Draft Letter of Offer

Dated October 15, 2010 For Equity Shareholders of our Bank only

The Karnataka Bank Limited

Our 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 in India 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) 2225588 Contact Person: Mr. Y V Balachandra, Company Secretary and Compliance Officer

E-mail: info@ktkbank.com; 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 PREMIUM 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 Rights Issue unless they can afford to take the risk of losing their investment. Investors are advised to read the risk factors carefully before taking an investment decision in this Rights Issue. For taking an investment decision, investors must rely on their own examination of our Bank and the Rights Issue including the risks involved. The securities being offered in the Rights Issue have not been recommended or approved by Securities and Exchange Board of India (SEBI) nor does SEBI guarantee the accuracy or adequacy of this Draft Letter of Offer. Investors are advised to refer “Risk Factors” on page 8 before making an investment in this Rights Issue.

ISSUER’S ABSOLUTE RESPONSIBILITY Our Bank, having made all reasonable inquiries, accepts responsibility for and confirms that this Draft Letter of Offer contains all information with regard to our Bank and the Rights Issue, which is material in the context of the Rights Issue, that the information contained 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 Draft Letter 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 of India Limited (“NSE”). The Equity Shares offered through this Draft Letter of Offer are proposed to be listed on the BSE and the NSE. 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 Stock Exchange is [●].

LEAD MANAGER TO THE ISSUE REGISTRAR TO THE ISSUE

Edelweiss Capital Limited 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021 Telephone: +91 22 4086 3535 Facsimile: +91 22 4086 3610 E-mail: ktk.rights@edelcap.com Investor Grievance E-mail: customerservice.mb@edelcap.com Website: www.edelcap.com Contact Person: Mr. Sumeet Lath/Mr. Jibi Jacob SEBI Registration No. INM0000010650

Integrated Enterprises India Limited No 30 Ramana Residency 4th Cross, Sampige Road, Malleswaram, Bangalore 560 003 Telephone: + 91 80 23460815-818 Facsimile: + 91 80 23460189 E-mail: alfint@vsnl.com Investor Grievance E-mail: ktkbankrights@vsnl.net Website:www.iepindia.com Contact Person: Mr. S. Vijayagopal SEBI Registration No: INR 000000544

ISSUE PROGRAMME

ISSUE OPENS ON LAST 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 ....................................................... 52 OUR 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 Bank’s financial statements as of fiscal 2010 and Reviewed financial statements for the six months ended on September 30, 2010 prepared in accordance with Indian GAAP and in accordance with the SEBI ICDR Regulations, as stated in the report of our Statutory Auditors for the fiscal 2010, M/s Vishnu Daya & Co, Chartered Accountants and M/s R.K Kumar & Co., Chartered Accountants, included in this Draft Letter of Offer. The current Auditors of our Bank are M/s Vishnu Daya & Co, Chartered Accountants and M/s R.K Kumar & Co., Chartered Accountants. 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 listed may 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, the official currency of India; references to the singular also refer to the plural and reference to a gender also refers to any other gender, wherever applicable, and the words “Lakh” or “Lac” mean “100 thousand” and the word “million” means “10 lakh” and the word “crores” means “10 million” or “100 lakhs” and the word “billion” means “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 act

on its behalf Equity Shares The Issued, Subscribed and Paid Up Equity Share Capital of our Bank

and the additional equity shares of our Bank offered pursuant to the Rights Issue

Depository 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 Disclosure

Requirements) 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 of our Bank with respect to this Issue in accordance with SEBI ICDR Regulations

Allotment

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 Rights Equity Shares are allotted.

ASBA/Application Supported by Blocked Amount

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

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

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

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

Designated Stock Exchange/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 shares of Rs. 10 each at a premium of Rs. [●] per share

Equity Shareholders/Eligible Equity Shareholders

Means a holder/beneficial owner of equity shares of The Karnataka Bank Limited 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 of our Bank on rights basis in the ratio of 2 Rights Equity Shares for every 5 Equity 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 after

incorporating SEBI comments on the Draft Letter of Offer dated [●] Record Date [●] Renouncee(s)

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

Rights Entitlement

The number of Equity Shares that an Eligible Equity Shareholder is entitled to in proportion to his / her shareholding in our Bank as on the Record Date.

Registrar To The Issue Integrated Enterprises India Limited Self Certified Syndicate Bank or SCSB

The Banks which are registered with SEBI under SEBI (Bankers to an Issue) Regulations, 1994 and offers services of ASBA, including blocking of bank account and a list of which is available on http://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” or “Karnataka Bank”

Unless the context otherwise indicates or implies, refers to “The Karnataka Bank Limited”

Auditors The statutory auditors of our Bank – M/s Vishnu Daya & Co, Chartered Accountants 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 the expression ‘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 Chartered

Accountants 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 thereto FERA Foreign Exchange Regulation Act, 1973 FII Foreign Institutional Investors (as defined under the Securities and

Exchange 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 Resident NRE 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 Reference

Number 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 thereto ST 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 Restructuring CRAR 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 Transfer NSLR Non- Statutory Liquidity Ratio MSME Micro Small and Medium Enterprises. Micro Enterprise shall mean where

the investment in plant and machinery does not exceed twenty-five lakh rupees. Small Enterprise shall mean where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees, and Medium Enterprise shall mean where the investment in plant 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 Act 2002/Securitisation Act

Securitisation and Reconstruction of Financial Assets and Enforcement of Security 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 and

readily available support against unexpected losses. It comprises paid-up capital and reserves consisting of any statutory reserves, free reserves and capital reserves as reduced by equity investments in subsidiaries, intangible assets, and losses in the current period and those brought forward 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 subordinated debt.

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 and financial 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 decided

against 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 of adjudications before various forums. We are involved in litigations for a variety of reasons, which generally arise 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 tax claims

31 213.33

2. Suits involving our Bank which are not acknowledged as 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 our businesses, 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 extent

depend 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 RBI’s monetary policy, de-regulation of 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 interest expense 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 and agricultural 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 form of SLR, currently 25%, of our net demand and time liabilities in Government or other approved securities or in cash. 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 the market 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 by

the 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 of operations.

The priority sector lending norms of the RBI require all banks in India to extend at least 40.00% of their adjusted net bank credit (“ANBC”) (net bank credit plus investments made by banks in non-SLR bonds held in Held to Maturity (“HTM”) category) to specified sectors, including agriculture, export credit and small scale industries, which are known as priority sectors. In accordance with these norms, at least 18.00% of our ANBC must 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 constituted 11.97% and 13.51% , respectively of our ANBC. As on March 31, 2010, our total advances made to the priority sector 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 targets that 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 intrest income. 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 we

are 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 March 31, 2010. The value of our net NPAs as at September 30, 2010 was Rs. 172.74 crore which represents 1.1 % of our net advances as of September 30, 2010. Various factors, like a rise in unemployment, slowdown in the India and 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 loans due 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 to certain 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 able to 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 requirements could 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 RBI’s regulations, we are subject to a CRR requirement 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 may further 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 in interest income and hence could materially and adversely affect our business, results of operations and financial condition. In addition, under the RBI’s regulations, we are required to maintain a SLR, according to which 25.00% 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 securities generally 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 SLR requirements 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 minimum

level 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 capital adequacy ratio was 11.41% (Basel I) and 11.71% (Basel II) as of September 30, 2010. We are exposed to the risk 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 our ability 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 ratio if 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 actions could materially and adversely affect our reputation, results of operations and financial condition. The Basel II guidelines for the capital adequacy framework also require maintenance of Tier-1 capital at 6.00%. The implementation 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 our capital requirement. There can be no assurance that we will be able to raise adequate additional capital in the future on terms favourable to us. 7. The value of our collateral may decrease or we may experience delays in enforcing our collateral if

borrowers 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 securities and corporate guarantees. The loans to corporate customers also include working capital credit facilities that are typically 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 marketable securities, 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 specialised quasi-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 and Enforcement of Security Interest Act, 2002 (SARFAESI Act), has strengthened the ability of lenders to resolve NPAs by granting them greater rights as to enforcement of security and recovery of dues from corporate borrowers. 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 expose us to a potential loss. Any unexpected losses could adversely impact our business, financial condition and the price of the Equity Shares. In addition, the RBI’s guidelines on corporate debt restructuring specify that for debt amounts of Rs. 10 crores and 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 a borrower, 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 our loans, could adversely affect our business and financial results. 8. Our risk management policies and procedures may not adequately address unanticipated risks. Inability

to 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 to continue to do so in the future. Despite this, our policies and procedures to identify, monitor and manage risks may not be fully effective. Some of our methods of managing risk are based upon the use of observed historical market behaviour. As a result, these methods may not accurately predict future risk exposures which could be significantly 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 designed for 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 management policies 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 other

misconduct 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 employees or 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 all our employees, we have in the past been held liable for the fraudulent acts committed by our employees. We cannot guarantee you that such events will not recur in the future. Any such event could adversely affect our reputation, operations, or otherwise have a material adverse effect on our business, financial condition or results of operation. Given the high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. 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 a deterioration in customer service and to loss or liability. We also face the risk that the design of our controls and procedures prove to be inadequate, or may be circumvented, thereby causing delays in detection of errors in information. 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 be

impaired, 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 be impaired. We are in a business where customer trust is critical and if the customers no longer identify us, it may affect our financial 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 use the trademark and our logo, our business could be adversely affected.Any legal proceedings which result in a finding that we have breached third parties’ intellectual property rights may require us to give financial compensation 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 and results 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 legal proceedings will not be initiated against our bank and any such proceedings, if initiated, could require us to incur additional costs and may adversely impact our reputation, business, financial condition and results of operations. 11. We are exposed to various industry sectors. Deterioration in the performance of any of the industry

