthorizing the issuing of Equity Shares to be submitted. There could be delay in listing the Equity Shares onthe BSE and/or the NSE. Any delay in obtaining the approval would restrict your ability to dispose off yourEquity Shares allotted in the Issue.

6. Significant differences exist between Indian GAAP and other accounting principles, such as U.S. GAAPand IFRS, which may be material to investors assessments of our financial condition. Our failure to

successfully adopt IFRS could have a material adverse effect on our stock price.

Our financial statements, including the financial statements provided in this Draft Letter of Offer are prepared inaccordance with Indian GAAP. We have not attempted to quantify the impact of U.S. GAAP or IFRS on thefinancial data included in this Draft Letter of Offer, nor do we provide a reconciliation of our financialstatements to those of U.S. GAAP or IFRS. Each of U.S. GAAP and IFRS differs in significant respects fromIndian GAAP. Accordingly, the degree to which the Indian GAAP financial statements included in this DraftLetter of Offer will provide meaningful information is entirely dependent on the readers level of familiarity


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with Indian accounting practices. Any reliance by persons not familiar with Indian accounting practices on thefinancial disclosures presented in this Draft Letter of Offer should accordingly be limited.

The Ministry of Corporate Affairs and the ICAI, the accounting body that regulates the accounting firms in

India, have announced a road map for the adoption of, and convergence of Indian GAAP with the IFRS (theconverged accounting standards) pursuant to which all scheduled commercial banks in India will be

required to prepare their annual and interim financial statements under converged accounting standardsbeginning with fiscal period commencing April 1, 2013. Because there is significant lack of clarity on theadoption of and convergence with IFRS and there is not yet a significant body of established practice on whichto draw in forming judgments regarding its implementation and application, we have not determined with anydegree of certainty the impact that such adoption will have on our financial reporting. There can be noassurance that our financial condition, results of operations, cash flows or changes in shareholders' equity will

not appear materially worse under converged accounting standards than under Indian GAAP. As we transition toconverged accounting standards, we may encounter difficulties in the ongoing process of implementing and

enhancing our MIS. Moreover, there is increasing competition for the small number of IFRS-experiencedaccounting personnel available as more Indian companies begin to prepare financial statements based onconverged accounting standards. There can be no assurance that our adoption of converged accounting standardswill not adversely affect our reported results of operations or financial condition and any failure to successfullyadopt converged accounting standards by April 2013 could have a material adverse effect on our stock price.

7. You may be subject to Indian taxes arising out of capital gains. Any gain realised on the sale of equityshares held for more than 12 months to an Indian resident, which are sold other than on a recognised

stock exchange and as result of which no STT has been paid, will be subject to capital gains tax in India.

Under current Indian tax laws and regulations, capital gains arising from the sale of shares in an Indian bank aregenerally taxable in India. Any gain realised on the sale of listed equity shares on a stock exchange held formore than 12 months will not be subject to capital gains tax in India if the STT has been paid on the transaction.The STT will be levied on and collected by a domestic stock exchange on which equity shares are sold. Anygain realised on the sale of equity shares held for more than 12 months to an Indian resident, which are soldother than on a recognised stock exchange and as result of which no STT has been paid, will be subject to

capital gains tax in India. Further, any gain realised on the sale of listed equity shares held for a period of 12months or less will be subject to capital gains tax in India.

Capital gains arising from the sale of our Equity Shares will be exempt from tax in India in cases where suchexemption is provided under the tax treaty between India and the country of which the seller is a resident.

Generally, Indian tax treaties, do not limit Indias ability to impose tax on capital gains. As a result, residents ofcertain countries may be liable for tax in India, as well as in their own jurisdictions on gain upon a sale of ourEquity Shares.

8. You will be subject to market risks until the Equity Shares credited to your demat account are listed andpermitted to trade.

You can start trading the Equity Shares Allotted to you only after they have been credited to your demataccount, are listed and permitted to trade. Since our Equity Shares are currently traded on the Stock Exchanges,

you will be subject to market risk from the date you pay for the Equity Shares to the date when trading approval

is granted for the same. Further, there can be no assurance that the Equity Shares Allocated to you will becredited to your demat account or that trading in the Equity Shares will commence in a timely manner. This riskfactor is for the information of investors and does not in any way dilute the right of investors and ourobligations.

9. Future issues or sales of Equity Shares may significantly affect the trading price of the Equity Shares.The future issue of Equity Shares or the disposal of Equity Shares by any of our major Equity Shareholders or theperception that such issues or sales may occur may significantly affect the trading price of the Equity Shares. There is

no restriction on our ability to issue Equity Shares or the relevant Equity Shareholders ability to dispose of their

Equity Shares, and there can be no assurance that we will not issue Equity Shares or that any such Equity Shareholder

will not dispose of, encumber, or pledge, its Equity Shares.

10. The Issue Price of our Equity Shares may not be indicative of the market price of our Equity Sharesafter the Issue.


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The Issue Price Equity Share may not be indicative of the market price for our Equity Shares after the Issue. Themarket price of our Equity Shares could be subject to significant fluctuations after the Issue, and may decline below

the Issue Price. There can be no assurance that the investor will be able to resell their shares at or above the Issue

Price. Among the factors that could affect our share price are:

quarterly variations in the rate of growth of our financial indicators, such as earnings per share, net incomeand revenues;

changes in revenue or earnings estimates or publication of research reports by analysts; speculation in the press or investment community; general market conditions; and domestic and international economic, legal and regulatory factors unrelated to our performance.11. A significant change in th

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