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Statement of the Chairman & Managing Director

Sri. Kaushik Mukherjee, I.A.S.,

at the 51st Annual General Meeting

held on 27th July 2010.

Dear shareholders,

It is my pleasure to welcome you all to the 51st Annual General Meeting of

your Corporation. At the outset, I am happy to inform you that our

Corporation has consolidated its financial position and registered an

operating profit of Rs. 9.80 crore during the year ended March 2010.

The Directors’ Report and the audited statements of accounts for the 51st

year ended 31st March 2010 have already been placed with you. I presume

you have had an opportunity to go through the report and hence I will take

the report as read.

However, I would like to take this opportunity to share with you some of

the salient aspects of the report.

ECONOMIC SCENARIO:

During the course of the year 2009-10, Indian economy exhibited clear

momentum in growth. As per the Central Statistical Organisation’s figure,

the GDP growth is estimated at 7.2 per cent with the industrial and service

sectors growing at 8.2 per cent and 8.7 per cent respectively. In the

agricultural sector, the impact of delayed and sub-normal monsoon

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reflected on the production and acreage data for kharif crops. Thus, the

production of foodgrains in the year 2009-10, is estimated at 218.19 million

tonnes which is lower as against 234.47 million tonnes in 2008-09. The

area coverage under total foodgrains during kharif 2009-2010 is 667.84

lakh hectare compared to 714.02 lakh hectare during kharif 2008-09, a

decline of 46.18 lakh hectare.

The cyclical slowdown in the industrial sector and the impact of the global

slow down during the year 2008 was partially arrested during the financial

year 2009-2010. The industrial growth for the entire fiscal, as measured

by Index of Industrial Production (IIP) stood at 10.4 per cent as against

2.8 per cent in 2008-09. Manufacturing sector, the main driver of industrial

growth was placed at 10.9 per cent as compared to 2.8 per cent in 2008-

09. Mining output and power generation also grew by 9.7 per cent and 6

per cent as against 2.6 per cent and 2.8 per cent respectively in the

previous fiscal.

In Karnataka, the growth in Gross State Domestic Product (GSDP), is

estimated at 5.5 per cent as compared to 4.5 per cent growth during

2008-09. The growth in GSDP of primary, secondary and tertiary

sectors is anticipated to be 0.1 per cent, 7.5 per cent and 6.2 per cent

respectively. The per capita income for the year 2009-10 is estimated

at Rs.32,411 as against Rs.31,041 for 2008-09 indicating growth of

4.4 per cent.

Against this background, KSFC has responded positively to the

requirements of the industrial and service sectors in Karnataka.

Corporation’s efforts during 2009-10 were directed towards customer

service, strengthening of recovery machinery, new business

development and close monitoring of NPA cases.

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FINANCIAL RESULTS :

During the year under review, the Corporation generated a gross revenue

of Rs. 209.00 crore on accrual basis as against Rs. 224.85 crore in

2008-09. Working of the Corporation for the year resulted in an operating

profit of Rs. 9.80 crore as against Rs. 8.25 crore in 2008-09. The net profit

for the year stands at Rs. 2.96 crore as compared to net loss of Rs. 39.84

crore for the year 2008-09.

MAJOR GOVERNMENT INITIATIVES IN KSFC :

Ø As part of restructuring programme, the State Government

approved the tripartite MoU of KSFC with SIDBI for a further period

of 5 years.

Ø The Government of Karnataka continued its One Time Settlement

scheme introduced during the year 2007-08 to help small borrowers

of KSFC to come out of the debt trap.

Ø Infused additional equity of Rs.110.00 crore by pass through

investments for improving the networth of the Corporation.

Ø Extended the interest subsidy scheme of GoK for first generation

SC Entrepreneurs to first generation ST entrepreneurs. Under

this scheme the net rate of interest after interest subsidy works to

4% p.a.

GOLDEN JUBILEE CELEBRATIONS BY THE

CORPORATION :

During the year 2009-10, the Corporation celebrated its Golden Jubilee on

12th of January 2010 at T.Chowdaiah Memorial Hall, Vyalikaval, Bangalore

for having completed 50 years of service in the cause of industrialisation in

Karnataka. Hon’ble Chief Minister of Karnataka Sri.B.S.Yeddyurappa was

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the chief guest at the function which was presided over by other dignatories

- Hon’ble Chairman of Karnataka Legislative Council, Hon’ble Minister for

Large and Medium Industries, Hon’ble Minister for Small Scale Industries

& Sericulture, Deputy Managing Director SIDBI, Chief Secretary of GoK,

Principal Secretary to Govt. & Chairman KSFC, Senior Officials of GoK,

distinguished past Chairmen and Managing Directors, Officers & employees

of KSFC.