sectors 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 and other industries. Our credit exposure in the textile industry is the largest wherein we have lent Rs. 549.07 crore as on September 30, 2010 which constituted 15.27% of our total funded industry exposure. Any significant deterioration 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 borrowers in 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 of operations, 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 face

further 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 from currency chest in their CVPS/ during inspection of the currency chests for non compliance with operational guidelines. 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 including

insurance 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 increasing our fee-based services. We have entered into an agreement with Franklin Templeton (I) Private Ltd, TATA Mutual Fund and ICICI Prudential Asset Management Company Limited for the distribution of mutual fund products. We also market and sell the life insurance products of MetLife India Insurance Company Private Limited and general insurance products of Universal Sompo General Insurance Company Ltd in conjunction with certain of our savings account and term deposit products. We earn fees and commissions for the distribution 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 certain

schemes 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 the total 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, the loan amounting to Rs. 19.98 Crore may be waived off by our Bank. This may have a negative effect on our profits and financial condition. In future, the GoI may further require us to waive off or reduce the outstanding amount 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 to weaker sections, which is aimed at facilitating the GoI’s initiative to empower them. Such schemes and credit facilities provided to members of the weaker sections may not be as profitable as compared to lending in the non-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 affected adversely. 15. Most of our branches are located on leased premises. We may not be able to renew the lease agreements

for 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 premises do 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, or both, 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 our business and financial condition 16. Our Regional Offices may have weak control over our branches which may adversely affect our

reputation, 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 lead to 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. We

also could experience difficulty in combining operations and cultures and may not realise the anticipated synergies 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 necessarily contribute to our profitability and may, in some cases, require us to assume operational and financial problems of the acquired entity, including high levels of NPAs. We also could experience difficulty in combining operations 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 results

of operations. The rating agencies ICRA and CARE have reaffirmed “LA +” and “A+” ratings respectively for Rs 350 crores Lower Tier II Subordinated debt instruments and CARE has given “A1+” rating for certificate of Deposits programme of Rs. 2,000 crores. Credit rating is considered as an assessment of our ability to honour our financial commitments and obligations as and when they become due. A downgrade in our credit rating may adversely 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 and

adversely 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 and advanced 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 Bank’s computer systems and network infrastructure 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 systems including firewalls and password encryption, designed to minimise the risk of security breaches. Although our Bank intends to continue to implement security technology and establish operational procedures to prevent break-ins, damage and failures, there can be no assurance that these security measures will be adequate or successful. A failure of security measures could have a material adverse effect on our Bank’s business, its future financial 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 past certain observations were made by RBI during the 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 effect on 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 including

derivatives. 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 crystallization of any of the above liabilities, we may be required to honour the demands raised. This may materially and adversely 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 Exchange Contacts*

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 the

branch 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 are required to obtain RBI approval before opening a branch office office in Tier 1 and Tier 2 centres (centres with population of 50,000 and above as per 2001 census), except in the case of North Eastern States and Sikkim where 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. This would affect our future growth, thereby having a material adverse impact on the business operations of our Bank. 23. A major part of our branch network is concentrated in southern India and thereby exposing us to

regional 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/or political circumstances in that region as compared to other public and private sector banks that have diversified national presence. Any disruption, disturbance or breakdown in the economy of southern India could adversely affect the result of our business and operations. 24. We may face labour disruptions that could interfere with our operations. Any such disruption in future

may 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 5,844 employees. Majority of our employees are members of Karnataka Bank Employees Association and Karnataka Bank 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 adverse effect 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 may

adversely 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 of regulatory and enforcement authorities in each of the jurisdictions in which we operate. The laws and regulations or the regulatory or enforcement environment in any of those jurisdictions may change at any time and 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 become increasingly complex governing a wide variety of issues, including interest rates, liquidity, capital adequacy, securitisation, investments, ethical issues, money laundering, privacy, record keeping, marketing and selling practices, 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 as well as require us to increase our lending to relatively riskier segments and may result in an increase in NPAs in the 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 the price 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 banking

company shall exercise voting rights on poll in excess of 10.00% of the total voting rights of all the shareholders of the banking company”.

• Section 15(1) of the Banking Regulation Act states that “no banking company shall pay any dividend

on 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 not represented 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 fund

and 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 limit at 25.00%) of such profit before paying any dividend.

• Section 19 of the Banking Regulation Act restricts the forming of subsidiaries by banks, which may

prevent us from exploiting emerging business opportunities. Similarly, Section 23 of the Banking Regulation Act contains certain restrictions on banking companies regarding the opening of new places of 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 India

equivalent to not less than 75.00% of its demand and time liabilities in India, which in turn may restrict us 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 time

chairman and other whole time directors. RBI has powers to remove managerial and other persons from office, and to appoint additional directors. We are also required to obtain approval of the RBI for the creation of floating charges on our borrowings, thereby hampering leverage. The Banking Regulation Act also contains provisions regarding production of documents and availability of records for inspection.

• Subject to and on account of laws governing banking companies, the financial disclosures in the offer

document 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 our

shareholders or any modification in such arrangement or compromise will not be sanctioned by any High Court unless such compromise or arrangement or modification, as the case may be, is certified by RBI in writing as capable of being implemented and as not being detrimental to the interests of our depositors. Our amalgamation with any other banking company will require the sanction of RBI and shall 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 provisions of the Companies Act. Further, RBI can also apply for winding up of a banking company in certain circumstances and can also be appointed as the liquidator and the GoI could acquire the undertakings of banking companies in certain cases.

• The forms of business in which we may engage are specified and regulated by the Banking Regulation

Act. Pursuant to the provisions of section 8 of Banking Regulation Act, we cannot directly or indirectly deal in the buying, selling or bartering of goods by itself or for others, except in connection with the realisation of security given to us or held by us, or in connection with bills of exchange received for collection or negotiation, or in connection with the administration of estates as executor, trustee or otherwise, or in connection with any business specified under section 6(1)(o) of the Banking Regulation 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) of Banking 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, banking companies may only carry on business activities permitted by Section 6 of the Banking Regulation Act or specifically permitted by the Reserve Bank of India. This may restrict our ability to pursue profitable business opportunities as they arise.

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

our business and operations. Most of our funding requirements are met through short-term and medium-term funding sources, primarily in the form of deposits. A portion of our assets have long-term maturities, creating a possibility for funding mismatches. In our experience, a substantial portion of our customer deposits have been rolled over on maturity and 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 adverse impact on our Bank’s business and operations. 27. If we are unable to adapt to rapid technological changes, our business, future financial performance

could suffer. Our future success and ability to compete with other banks will depend, in part, on our ability to respond to technological advances and emerging banking industry standards and practices on a cost-effective and timely basis. 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 or adapt its transaction processing systems to customer requirements or emerging industry standards. If our Bank is unable, 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 future financial performance of our Bank could be materially affected. 28. We rely on the accuracy and completeness of information provided to us about our customers and

counterparties 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 may rely 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 and completeness 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 customer’s audited financial statements conform to generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations 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 information furnished 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 licenses

required 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 Operations and 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 and approvals for our proposed operations. While we believe that we will be able to renew or obtain such permits and approvals as and when required, there can be no assurance that the relevant authorities will issue any of such permits or approvals in the time-frame anticipated by us or at all. Our failure to renew, maintain or obtain the 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 area

which 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 assure you 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 fail market 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 of relevant 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 the future and, if so, the level of such future dividends. The declaration, payment and amount of any future dividends 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 in India from time to time. 32. Any inability to attract and retain talented professionals may materially and adversely impact our

business. Our performance and success depends largely on our ability to nurture and retain the continued service of our management 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-man insurance 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 our strategy and we believe it to be a significant source of competitive advantage. Our inability to attract and retain talented professionals or the loss of key management personnel could have a material and adverse impact on our business, 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 the

market price of our Equity Shares. We may be required to finance our growth through additional equity offerings. Any future issuance of our equity shares could dilute the holdings of investors in our Bank and could adversely affect the market price of our 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 Bank

is unclear. As of July 1, 2010, RBI guidelines replacing the benchmark prime lending rate regime with a base rate regime became effective. The Bank plans to implement the new base rate regime and has declared that its initial base rate, 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 Bank and other banks are unclear as of the date of this Draft Letter of Offer. If the base rate regime is successful in promoting transparency and enhancing competition in the bank lending markets in India, our Bank may lose business to its competitors, who may benefit more from the new regime than our Bank does. As banks are unable to lend at rates below their base rate, regardless of the creditworthiness of the borrower, it is possible that the Bank will be restricted from making loans that would otherwise result in a profit, thereby adversely affecting the Bank‘s results of operations. It is also possible that the base rate regime will increase deposit rates, which would raise our Bank‘s cost of funding, lower the Bank‘s 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 the

RBI. 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 approval will 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 of this Draft Letter of Offer. 36. A nation-wide credit bureau has become operational in India only recently and may not provide

adequate information. Until such time, we may be more susceptible to higher NPAs compared to banks in 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. CIBIL’s 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 may be 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 financial

difficulties 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 may be 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 developed countries. Additionally, the credit risk of borrowers in India is higher than in developed countries. India’s nationwide credit bureau is still developing, which may affect the quality of information available to us about the credit history of our borrowers, especially individuals and small businesses. The problems faced by individual Indian financial institutions and any instability in or difficulties faced by the Indian financial system generally could create adverse market perception about Indian financial institutions and banks. This in turn could 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 to

competitive 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. Some of 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 of market 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. In particular, 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 its branches or establish wholly-owned subsidiaries in India or invest up to 74% in the equity of Indian private sector banks, which is likely to further increase competition in the Indian banking industry. The foreign banks that 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 the banking sector which would lead to higher competition amongst the banks. In August 2010, RBI released a discussion paper on ―Entry of New Banks in the Private Sector which, inter alia, includes discussion on the minimum capital requirements for new banks and promoters contribution, foreign shareholding in the new banks, whether industrial or business houses should be permitted to promote banks and whether non-banking financial companies should be entitled to convert to banks. Further, the GoI is also encouraging banks and other financial 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 performance and the market price of the Equity Shares. Our future success will depend in large part on our ability to respond in 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 the

emerging 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. Although economic conditions differ in each country, investors’ reactions to developments in one country may affect securities of issuers in other countries, including India. Accordingly, the price and liquidity of our Equity Shares may 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 liquidity of 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, disputes have occurred on occasion between listed companies and the Indian stock exchanges and other regulatory bodies that, 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 stoppage on, 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 developed economies. The regulation and monitoring of Indian securities markets and the activities of investors, brokers and other participants differ, in some cases significantly, from those in the U.S. and Europe. Indian stock exchanges 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 liquidity of 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, disputes have occurred on occasion between listed companies and the Indian stock exchanges and other regulatory bodies that, in some cases, have had a negative effect on market sentiment. If similar problems occur in the future, the market 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 trading prices, 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 a shareholder’s 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 allow transactions beyond specified increases or decreases in the price of the Equity Shares. This circuit breaker operates 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 the historical volatility in the price and trading volume of the Equity Shares. The BSE and NSE halted trading due to the index-based market-wide circuit breaker on May 18, 2009 after the index crossed the threshold of such circuit breaker. A closure of, or trading stoppage on, either the BSE or the NSE could adversely affect the trading price of the Equity Shares.

The circuit breaker limits the upward and downward movements in the price of the Equity Shares. As a result of this circuit breaker, no assurance may be given regarding your ability to sell your Equity Shares or the price at which 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 NSE in 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 documents authorizing the issuing of Equity Shares to be submitted. There could be delay in listing the Equity Shares on the BSE and/or the NSE. Any delay in obtaining the approval would restrict your ability to dispose off your Equity Shares allotted in the Issue. 6. Significant differences exist between Indian GAAP and other accounting principles, such as U.S. GAAP

and 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 in accordance with Indian GAAP. We have not attempted to quantify the impact of U.S. GAAP or IFRS on the financial data included in this Draft Letter of Offer, nor do we provide a reconciliation of our financial statements to those of U.S. GAAP or IFRS. Each of U.S. GAAP and IFRS differs in significant respects from Indian GAAP. Accordingly, the degree to which the Indian GAAP financial statements included in this Draft Letter of Offer will provide meaningful information is entirely dependent on the reader’s level of familiarity

21

with Indian accounting practices. Any reliance by persons not familiar with Indian accounting practices on the financial 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 (the “converged 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 standards beginning with fiscal period commencing April 1, 2013. Because there is significant lack of clarity on the adoption of and convergence with IFRS and there is not yet a significant body of established practice on which to draw in forming judgments regarding its implementation and application, we have not determined with any degree of certainty the impact that such adoption will have on our financial reporting. There can be no assurance 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 to converged 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-experienced accounting personnel available as more Indian companies begin to prepare financial statements based on converged accounting standards. There can be no assurance that our adoption of converged accounting standards will not adversely affect our reported results of operations or financial condition and any failure to successfully adopt 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 equity

shares 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 are generally taxable in India. Any gain realised on the sale of listed equity shares on a stock exchange held for more 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. Any gain realised on the sale of equity shares 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. Further, any gain realised on the sale of listed equity shares held for a period of 12 months 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 such exemption 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 India’s ability to impose tax on capital gains. As a result, residents of certain countries may be liable for tax in India, as well as in their own jurisdictions on gain upon a sale of our Equity Shares.

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

You can start trading the Equity Shares Allotted to you only after they have been credited to your demat account, 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 be credited to your demat account or that trading in the Equity Shares will commence in a timely manner. This risk factor is for the information of investors and does not in any way dilute the right of investors and our obligations. 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 the perception 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 Shares

after the Issue.

22

The Issue Price Equity Share may not be indicative of the market price for our Equity Shares after the Issue. The market 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 income

and 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 the Government’s economic liberalization and deregulation policies could

adversely affect our business and the price of our Equity Shares. Our business and customers are predominantly located in India or are related to and influenced by the Indian economy. The Indian government has traditionally exercised, and continues to exercise, a dominant influence over many aspects of the economy. Government policies could adversely affect business and economic conditions in India, our ability to implement our strategy and our future financial performance. Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector and encouraging the development of the Indian financial sector. For the past several years, coalition governments have governed India. The leadership of India and the composition of the coalition in power are subject to change and election results are sometimes not along expected lines. It is difficult to predict the economic policies that will be pursued by the Government. The rate of economic liberalization could change and specific laws and policies affecting banking and finance companies, foreign investment, currency exchange and other matters affecting investment in our securities could change as well. Any significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our business in particular. 12. Civil unrest, acts of violence including terrorism or war involving India and other countries could

materially and adversely affect the financial markets and our business. Civil unrest, acts of violence including terrorism or war, may negatively affect the Indian markets where our Equity Shares will be traded and also materially and adversely affect the worldwide financial markets. These acts may also result in a loss of business confidence, make travel and other services more difficult and ultimately materially and adversely affect our business. Diplomatic relations between the GoI and neighbouring countries have suffered post the terrorist attacks on November 26, 2008. While the GoI has been trying to engage in conciliatory efforts any further tension or deterioration of relations might result in investor concern about stability in the region, which could materially and adversely affect the price of the Equity Shares. India has also witnessed civil disturbances in recent years and it is possible that future civil unrest as well as other adverse social, economic and political events in India could have an adverse impact on us. Such incidents could also create a greater perception that investment in Indian companies involves a higher degree of risk and could have an adverse impact on our business, financial condition, results of operations and the price of the Equity Shares. 13. Trade deficits could materially and adversely affect our Bank’s business and the price of our Bank’s

Equity Shares. India’s trade relationships with other countries and its trade deficit, driven to a major extent by global crude oil prices, may adversely affect Indian economic conditions. If trade deficits increase or are no longer manageable because of the rise in global crude oil prices or otherwise, the Indian economy, and therefore our Bank’s business, its financial performance, shareholders’ funds and the price of its Equity Shares could be materially and adversely affected. 14. Financial difficulty and other problems in certain financial institutions in India could adversely affect

our business and the price of our Equity Shares. As an Indian bank, we are exposed to the risks of the Indian financial system which may be affected by the financial difficulties faced by certain Indian financial institutions because the commercial soundness of many

23

financial institutions may be closely related as a result of credit, trading, clearing or other relationships. This risk, which is sometimes referred to as “systemic risk”, may adversely affect financial intermediaries, such as clearing agencies, banks, securities firms and exchanges with whom we interact on a daily basis and who may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. Any such difficulties or instability of the Indian financial system in general could create an adverse market perception about Indian financial institutions and banks and hence adversely affect our business. As the Indian financial system operates within an emerging market, it faces risks of a nature and extent not typically faced in more developed economies, including the risk of deposit runs notwithstanding the existence of a national deposit insurance scheme. 15. A decline in India’s foreign exchange reserves may affect liquidity and interest rates in the Indian

economy, which could adversely impact us. The direct adverse impact of the global financial crisis on India has been the reversal of capital inflows and decline in exports, leading to pressures on the balance of payments and a sharp depreciation of the Indian Rupee vis-à-vis the US Dollar. Any increased intervention by the RBI in the foreign exchange market to control the volatility of the exchange rate may result in a decline in India’s foreign exchange reserves and reduced liquidity and higher interest rates in the Indian economy, which could adversely affect our business and our future financial performance. 16. Any downgrading of India’s debt rating by an international rating agency could adversely affect our

business and the price of our Equity Shares. Any adverse revisions to India’s credit ratings for domestic and international debt by international rating agencies may adversely impact our ability to raise additional financing, and the interest rates and other commercial terms at which such additional financing is available. This could have a material adverse effect on our business and future financial performance, our ability to obtain financing for capital expenditures, and the price of our Equity Shares. 17. Investors may not be able to enforce a judgment of a foreign court against us. It may not be possible for investors in our Equity Shares to effect service of process outside of India on us or our directors and executive officers named in this Draft Letter of Offer who are residents of India or to enforce judgments obtained against us or these persons in foreign courts predicated upon the liability provisions of foreign countries. Moreover, it is unlikely that a court in India would award damages on the same basis as a foreign court if an action were brought in India or that an Indian court would enforce foreign judgments if it viewed the amount of damages as excessive or inconsistent with Indian law and practice. 18. A third party could be prevented from acquiring control of our Bank because of the takeover regulations

under Indian law. There are provisions in Indian law that may discourage a third party from attempting to take control of our Bank, even if it would result in the purchase of our Equity Shares at a premium to the market price or would otherwise be beneficial to our Bank’s shareholders. Indian takeover regulations contain certain provisions that may delay, deter or prevent a future takeover or change in control so as to ensure that the interests of shareholders are protected. Any person acquiring either “control” or an interest (either on its own or together with parties acting in concert with it) in 15% or more of our Bank’s voting Equity Shares must make an open offer to acquire at least another 20% of our Bank’s outstanding voting Equity Shares. A takeover offer to acquire at least another 20% of our Bank’s outstanding voting Equity Shares also must be made if a person (either on its own or together with parties acting in concert with it) holding between 15% and 55% of our Bank’s voting Equity Shares has entered into an agreement to acquire or decided to acquire additional voting Equity Shares in any financial year that exceed 5% of our Bank’s voting Equity Shares. These and other applicable provisions may discourage or prevent certain types of transactions involving an actual or threatened change in control. 19. Your ability to sell your Equity Shares to a resident of India may be subject to delays if RBI approval is

required. Under current Indian regulations and practice, approval of the RBI is required for the sale of Equity Shares by a non-resident to a resident of India, unless the sale is made on a stock exchange in India through a stock broker

24

or a merchant banker registered with SEBI, at the market price or in terms of the pricing guidelines specified by RBI in the case of an off-market transfer. If the Equity Shares are thinly traded, then certain other pricing guidelines specified by RBI must be followed. Prior to the repatriation of sale proceeds, certain filings must be made with an authorised dealer remitting the proceeds along with certain documents, including an undertaking from the resident buyer in the prescribed form stating that the pricing guidelines have been adhered to and a no objection/tax clearance certificate from the income tax authority or an accountant has been obtained. If any approvals are required from the RBI or any other government agency, they may not be obtained on terms favourable to a non-resident investor or at all. We cannot guarantee that any approval, if required, will be obtained in a timely manner or at all. Because of possible delays in obtaining requisite approvals, investors in the Equity Shares may be prevented from realising gains during periods of price increases or limiting losses during periods of price declines. 20. Foreign investment in our Bank as well as acquisitions or transfers of our Equity Shares resulting in an

aggregate holding of five per cent or more is subject to limits specified by the Reserve Bank of India. These restrictions may adversely affect the liquidity of our Equity Shares and could result in the absence of FII buying support even in situations where there is a decline in the price of our Equity Shares.