On this occasion, of Commemorating 50 years of Corporation’s

contribution to the economy in specific and Nation / State at large, a

compendium of i l lustrat ive success stories of KSFC t i t led

“The Trailblazers”, was released by the Hon’ble Chief Minister of

Karnataka. The Corporation also identified a list of 30 noteworthy

clients, both past and present, in different sectors viz., Information

Technology, Biotechnology, Automobile, Engineering, Health care,

Hospitality, Construction, Food Processing, Textiles, Printing &

Publishing and other sectors and awarded them with medals and

meritorious certificates for their outstanding achievements in their

specialised fields. This list included today’s giants such as Infosys,

Biocon, Ace Designers and other distinguished clients. The awards

were presented by the Hon’ble Chief Minister of Karnataka.

SANCTIONS :

Sanctions of loans during the year 2009-10, under various schemes touched

Rs. 631.49 crore covering 1,461 cases as against Rs. 565.24 crore covering

1,420 cases during 2008-09. Cumulative sanctions reached Rs. 9,733.26

crore covering 1,62,106 cases as on 31-03-2010.

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FLOW OF ASSISTANCE :

a. Assistance to small-scale enterprises : During the year, the

Corporation sanctioned an amount of Rs. 287.67 crore to 892

small-scale enterprises. Cumulative assistance to small-scale

enterprises at the end of March 2010 stood at Rs. 5,009.59 crore

to 1,05,410 units.

b. Assistance to medium-scale enterprises : During the year, the

Corporation extended financial assistance to 10 medium-scale

enterprises amounting to Rs. 22.56 crore. The cumulative

assistance to medium-scale enterprises at the end of March 2010

stood at Rs. 883.94 crore to 1,662 units.

c. Assistance to transport : During the year, the Corporation

extended financial assistance to 69 cases amounting to Rs. 6.05

crore. The cumulative assistance to this sector stood at Rs. 738.59

crore to 40,431 cases.

d. Assistance to other sectors : During the year, assistance to other

sectors excluding SMEs and transport amounted to Rs. 315.21

crore to 490 cases. Cumulative assistance to other sectors stood

at Rs. 2,393.58 crore to 11,629 cases.

HEAD OFFICE & BRANCH OFFICE SANCTION :

During the year, loan sanctioned by head office amounted to Rs. 164.11

crore to 58 cases compared to previous years sanction of Rs.197.35 crore

to 65 cases. Loan sanctioned by branch offices amounted to Rs. 467.38

crore to 1,403 cases compared to Rs. 367.89 crore to 1,355 cases in the

previous year.

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INVESTMENT, VALUE OF OUTPUT AND

EMPLOYMENT :

The investment catalysed by the Corporation in 2009-10 is expected to be

Rs. 3,826.34 crore resulting in value of output to Rs. 3,011.49 crore and

generated employment to 9,722 persons.

DISBURSEMENT :

Disbursements made during the year touched Rs. 434.39 crore as against

Rs. 383.92 crore during the year 2008-09. Cumulative disbursements

reached Rs. 7,647.84 crore as on 31.03.2010.

RECOVERY :

The total recovery during the year stood at Rs. 554.94 crore as compared

to Rs. 501.22 crore made in the previous year. Recovery, in respect of

term loans, was Rs. 544.01 crore, leasing Rs. 0.21 crore and Rs. 10.72

crore in respect of financial services.

TREASURY ACTIVITY :

The process of recapitalisation of the Corporation through pass through

equity by the Government of Karnataka continued during the financial year

2009-10. The State Government routed a sum of Rs.110.00 crore of its

investment through the Corporation for investment in Krishna Bhagya Jala

Nigam Ltd. (Rs. 50.00 crore) and Cauvery Neeravari Nigam Ltd. (Rs. 60.00

crore). Apart from this, the Govt. of Karnataka released Rs. 8.34 crore as

equity support, towards settling of NPAs of small and tiny borrowers under

the Special OTS Scheme of Govt. of Karnataka and SIDBI converted the

loan in lieu of capital amounting to Rs. 9.17 crore into equity during the

year. As a result, the equity base of the Corporation got enhanced by

Rs. 127.52 crore and stood at Rs. 652.40 crore (including share application

money) by 31.3.2010 compared to Rs. 524.88 crore as on 31.3.2009.