Under Indian laws, the aggregate permissible foreign investment (including foreign direct investment (‘‘FDI’’) and investment by registered foreign institutional investors (‘‘FIIs’’) and nonresident Indians (‘‘NRIs’’) in a private sector bank, such as our Bank, is limited to an aggregate of 74% of the paid up capital. Further, the foreign exchange regulations stipulate that the aggregate foreign institutional investor‘s/ FII’s holding cannot exceed 24% of the total issued capital. However, with the approval of the Board of Directors and the shareholders by way of a special resolution, the aggregate FII holding in a company can be increased up to sectoral limits. Presently, the FII shareholding limit of our Bank is 49% of our paid up capital as approved by the shareholders. As on September 30, 2010, our FII holding was 28.78 %. Accordingly, unless the current foreign investment limit applicable to us is liberalised, the scope of us getting additional foreign investment will be limited. Once the aggregate foreign investment of a bank reaches this cut-off point, the RBI cautions non-resident investors and authorised dealers not to further transact in equity shares of such bank without prior approval of the RBI. These restrictions may adversely affect the liquidity of our Equity Shares and could result in the absence of FII buying support even in situations where there is a decline in the price of our Equity Shares. Pursuant to the Guidelines for Acknowledgement of Shares in Private Banks dated February 3, 2004, or the Acknowledgement Guidelines, any acquisition or transfer of shares in a private bank which will take the aggregate holding of an individual or a group to five per cent or more of the paid-up capital of a bank, requires the prior “acknowledgement” of the RBI. The term “holding” refers to both direct and indirect holdings, beneficial or otherwise, and is computed with reference to the holding of the applicant, relatives (where the applicant is a natural person) and associated enterprises. In considering whether it will grant its acknowledgement to any application for an acquisition or transfer resulting in a holding of five per cent or more of the paid-up capital of a private bank, the RBI considers, among other matters, whether the applicant or proposed acquirer (including all entities connected with the acquirer) meets certain fitness and propriety tests. The RBI considers additional criteria when granting its acknowledgement where the acquisition or transfer will take the aggregate shareholding of the applicant or proposed acquirer to 10.00% or more and certain further criteria when granting its acknowledgement where the acquisition or transfer will take the aggregate shareholding of the applicant or proposed acquirer to 30.00% or more of the paid-up capital of a private bank. The RBI may require the applicant or proposed acquirer to seek further approval in relation to subsequent acquisitions at any higher threshold as it may specify. The aforementioned regulatory framework could adversely affect the free transferability of the Equity Shares. 21. After this Issue, the price of our Equity Shares may be highly volatile. The prices of our Equity Shares on the Indian stock exchanges may fluctuate after this Issue as a result of several factors, including: • volatility in the Indian and global securities market or in the Rupee’s value relative to the U.S. dollar, the

Euro and other foreign currencies; • our profitability and performance; • performance of our competitors in the Indian banking industry and the perception in the market • significant developments in India’s economic liberalisation and deregulation policies; • significant developments in India’s fiscal, environmental and other regulations;

25

• an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenues and cost structures; and

• the present state of our development There can be no assurance that an active trading market for our Equity Shares will be sustained after this Offering, or that the prices at which our Equity Shares have historically traded will correspond to the price at which the Equity Shares are offered in this Offering or the prices at which our Equity Shares will trade in the market subsequent to this Offering. The Indian stock markets have witnessed significant volatility in the past and our Equity Share price may be volatile and may decline post listing. Prominent Notes:

1. This Issue is of [●] Rights Equity Shares for cash at a premium of Rs.[●]/- per Rights Equity Share on

rights basis to the existing Equity Shareholders of our Bank in the ratio of 2 Rights Equity Share for every 5 Equity Share held on the Record Date i.e. [●] in terms of this Draft Letter of Offer.

2. Net worth of our Bank as on March 31, 2010 is Rs. 1,832.75 crores September 30, 2010 is Rs. 1,910.10

crores. The Issue is of an amount aggregating Rs. [●] Crores.

3. The book value per Equity Share as of March 31, 2010 and September 30, 2010 was Rs. 136.80 and Rs. 142.33 per Equity Share.

4. Our Bank has entered into certain related party transactions as disclosed in the section titled “Financial Statements” on page F-25.

5. None of our directors and their relatives have financed the purchase by any other person of securities of our Bank other than in the normal course of the business of the financing entity during the period of six months immediately preceding the date of filing this Draft Letter of Offer with SEBI.

6. No loans and advances have been granted to our Directors

7. Trading in equity shares for all investors shall be in dematerialised form only.

8. Except as stated in this Draft Letter of Offer under section titled “Our Management” on page 55 of this

Draft Letter of Offer, the Directors have no interest other than to the extent of Equity Shares of our Bank held or reimbursement of expenses incurred or normal remuneration or benefits.

9. The Lead Manager and our Bank shall make any information relating to the Issue available to the

investors at large and no selective or additional information would be available for a section of the investors in any manner whatsoever.

10. The Lead Manager and our Bank shall update this Draft Letter of Offer and keep the

shareholders/public informed of any material changes till the listing and trading commencement and our Bank shall continue to make all material disclosures as per the terms of the listing agreement.

11. Investors may contact Lead Manager or Compliance Officer of our Bank for any queries/ complaints pertaining to the Issue.

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SUMMARY OF THE ISSUE

Pursuant to the resolution passed by the Board of Directors of our Bank under Section 81(1) of the Companies Act, 1956 at the meeting held on July 30, 2010 and subsequently approved by the members of our Bank at the Extra-Ordinary General Meeting held on September 9, 2010, it has been decided to make the following offer to the eligible equity shareholders of our Bank, with a right to renounce. The following is a summary of the Issue. This summary should be read in conjunction with, and is qualified in its entirety by, more detailed information in the chapter titled “Terms and Procedure of the Issue” beginning on page 85 of this Draft Letter of Offer.

Rights Equity Shares proposed to be issued [●] Rights Equity Shares

Rights Entitlement for Equity Shares 2 Rights Equity Shares for every 5 Equity Shares held on the Record Date

Record Date [●] Issue Price per Rights Equity Share Rs. [●] Face Value per Rights Equity Share Rs. 10 Equity Shares outstanding prior the Issue

13,43,00,217 Equity Shares

Equity Shares outstanding after the Issue

[●]Equity Shares

Use of Issue Proceeds For further information, please refer to the chapter titled “Objects of the Issue” beginning on page 42 of this Draft Letter of Offer.

Payment terms The payment terms available to the Investors are as follows:

Due Date Amount On Rights Issue application Rs. [●] which constitutes 100% of the full amount of the Issue Price

of Rs. [●].

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SUMMARY FINANCIAL INFORMATION

The following tables set forth the summary financial information derived from the financial statements of our Bank as on and for Fiscal 2010 and six months period ended September 30, 2010, prepared in accordance with Indian GAAP. The summary financial information of our Bank presented below, is in crores and should be read in conjunction with the financial statements and the notes (including the significant accounting principles) thereto included in the chapters “Financial Statements” of the Draft Letter of Offer. BALANCE SHEET AS ON 31ST MARCH, 2010

(Rs in Crore)

As on As on

Schedule

No. 31.03.2010 31.03.2009

CAPITAL AND LIABILITIES Capital 1 133.99 121.58Reserves and Surplus 2 1,698.76 1,445.44Deposits 3 23,730.65 20,333.29Borrowings 4 341.64 3.97Other Liabilities and Provisions 5 1,130.11 953.52

TOTAL 27,035.15 22,857.80 ASSETS Cash and balances with Reserve Bank of India 6 1,743.10 1,364.98Balances with Banks and Money at Call & Short Notice 7 62.45 95.75Investments 8 9,992.05 8,961.49Advances 9 14,435.68 11,810.04Fixed Assets 10 148.07 138.49Other Assets 11 653.80 487.05

TOTAL 27,035.15 22,857.80 Contingent Liabilities 12 10,119.24 10,042.74Bills for Collection 1,032.24 928.93 Significant Accounting Policies 17 Notes on Account 18

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(Rs in crore)

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2010

Schedule No. Year ended

31.03.2010 Year ended 31.03.2009

I. INCOME

Interest Earned 13 2,043.42 1,948.76

Other Income 14 311.26 321.79

Total 2,354.68 2,270.55

II. EXPENDITURE Interest Expended 15 1,707.79 1,443.83

Operating Expenses 16 386.05 346.51

Provisions and Contingencies 93.72 213.51

Total 2,187.56 2,003.85

III.PROFIT Net profit for the year 167.12 266.70 Profit brought forward 0.03 0.10

Total 167.15 266.80 IV. APPROPRIATIONS Transfer to Statutory Reserve 88.00 100.00Transfer to Capital Reserve -- 60.67Transfer to Revenue Reserve 3.00 7.00Transfer to Special Reserve u/s 36 (i) (viii) of IT Act 6.68 12.31Transfer to Investment Reserve Account 5.70 --

Transfer to Other Funds 1.00 1.45

Transfer to Proposed dividend 53.63 72.94

Transfer to Tax on proposed dividend 9.11 12.40

Balance carried over to Balance Sheet 0.02 0.03

Total 167.14 266.80

Number of Shares outstanding during the year (weighted average) 12.37.79.973 12.14.44.753Earning per share (Rs per share of Rs10/- each - see note No: 7 of schedule 18 )

Basic Rs. 13.50 21.96

Diluted Rs 13.45 21.96

Significant Accounting Policies 17 Notes on Account 18

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(Rs in crores)

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2010 March 31, 2010 March 31, 2009 A CASH FLOW FROM OPERATING ACTIVITIES Net profit before tax and extra ordinary items 193.05 406.15 Adjustments for : Depreciation on Fixed Assets including Lease Adjustment charges 22.15 19.82 Provisions and Contingencies 71.08 80.50 Amortisation of premium on Held to Maturity Investments 28.86 11.95 122.09 112.27 Operating profit before working capital changes 315.14 518.42 Adjustment for : i) Advances & Other Assets -2662.89 -919.27 ii) Investments -1041.20 -2650.43 iii) Deposits, Borrowings & Other Liabilities 3793.27 3166.36 89.18 -403.34 Cash generated from operations 404.32 115.08 Direct taxes paid 102.58 168.10 Net cash flow from operating activities (A) 301.74 -53.02 B CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets -32.35 -39.04 Sale of fixed assets 0.88 0.51 Net cash used in investing activities (B) -31.47 -38.53 C CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issue of share capital (net of expenses) 158.84 1.06 Proceeds from long term borrowings 0.00 0.00 Dividend paid (Including Tax on Dividend) -84.30 -70.21 Net Cash generated from Financing Activities ( C ) 74.54 -69.15 Net increase in Cash & Cash equivalents (A+B+C) 344.81 -160.70 Cash & cash equivalents as at (opening) 1460.74 1621.43 Cash & cash equivalents as at (closing) 1805.55 1460.74

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(Rs in Crore) BALANCE SHEET AS ON 30TH SEPTEMBER 2010

As on As on

Schedule No. 30.09.2010 31.03.2010

CAPITAL AND LIABILITIES Capital 1 134.21 133.99 Reserves and Surplus 2 1,775.90 1,698.76 Deposits 3 25,045.31 23,730.65 Borrowings 4 917.25 691.64 Other Liabilities and Provisions 5 727.22 780.11 TOTAL 28,599.89 27,035.15 ASSETS Cash and balances with Reserve Bank of India 6 1,774.83 1,743.10 Balances with Banks and Money at Call & Short Notice 7 40.75 62.45 Investments 8 10,435.04 9,992.05 Advances 9 15,683.07 14,435.68 Fixed Assets 10 146.08 148.07 Other Assets 11 520.12 653.80 TOTAL 28,599.89 27,035.15 Contingent Liabilities 12 9,286.60 10,119.24 Bills for collection 1,244.50 1,032.24 Significant Accounting Policies 17 Notes on Account 18

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(Rs in Crore)

PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED 30TH SEPTEMBER 2010

Schedule No.

Half year ended

30.09.2010

Half year ended

30.09.2009

Year ended 31.03.2010

I. INCOME Interest Earned 13 1,116.47 971.65 2,043.42 Other Income 14 132.27 185.94 311.26 Total 1,248.74 1,157.59 2,354.68 II. EXPENDITURE Interest Expended 15 857.92 869.69 1,707.79 Operating Expenses 16 239.71 189.59 386.05 Provisions and Contingencies 75.91 41.89 93.72 Total 1,173.54 1,101.17 2,187.56 III.PROFIT Net profit for the year 75.20 56.42 167.12 Profit brought forward 0.02 0.10 0.03

Total 75.22 56.52 167.15 IV. APPROPRIATIONS Transfer to Statutory Reserve 0.00 0.00 88.00 Transfer to Capital Reserve 0.00 0.00 0.00 Transfer to Revenue Reserve 0.00 0.00 3.00 Transfer to Special Reserve u/s 36 (i) (viii) of IT Act 0.00 0.00 6.68 Transfer to Investment Reserve Account 0.00 0.00 5.70 Transfer to Other Funds 0.00 0.00 1.00 Transfer to Proposed dividend 0.00 0.00 53.63 Transfer to Tax on proposed dividend 0.00 0.00 9.11 Balance carried over to Balance Sheet 75.22 56.52 0.02

Total 75.22 56.52 167.14

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GENERAL INFORMATION

Dear Equity Shareholder(s), Pursuant to the resolution passed by the Board of Directors of our Bank under Section 81(1) of the Companies Act, 1956 at the meeting held on July 30, 2010 and subsequently approved by the members of our Bank at the Extra-Ordinary General Meeting held on September 9, 2010, our Bank has been authorized to make the following Rights Issue to its Equity Shareholders: Issue of [●] Equity Shares of Rs.10 each for cash at a premium of Rs. [●]/- per Equity Share aggregating to Rs. [●] crores on rights basis to the existing Equity Shareholders of our Bank, in the ratio of two Equity Shares for every five Equity Shares (i.e. 2:5) held as on the record date i.e. [●], 2010. REGISTERED OFFICE The Karnataka Bank Limited P.B. No. 599, Mahaveera Circle, Kankanady, Mangalore - 575 002 India Telephone: +91 (0824) 2228222 Fascimile: +91 (0824) 2225588 Website: www.karnatakabank.com Email: info@ktkbank.com Company Identification Number: L85110KA1924PLC001128 ADDRESS OF THE REGISTRAR OF COMPANIES The Registrar of Companies, Karnataka 'E' Wing, 2nd Floor Kendriya Sadana Koramangala, Bangalore-560034 Telephone: 080-25633105, 080-25537449/25633104 Fascimile: 080-25538531 Email: roc.bangalore@mca.gov.in The Equity Shares are listed on the BSE and the NSE. Company Secretary and Compliance Officer Mr. Y V Balachandra Company Secretary and Compliance Officer P.B. No. 599, Mahaveera Circle, Kankanady, Mangalore - 575 002 India Telephone: +91 (0824) 2228222 Fascimile: +91 (0824) 2225588 Website: www.karnatakabank.com E-mail: comsec@ktkbank.com Investors may contact the Compliance Officer for any pre-issue /post-issue related matters such as non-receipt of letters of allotment/ share certificates/ refund orders, etc. All grievances relating to the ASBA process may be addressed to the Registrar to the Issue, with a copy to the SCSB, giving full details such as name, address of the applicant, number of Equity Shares applied for, Amount blocked, ASBA Account number and the Designated Branch of the SCSB where the CAF was submitted by the ASBA Investors. Auditors of our Bank

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The auditors of our Bank are: M/s Vishnu Daya & Co Chartered Accountant GF No 7, Karuna Complex, No 337 Sampige Road, Malleshwaram, Bangalore-560 003 Tel: 080-23312779,Fax: 23313725 Email:Vishnu@vishnudaya.com

M/s R K Kumar & Co Chartered Accountants II Floor, Congress Building 573, Mount Road Chennai-600006 Tel: 044-24349866, Fax:-24349857 Email: rkkco@dataone.in

Registrar to the Issue Integrated Enterprises India Limited No 30 Ramana Residency 4th Cross, Sampige Road, Malleswaram, Bangalore 560 003 Telephone: 080-23460815-818 Facsimile: 080-23460189 E-mail: alfint@vsnl.com Investor Grievance E-mail: ktkbankrights@vsnl.net Website:www.iepindia.com Contact Person: Mr. S. Vijayagopal SEBI Reg. No: INR 000000544 Lead Manager to the Issue Edelweiss Capital Limited 14th Floor, Express Towers, Nariman Point, Mumbai 400 021, India Board: +91 (22) 4086 3535 Fax: +91 (22) 4086 3610 E-mail: ktk.rights@edelcap.com Investor Grievance I.D.: customerservice.mb@edelcap.com Website: www.edelcap.com Contact Person: Mr. Sumeet Lath/Mr. Jibi Jacob SEBI Registration No. INM0000010650 Legal Advisor to the Issue Khaitan & Co One Indiabulls Centre 13th Floor, 841 Senapati Bapat Marg Mumbai 400 013, India Tel: + 91 22 6636 5000 Fax: + 91 22 6636 5050 Bankers to the Issue [●] Self Certified Syndicate Banks The list of banks that have been notified by SEBI to act as SCSB for the ASBA process is provided on www.sebi.gov.in/pmd/scsb.pdf.

34

Statement of responsibility of the Lead Manager Edelweiss Capital Limited is the sole Lead Manager to the Issue. However, the details of responsibility for Edelweiss Capital Limited are follows: S.No Activities

1 Capital structuring with relative components and formalities such as type of instruments, etc. 2 Drafting and design of the Letter of Offer and of advertisement /publicity material including newspaper

advertisements and brochure /memorandum containing salient features of the Letter of Offer. Compliance with the SEBI Regulations and other stipulated requirements and completion of prescribed formalities with Stock Exchange and SEBI.

3 Marketing of the Issue which will cover, inter alia, formulating marketing strategies, preparation of publicity budget, arrangements for selection of (i) ad-media and (ii) bankers to the issue.