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During the year, the Corporation availed a refinance of Rs. 200.00 crore

from SIDBI, and repaid Rs. 179.68 crore. The LoC outstanding of SIDBI,

which was at Rs. 891.56 crore as on 31.03.2009 increased to Rs. 911.87

crore by 31.03.2010. The interest cost on account of LoC reduced from

Rs. 79.26 crore for the year 2008-09 to Rs. 74.48 crore for the year

2009-10. The Corporation availed a rebate of Rs. 1.13 crore from SIDBI for

prompt payment of principal and interest installments.

The Corporation redeemed bonds worth Rs. 42.74 crore during the year

and raised Rs. 77.00 crore through issue of private placement bonds at a

coupon rate of 8.23 per cent, thereby the outstanding of the bonds increased

to Rs.646.97 crore as on 31.03.2010 from Rs. 612.71 crore as on

31.03.2009. The interest cost on bonds reduced from Rs. 66.29 crore for

the year 2008-09 to Rs. 51.68 crore for the year 2009-10.

The government guaranteed liability stood at Rs. 577.21 crore (including

the subsidy bonds of Rs. 49.42 crore ) by the year end. The Corporation

remitted a sum of Rs. 4.51 crore to the State treasury as guarantee

commission.

The total long-term liability of the Corporation, which was at Rs. 1,619.45

crore at the beginning of the year increased to Rs. 1,665.87 crore (including

the subsidy bonds issued on behalf of the GoK) by the year-end. The total

interest and financial expenses reduced from Rs. 163.84 crore for the

year 2008-09 to Rs. 137.06 crore for the year 2009-10.

OTHER FINANCIAL SERVICE ACTIVITIES:

Strategic alliances entered into with different organisations – UTI, HDFC,

LIC AMCs, LIC of India, IFFCO-TOKIO and IL & FS directed towards fee-

based activities to augment income generation have yielded results. Under

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the mutual funds activity, the Corporation mobilised an impressive business

of Rs. 976.45 crore during the year and earned an income of Rs. 15.70

lakhs. The Corporation has a strategic tie-up with IFFCO-TOKIO and LIC

of India for marketing general and life insurance products respectively and

mobilised a premium collection of Rs.35.29 lakhs and earned Rs.1.98

lakhs during the year under review. Similarly, the Corporation made

progress in its general insurance business and collected a premium of

Rs, 2.36 crore and earned an income of Rs.39.42 lakhs. Under monitoring

of IPOs, the Corporation earned a revenue of Rs. 8.75 lakhs. The

Corporation has also entered into MoU with Syndicate Bank and Vijaya

Bank to assist the banks in their resolution of cases under SARFAESI

Act and earned a revenue of Rs.1.55 lakhs. Steps are initiated on the

same lines by the Corporation to enter into MoU with HUDCO during the

year 2010-11.

INFRASTRUCTURE DEVELOPMENT ACTIVITY :

KSFC has ventured into diversification in infrastructure development activity

under the public / private participation model.

The Corporation is interacting / negotiating with various Government

Departments / Governmental Agencies / Registered Societies / Trusts,

etc., and exploring suitable infrastructure development projects on joint

venture basis. In respect of such joint venture projects, the Corporation

would take care of all the financial tie-ups for development of these

properties. The expected income out of different revenue models, will be

shared with the owners of the properties in appropriate ratio on mutually

agreeable terms, after studying economics / viability. The joint venture

proposals are in various stages of processing.

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Further, Corporation has been allotted 10 acres land in Harohalli industrial

area by the State Level Single Window Clearance Committee. It is proposed

to develop IT / BT / SME parks on this land. The concerned industrial area

are in various stages of acquisition / development by KIADB. The possession

of this plot is likely to be given by KIADB during 2010-11.

Karnataka Enterprise Solutions Ltd (KESOL), an SPV of KSFC with IL&FS

has been empanelled as “Transactional Advisor” for Infrastructure projects

of GoK. KESOL has received assignments from Government of Karnataka

for preparation of Pre-Feasibility studies for infrastructure projects. With

these developments, Corporation is hopeful of taking many more

assignments in infrastructure sector for Government of Karnataka.