4 Selection of various agencies connected with the Issue, namely Registrars to the Issue, printers, bankers and advertisement agencies.

5 The post-issue activities will involve essential follow-up steps, which must include finalization of basis of allotment / weeding out of multiple applications, listing of instruments and dispatch of certificates and refunds, with the various agencies connected with the work such as registrars to the issue, bankers to the issue, and bank handling refund business. Even if many of these post-issue activities would be handled by other intermediaries, the Lead Manager shall be responsible for ensuring that these agencies fulfill their functions and enable him to discharge this responsibility through suitable agreements with the Issuer.

6 Ensuring compliance with the SEBI (ICDR) Regulations 2009 and other requirements and formalities specified by SEBI and the recognized stock exchanges where specified securities being offered are proposed to be listed.

Issue Schedule Issue Opening Date: [●] Last date for receiving requests for split forms: [●] Issue Closing Date: [●] Trustees As this is an issue of equity shares, the appointment of trustees is not required. Monitoring Agency Our Bank is not required to appoint a monitoring agency pursuant to Regulation 16 of the SEBI ICDR Regulations. Our Board will monitor the use of the proceeds of this Issue as per clause 49 of the Listing Agreement. Underwriting This Issue is not underwritten and our Bank has not entered into any underwriting arrangement. Principal Terms of Loans and Assets charged as security For details of the principal terms of loans and assets charged as security, please see the chapter “Financial Statements” on page F 10-11.

35

CAPITAL STRUCTURE

The share capital of our Bank as on October 15, 2010 is as under: (Rs. in Crores, except share data)

Aggregate value

at Face Value

Aggregate Value at Issue

Price Authorized share capital 20,00,00,000Equity Shares of Rs. 10 each 200.00 Issued capital 13,43,23,845 Equity Shares of Rs. 10 each 134.32 Subscribed 13,43,16,767 Equity Shares of Rs. 10 each 134.32 Paid up Capital 13,43,00,217 Equity Shares of Rs. 10 each 134.30 Present Issue being offered to the Equity Shareholders through the Draft Letter of Offer [●]Equity Shares of Rs. 10 each at a premium of Rs. [●], i.e. at a price of Rs. [●] per share

[●] [●]

Paid up capital after the Issue [●] Equity Shares of Rs. 10 each [●] Share premium Account Before the Issue 317.61 After the Issue [●]

Issued Capital

1. The issued capital of 13,43,23,845 equity shares consists of a. 23,628 equity shares comprising of –

i. 350 shares kept in abeyance in the bonus issue of shares during the year 2002-03 ii. 350 shares kept in abeyance in the rights issue of shares during the year 2002-03

b. 4,128 shares in the rights issue kept in abeyance during 1995-96 which have since been lapsed c. 150 shares in the rights issue kept in abeyance during 2002-03 rights issue which have since been

lapsed. d. 2,100 shares kept in abeyance during 2004-05 rights issue. e. 16,550 shares forfeited on October 10, 1998.

Subscribed Capital

The subscribed capital includes 16,550 shares, which were allotted in 1995-96 pursuant to the public issue but forfeited on October 10, 1998 for non-payment of allotment money.

Paid-up Capital

The paid-up capital excludes 16,550 shares, which were allotted in 1995-96 pursuant to the public issue but forfeited on October 10, 1998 for non-payment of allotment money.

36

Present Issue a. The present issue of rights shares is in the ratio of two shares of Rs. 10 each for every five shares held

on the record date i.e. [●] b. In addition to the paid up capital of 13,43,00,217 equity shares, 2,800 shares kept in abeyance on

account of earlier issues are considered to arrive at the adjusted paid up capital of 13,43,03,017 equity shares. The above 2,800 equity shares comprises of: i. 350 shares kept in abeyance in the bonus issue of shares during the year 2002-03 ii. 350 shares kept in abeyance in the rights issue of shares during the year 2002-03 iii. 2,100 shares kept in abeyance in the rights issue of shares during the year 2004-05.

The exact number of shares offered in the Issue may increase marginally in view of rounding off the fractional entitlements of .50 or more and disregarding the fractional entitlements of less than 0.50. Further, minimum offer of 1 share would be made to members holding one share on the record date and exercise of stock options vested with the employees of our Bank before the Record Date. Outstanding Instruments Employee Stock Option Scheme, 2006 The shareholders of our Bank had approved the employee stock option scheme at the annual general meeting held on July 6, 2006 for grant to eligible employees upto 15,00,000 stock options in aggregate. Accordingly, stock options have been granted to eligible employees at an exercise price of Rs. 50 per share. These stock options would vest within a period not exceeding three years in a graded manner i.e. 40%, 30% and 30%. The options vested, subject to other conditions, are exercisable within a period of 5 years from the respective dates of vesting. During the year ended March 31, 2010 our Bank has provided a sum of Rs. 3,82,61,525 as employee compensation cost being the proportionate accounting value in respect of stock options. Summary of the Stock options is as under:

Series 1 Series 2 Series 3 Stock Options Granted (Gross) 978,800 11,400 517,600 Less: Cancellations of Granted Options - - 2,700 Stock Options Granted (Net) (A) 978,800 11,400 514,900 Options vested 910,900 8,650 348,425 Options exercised (B) 620,720 4,850 186,335 Shares issued on exercise of options 620,720 4,850 186,335 Options lapsed (C) 63,040 2,770 20,220 Variation of terms of options nil nil nil Money realized by exercise of options 31,036,000 242,500 9,316,750 Total number of options in force (D) = (A)-(B)-(C) 295,040 3,780 311,045 D = A - B – C Total Options Outstanding (Total of all the series of D) 609,865

Person-wise details of options granted to Directors and key managerial persons

None of our Directors have been granted stock options.

Except as stated below, none of our key managerial persons in our Bank have been granted stock options as on the date of the filing of the Draft Letter of Offer:

Sr. No Name of the Key Managerial Personnel No. of options granted

1 Shri K H Shivaswamy Aithal K H 8,000 2 P Jairama Hande 8,000

37

Sr. No Name of the Key Managerial Personnel No. of options granted

3 N Upendra Prabhu 8,000 4 Ashok Hegde 8,000 5 M V C S Karanth 8,000

Promoters and Promoter Group related information Our Bank has no identifiable promoters. Hence, no disclosure of details in relation to their holding, pledge of shares held, acquisition of shares by the promoter and promoter group in the last one year immediately prior to the date of filing of the Draft Letter of Offer, participation in the issue and lock-in are not applicable. Shareholding Pattern Shareholding pattern as on September 30, 2010 as filed with the Stock Exchanges

Category Code

Total Number of shareholders

Total shareholding as a percentage of total number of shares

Shares pledged or otherwise encumbered

Category of shareholder

Total number of shares

Number of shares held in dematerialized form

As a percentage of (A+B)1

As a percentage of (A+B+C)

Number of shares

As a percentage

(I) (II) (III) (IV) (V) (VI) (VII) (VIII) (IX=(VIII)(IV)*100

(A) Shareholding of Promoter and Promoter Group[2]

0 0 0 0 0

(1) Indian 0 0 0 0 0 (a) Individuals/

Hindu Undivided Family

0 0 0 -

-

0 0

(b) Central Government/ State Government(s)

0 0 0 0 0 0 0

(c) Bodies Corporate

0 0 0 -

-

0 0

(d) Financial Institutions/ Banks

0 0 0 0 0 0 0

(e) Any Other (specify)

0 0 0 0 0 0 0

Sub-Total (A)(1)

0 0 0 0.00 0.00 0 0

(2) Foreign 0 0 0 0 0 (a) Individuals

(Non-Resident Individuals/ Foreign Individuals)

0 0 0 0 0 0 0

(b) Bodies Corporate

0 0 0 0 0 0 0

38

Category Code

Total Number of shareholders

Total shareholding as a percentage of total number of shares

Shares pledged or otherwise encumbered

Category of shareholder

Total number of shares

Number of shares held in dematerialized form

As a percentage of (A+B)1

As a percentage of (A+B+C)

Number of shares

As a percentage

(c) Institutions 0 0 0 0 0 0 0 (d) Any Other

(specify) 0 0 0 0 0 0 0

Sub-Total (A)(2)

0 0 0 0.00 0.00 0 0

Total Shareholding of Promoter and Promoter Group (A)= (A)(1)+(A)(2)

0 0 0 0.00 0.00 0 0

(B) Public shareholding [3]

(1) Institutions (a) Mutual Funds/

UTI 6 3,333,914 3,333,914 2.48 2.48

(I) (II) (III) (IV) (V) (VI) (VII) (VIII) (IX=(VIII)

(IV)*100 (b) Financial

Institutions/ Banks

7 220,750 220,750 0.16 0.16

(c) Central Government/ State Government(s)

(d) Venture Capital Funds

(e) Insurance Companies

7 4,714,102 4,714,102 3.51 3.51

(f) Foreign Institutional Investors

77 38,624,670 38,624,670 28.78 28.78

(g) Foreign Venture Capital Investors

(h) Any Other (specify)

Sub-Total (B)(1)

97 46,893,436 46,893,436 34.94 34.94

(2) Non-institutions

(a) Bodies Corporate

1,114

24,454,664

24,198,438

18.22

18.22

(b) Individuals - i. Individual

shareholders holding nominal

83,955

42,122,173

27,056,178

31.39

31.39

39

Category Code

Total Number of shareholders

Total shareholding as a percentage of total number of shares

Shares pledged or otherwise encumbered

Category of shareholder

Total number of shares

Number of shares held in dematerialized form

As a percentage of (A+B)1

As a percentage of (A+B+C)

Number of shares

As a percentage

share capital up to Rs. 1 lakh.

ii. Individual shareholders holding nominal share capital in excess of Rs. 1 lakh.