NEW SCHEMES INTRODUCED DURING THE YEAR:

Line of Credit (LoC) for purchase of raw materials from

KSSIDC :

A new scheme in the form of Line of Credit to Micro, Small and Medium

Scale Industrial Enterprises was introduced during the year under review

to extend financial assistance towards purchase of raw materials from

KSSIDC. The objective of the scheme is to provide timely and adequate

working capital assistance in the form of Working Capital Term Loan

(WCTL) to MSMEs for purchase of raw materials from KSSIDC. The

minimum LoC amount is Rs. 5.00 lakhs and the maximum LoC amount is

Rs. 100.00 lakhs.

Scheme for financing of Energy Saving Projects (SESP) for

MSMEs under JICA line of credit of SIDBI :

During the year, a Line of Credit scheme was introduced for Energy Saving

Projects in the MSME sector in order to facilitate the flow of funds for the

investment in energy saving project. KSFC operated the scheme during

the year under review to promote energy saving MSMEs by providing

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financial assistance to them thereby contributing to environmental

improvement and economic development.

Scheme for financing of wine manufacturing industries :

Considering the market potential for financing wine manufacturing units, a

new scheme for financing wine manufacturing industries was introduced

during the year under review. The overall objective of the scheme is to

promote wine manufacturing units in MSME sector in the State of

Karnataka by providing financial assistance to them thereby helping the

farmers to get better market / price for their products.

Interest Subsidy Scheme for Scheduled Tribe Entrepreneurs:

During the year under review, the Interest Subsidy Scheme facility was

also extended to Scheduled Tribe entrepreneurs on the lines of the existing

scheme for Scheduled Caste entrepreneurs.

FUTURE OUTLOOK :

During the year, the Corporation has been successful in reducing its net

NPA to 3.45 per cent from 9.71 per cent in 2008-09. The task ahead is to

further reduce the NPA in the year 2010-11. Competitive lending rate, pro-

active policies and customer service shall be the key factors in the

operations of the Corporation. The efforts of the Corporation to make

interest rate market driven is expected to give fillip to your Corporation in

attracting more and more SMEs into its fold, strengthen its business

portfolio and improve its market share.

The Corporation has streamlined its operation, put in place several policies

to bring transparency in working systems through which the Corporation

is poised to cater to SMEs with new zeal.

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The Corporation is focussing on improved operational efficiency with

customer centric approach. The Corporation is also bringing out several

improvements / changes in Corporate Governance.

KSFC, completing yet another milestone, endeavours to upgrade its

services to customers by utilising its online with web portal services.

TARGETS FOR 2010-2011:

The Corporation for the year 2010-11, has set the following operational

targets:

Sanctions : Rs. 950.00 crore.

Disbursements : Rs. 715.00 crore.

Recovery : Rs. 565.00 crore.

Concerted efforts will be made to achieve the targets and to improve the

working results of the Corporation.

ACKNOWLEDGEMENTS :

I take this opportunity to place on record my special thanks and gratitude

to the Government of Karnataka for all the support extended for the

settlement of small loans and equity support.

I thank the Finance Department of Gok and Industries & Commerce, GoK

for their continued support and guidance. Likewise, I express my thanks

to the Govt. of India and the Reserve Bank of India for their guidance.

I am specially thankful to Small Industries Development Bank of India for

the timely refinance support and constant help and guidance in every

phase of the working of the Corporation.

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I would like to place on record my grateful thanks to Canara Bank, Syndicate

Bank, LIC of India, UTI-MF, IFFCO- Tokio and HDFC for their association

with KSFC and industry associations viz., KASSIA, AWAKE, BCIC &

FKCCI etc.

My sincere appreciation and thanks to the Commercial Banks, Apex Bank,

Co-operative Banks, KSSIDC, KIADB and KPTCL for their co-operation.

I place on record the invaluable service rendered by Sri. M. R. Sreenivasa

Murthy, I.A.S., during his tenure as Chairman of the Corporation.

I take this opportunity to acknowledge the contributions made by the out

going directors Sri.S.R.Hanchinamani, Dr. Rajkumar Khatri,I.A.S.,

Sri Ramesh G. Dharmaji and Smt.V.Kalyani during their tenures.

In particular, I thank all the clients of KSFC for reposing faith in the

Corporation, and continuing their relationship with KSFC, the shareholders

for their unstinted support and the investors in the bond issues of the

Corporation.

Let me take this opportunity to thank all the officers and staff of the

Corporation.

Thank you,

Date : 27th July 2010 Chairman & Managing Director

Place : Bangalore