571

18,488,031

16,407,006

13.78

13.78

(c) Any Other (specify)

Trust

7

41864 41864 0.03

0.03

Clearing Members

537

453662 453662 0.34

0.34

NRI

587

1745382 1745382 1.30

1.30

OCB

-

0 0 -

-

Sub-Total (B)(2)

86,771 87,305,776 69,902,530 65.06 65.06 0 0.00

Total Public Shareholding (B)= (B)(1)+(B)(2)

86,868 134,199,212 116,795,966 100.00 100.00 0 0.00

TOTAL (A)+(B)

86,868 134,199,212 116,795,966 100.00 100.00 0 0.00

(C) Shares held by Custodians and against which Depository Receipts have been issued

0 0 0 0 0

GRAND TOTAL (A)+(B)+(C)

86,868 134,199,212#

116,795,966 100.00 100.00 0 0.00

# Post September 30, 2010, our Bank has allotted 1,01,005 Equity Shares pursuant to the Employee Stock Option Scheme, 2006 (“ESOP Scheme”).

Details of our Shareholders holding more than one per cent of the share capital of our Bank as on September 30, 2010 is as follows:

Sr. No. Name of the shareholder Number of

shares Shares as a percentage of total number of shares {i.e., Grand Total (A)+(B)+(C) indicated in Statement at para (I)(a) above}

1 HSBC Financial Services (Middle East) Ltd 5,999,999 4.47 2 Birla Sun Life Insurance Company Limited 5,003,068 3.73

40

Sr. No. Name of the shareholder Number of shares

Shares as a percentage of total number of shares {i.e., Grand Total (A)+(B)+(C) indicated in Statement at para (I)(a) above}

3 Life Insurance Corporation of India 3,603,918 2.69

4 Credit Suisee (Singapore) Limited 3,511,409 2.62

5 Macquarie Bank Limited 3,040,496 2.27

6 Kuroto Fund Lp 2,437,914 1.82 7 Swiss Finance Corportion (Mauritius) Ltd 2,318,757 1.73 8 Franklin Templeton Investment Funds 2,309,981 1.72 9 Goldman Sachs Investments (Mauritius) I 2,194,287 1.64

10 Reliance Capital Trustee Company Limited 1,931,714 1.44 11 Wellington Management Company, LLP A/C B 1,821,031 1.36 12 Kotak Mahindra Investments Ltd. 1,845,496 1.38 13 Fern Health Care Pvt Ltd 1,758,829 1.31 14 Religare Enterprises Limited 1,741,171 1.30 15 Equinox Partners LP 1,500,000 1.12

TOTAL

41,018,070 30.57

RELEVANT RBI PROVISIONS Rights issues by private sector banks – Acknowledgement of transfer / allotment of shares 1) In terms of RBI Circular DBOD.No.PSBS.BC.79/16.13.100 /2001-2002 dated March 20, 2002, listed as

well as unlisted private sector banks are not required to obtain approval of RBI for Rights Issue. 2) While reviewing, the following issues have emerged with reference to percentage of holding at the time of

rights issue:- a) When some shareholders (individuals/ entities / groups) pick up unsubscribed shares which would

result in his / its holding going up as a percentage of total paid up capital of the bank. b) When Some shareholders not picking up their entitlements, holdings of the other shareholders would

go up in percentage even if they pick up their own entitlements. The above matter has been examined from the point of view of applicability of RBI Circular DBOD. NO.PSBS. BC. 64/ 16.13.100/ 2003-04 dated February 3, 2004 on acknowledgement of transfer/ allotment of shares in private sector banks and DBOD. NO. BP.BC.71/ 21.01.01/ 2004-05 dated February 28, 2005 on ownership and governance and also the regulatory limits such as the cap for the aggregate FDI/FII/NRI holdings and the 5% limit for a bank’s investment in equity of another bank. RBI has advised banks going for rights issue to make complete disclosure of the regulatory requirements in the offer documents, including the following that: i. Subscription to rights other than own entitlement will not be permitted if such subscription would result

in breach of any statutory / regulatory ceilings ii. any acquisition of shares that will take the shareholding of any entity/ group of entities to 5% or more

of the paid up capital of the bank would require acknowledgement of RBI in terms of the criteria laid down in the RBI guidelines contained in the Circular DBOD. NO.PSBS. BC. 64/ 16.13.100/ 2003-04 dated February 3, 2004. Further, in terms of the guidelines on ownership and governance issued on February 28, 2005 any acquisition that will take the shareholding of any entity/ group, directly or indirectly, to 10% or more of the paid-up capital of the bank will require the prior approval of RBI

iii. If the holding of any shareholder breaches any statutory / regulatory ceilings as a result of non-

subscription of rights by other shareholders, the shareholder concerned will not be able to acquire any further shares till his/ its shareholding is brought within the stipulated ceilings.

41

Notes:

1. No further issue of capital by way of issue of bonus shares, preferential allotment, rights issue or public

issue or in any other manner which will affect the equity capital of our Bank, shall be made during the period commencing from the filing of the Draft Letter of Offer with the SEBI to the date on which the Equity Shares issued under the Draft Letter of Offer are listed or application moneys are refunded on account of the failure of the Issue.

2. Further, except for (i) the allotment of Equity Shares pursuant to exercise of stock options vested pursuant

to our Bank’s Employee Stock Option Scheme, at present our Bank has no intention to alter the equity capital structure by way of split/consolidation of the denomination of the shares, or issue of shares on a preferential basis or issue of bonus or rights or pubic issue of shares or any other securities for a period of six months from the date of opening of the Issue.

3. The attention of the investors is drawn to section 12 (2) of the Banking Regulation Act 1949, as amended which states that: “No person holding shares in the banking company shall in respect of any shares held by him, exercise voting rights on poll in excess of 10% of the total voting rights of all the shareholders of the banking company.”

4. The Issue will remain open for 15 days. However, the Board will have the right to extend the Issue period

as it may determine from time to time but not exceeding 30 days from the Issue Opening Date.

5. At any given time, there shall be only one denomination of the Equity Shares of our Bank.

42

OBJECTS OF THE ISSUE

We are a banking company regulated by RBI. The RBI guidelines require us to maintain a minimum Capital Adequacy Ratio of 9% subject to a minimum Tier I capital adequacy ratio of 6%. As per our six month financial statements for period ended September 30, 2010, our total capital adequacy ratio under Basel I was 11.41% and Based II was 11.71%. However, considering the future growth plans and increase in risk weighted assets, our Bank would require additional capital to meet the Basel II norms.

The objects of the Issue are to augment our capital base to meet the capital requirements and growth in our assets, primarily our loan and investment portfolio, compliance with regulatory requirements including meeting the expenses of the Issue. The main objects clause and the objects incidental or ancillary to the main objects clause of our Memorandum of Association enable us to undertake our existing activities. Further, the main objects of our Bank enable us to carry on the activities for which the funds are being raised by us in the Issue. Requirement and Sources of Funds

Particulars Amount* (Rs. in Crores)

Augment our capital base to meet our capital adequacy requirements arising out of growth in our business

[●]

Estimated Issue expenses [●] Net Proceeds [●] * - to be updated on finalization of Issue Price The stated Objects of the Issue are proposed to be financed entirely from the Proceeds of the Issue. Therefore, excluding the amount to be raised through proposed Rights issue, there is no requirement of firm arrangements of finance. (a) Augment our capital base to meet our capital adequacy requirements arising out of growth in our

businesses As we are engaged in the business of banking, we are seeking to strengthen our capital base to support the future growth in our assets and comply with the capital adequacy requirements applicable to us. (b) Estimated Issue Expenses

The total expenses of the Issue are estimated to be approximately Rs. [●] crores. The Issue related expenses include, among others, Issue management fees, Registrar fees, printing and distribution expenses, fees of the legal counsels, advertisement, listing fees to the Stock exchanges etc. The break-up of total issue expenses is as under –

Category Estimated expenses* (Rs. In crores)

% of the Issue Expenses

% of total Issue Size

Fees to the Lead Manager [●] [●] [●] Fees to the Registrar to the Issue [●] [●] [●] Fees to the Legal advisors [●] [●] [●] Fees to the Auditors [●] [●] [●] Advertising and Publicity Expenses [●] [●] [●] Printing, Postage, Stationery Expenses [●] [●] [●] Contingency, Stamp duty, Listing Fees, etc [●] [●] [●] Total [●] [●] [●]

* - to be updated on finalization of Issue Price Monitoring of Utilisation of Funds Pursuant to Regulation 16 of the SEBI ICDR Regulations, our Bank is not required to appoint a monitoring agency. Our Board and Audit Committee will monitor the use of the proceeds of this Issue as per clause 49 of the Listing Agreement.

43

STATEMENT OF TAX BENEFITS

To, The Board of Directors, The Karnataka Bank Limited P.B. No. 599, Mahaveera Circle, Kankanady, Mangalore - 575 002 Karnataka Dear Sir, We hereby confirm that the information provided below states the possible direct tax benefits available to Karnataka Bank Limited (“The Bank”) and its shareholders under the current direct tax laws presently in force in India. Several of these benefits are dependent on the Bank or its shareholders fulfilling the conditions prescribed under the relevant provisions of the tax law. Hence, the ability of the Bank or its shareholders to derive tax benefits is dependent upon fulfilling such conditions, which based on business imperatives, the Bank or its shareholders may or may not choose to fulfill. The benefits discussed below are not exhaustive. We are informed that this statement is only intended to provide general information to the investors and hence is neither designed nor intended to be a substitute for professional tax advice. In view of the individual nature of tax consequences and the changing tax provisions, each investor is advised to consult his or her own tax consultant with respect to the specific tax implications arising out of their participation in the issue. Unless otherwise specified, sections referred to below are sections of the Income-tax Act, 1961 (“The Act”). The Income-tax rates referred here are the existing tax rates based on the rates prescribed in the Finance Act, 2010 for the Financial Year 2010-11. All the provisions set out below are subject to conditions specified in the respective sections. The below mentioned contents are based on information, explanations and representations obtained from the Bank and on the basis of our understanding of the business activities and operations of the Bank and the interpretation of tax laws presently in force in India. We do not express any opinion or provide any assurance as to whether:

The Bank or its shareholders will continue to obtain these benefits in future; or

The conditions prescribed for availing the benefits, where applicable have been/ would be met.

44

I. INCOME-TAX ACT, 1961

A. TO THE BANK (i) Special Tax Benefits:

1. As per the provisions of section 36(1)(iiia) the Act, the Bank is entitled to deduction in respect of prorata amount of discount on a zero coupon bond, having regard to the period of life of such bond, calculated in the manner as may be prescribed by rules in this behalf. Zero coupon bond is defined under section 2(48) of the Act to mean a bond issued by any infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank on or after 1.6.2005 in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company/fund or public sector company or scheduled bank and which is notified by the Central Government in this behalf.

2. Under section 36(1)(vii), any bad debt or part thereof written off as irrecoverable in the

accounts of the Bank is allowable as a deduction from the Bank’s total income. However deduction is limited to the amount by which such bad debts or part thereof, exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act, and further subject to compliance with section 36(2)(v) of the Act which requires that such debt or part thereof should have been debited to the provision for bad and doubtful debts account.

3. Under section 36(1)(viia) of the Act, a deduction is allowable in respect of any provision

made for bad and doubtful debts, by an amount not exceeding 7.5% of total income (computed before making any deduction under this section and Chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by rural branches of the Bank.

As per the third proviso to the section and subject to the conditions specified therein, the Bank at its option is allowed a further deduction for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government.

4. In terms of section 36(1) (viii) of the Act, the bank is allowed deduction at 20% of the profits

derived from the business of long term finance for industrial or agricultural development or development of infrastructure facility in India or development of housing in India computed in the manner specified under the section and carried to the Special Reserve account from time to time not exceeding twice the paid-up capital and general reserves. The amount withdrawn from such a Special Reserve Account would be chargeable to income tax in the year of withdrawal, in accordance with the provisions of section 41(4A) of the Act.

5. In terms of section 43D of the Act, interest on certain categories of bad and doubtful debts as

specified in Rule 6EA of the Income-tax Rules, 1962, shall be chargeable to tax only in the year of receipt or credit to Profit and Loss Account, whichever is earlier.

(ii) General Tax Benefits

6. As per provisions of Section 10(15)(i) of the Act, income by way of interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as notified by the Central Government in the Official Gazette is exempt from tax, subject to such conditions and limits as may be specified by Central Government in this behalf.

7. Under section 10(15)(vii) of the Act, interest on bonds issued by a local authority or by a State

Pooled Finance Entity and specified by the Central Government by notification in the Official Gazette is exempt from tax. For the purpose of this section, “State Pooled Finance Entity” means such entity which is set up in accordance with the guidelines for the Pooled Finance Development Scheme notified by the Central Government in the Ministry of Urban Development.

45

8. Dividends earned by the Bank are exempt from tax in accordance with and subject to the

provisions of section 10(34) read with section 115-O of the Act. However, as per section 94(7) of the Act, losses arising from sale/ transfer of shares, where such shares are purchased within three months prior to the record date and sold within three months from the record date, will be disallowed to the extent such loss does not exceed the amount of dividend claimed exempt.

9. Income earned by the Bank from investment in units of a specified Mutual Fund is exempt

from tax under section 10(35) of the Act. However, as per section 94(7) of the Act, losses arising from the sale/ redemption of units purchased within three months prior to the record date (for entitlement to receive income) and sold within nine months from the record date, will be disallowed to the extent such loss does not exceed the amount of income claimed exempt.

Further, as per section 94(8) of the Act, if an investor purchases units within three months prior to the record date for entitlement of bonus and is allotted bonus units without any payment on the basis of holding original units on the record date and such person sells/ redeems the original units within nine months of the record date, then the loss arising from sale/ redemption of the original units will be ignored for the purpose of computing income chargeable to tax and the amount of loss ignored shall be regarded as the cost of acquisition of the bonus units.

10. Section 14A of the Act restricts claim for deduction of expenses incurred in relation to

incomes which do not form part of the total income under the Act. Thus, any expenditure incurred to earn tax exempt income is not tax deductible expenditure.

11. Under the provisions of section 43(5) (d) of the Act, an eligible transaction in respect of

trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, carried out in a recognized stock exchange is not deemed to be a speculative transaction. An eligible transaction is defined to mean any transaction carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary and which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number and permanent account number.

12. In case of loss under the head “Profit and Gains from Business or Profession (Non

Speculative)”, it can be set-off against other income and the excess loss after set-off can be carried forward for set-off against Business Income of the next eight Assessment Years in terms of provisions of section 70, 71 & 72 of the Act.

13. The unabsorbed depreciation, if any, can be adjusted against any other income and can be

carried forward for set-off against the income of future years as per the provisions of section 32 of the Act.

14. From assessment year beginning 1st April, 2010, the amount of tax paid under Section 115JB

of the Act by the Bank for any assessment year beginning on or after 1st April 2006 will be available as credit for ten years succeeding the Assessment Year in which MAT credit becomes allowable in accordance with the provisions of section 115JAA of the Act.

B. TO THE SHAREHOLDERS OF THE BANK (i) Special Tax Benefits

There are no special tax benefits available to the shareholders of the Bank.

46

(ii) General Tax Benefits a) RESIDENTS:

1. Dividends earned on shares of the Bank are exempt from tax in accordance with and subject to the provisions of section 10(34) read with section 115-O of the Act. However, as per section 94(7) of the Act, losses arising from sale/ transfer of shares, where such shares are purchased within three months prior to the record date and sold within three months from the record date, will be disallowed to the extent such loss does not exceed the amount of dividend claimed exempt.

2. Long term capital gain, as defined under section 2(29A) of the Act, arising on sale of Banks

share is fully exempt from tax in accordance with the provision of section 10(38) of the Act where the sale is made on or after October 1, 2004 on a recognized stock exchange and transaction is chargeable to securities transaction tax.

3. Section 14A of the Act restricts claim for deduction of expenses incurred in relation to

incomes which do not form part of the total income under the Act. Thus, any expenditure incurred to earn tax exempt income is not tax deductible expenditure.

4. Under section 36(1)(xv) of the Act, securities transaction tax paid by a shareholder in respect

of taxable securities transactions entered into in the course of its business, would be allowed as a deduction if the income arising from such taxable securities transactions is included in the income computed under the head “profit and gains of business or profession”.

5. Under section 54EC of the Act, long term capital gain arising on sale of Bank`s share {other

than sale referred to in section 10(38) of the Act} is exempt from tax to the extent the same is invested in certain notified bonds within a period of six months from the date of such transfer (up to a maximum limit of Rs 50 lakhs) and held for a minimum period of three years.

6. Under section 54F of the Act, long term capital gain arising to an individual or a HUF on sale

of Bank’s share {other than sale referred to in section 10(38) of the Act is exempt from tax if the net consideration is invested to purchase a residential house property within a period of one year before or two years after the date of sale/ transfer or invested in the construction of a residential house property within a period of three years after the date of sale/transfer. If only a part of the net consideration is invested in the new asset then the exemption will be available proportionately.

000 7. Taxable long term capital gains would arise [if not exempt under section 10(38) or any other

section of the Act] to a resident shareholder where the equity shares are held for a period of more than 12 months prior to the date of transfer of the shares. In accordance with and subject to the provisions of section 48 of the Act, in order to arrive at the quantum of capital gains, the following amounts would be deductible from the full value of consideration:

(a) Cost of acquisition/ improvement of the shares as adjusted by the cost inflation index

notified by the Central Government; and

(b) Expenditure incurred wholly and exclusively in connection with the transfer of shares

8. Under section 111A of the Act, Short term capital gains on the transfer of equity shares, where the shares are held for a period of not more than 12 months would be taxed at 15% (plus applicable surcharge and education cess), where the sale is made on or after October 1, 2004 on a recognized stock exchange and the transaction is chargeable to securities transaction tax. In all other cases, the short term capital gains would be taxed at the normal rates of tax (plus applicable surcharge and education cess). Cost indexation benefits would not be available in computing tax on short term capital gain.

9. Under section 112 of the Act, long-term capital gains are subject to tax at a rate of 20% (plus

applicable surcharge and cess) after indexation, as provided in the second proviso to section

47

48 of the Act. However, in case of listed securities or units, the amount of such tax could be limited to 10% (plus applicable surcharge and cess), without indexation, at the option of the shareholder in cases where securities transaction tax is not levied.

10. From assessment year beginning 1st April, 2010, the amount of tax paid under section 115JB of the Act by the Corporate Assessee for any assessment year beginning on or after 1st April 2006 will be available as credit for ten years succeeding the Assessment Year in which MAT credit becomes allowable in accordance with the provisions of section 115JAA of the Act.

11. In accordance with the provisions of section 56(1)(vii) of the Act, If an individual or HUF

receives any shares, without consideration, the aggregate fair market value of which exceeds Rs.50,000, the whole of the fair market value of such shares will be considered as income in the hands of the recipient. Similarly, if an individual or HUF receives any shares for consideration which is less than the fair market value of the shares by an amount exceeding Rs.50000, the fair market value of such shares as exceeds the consideration will be considered as income in the hands of the recipient. However, the above ceilings of Rs.50,000 shall not apply to any shares received from any relative (as given in Explanation to clause (vi) of sub-section (2) of Section 56 of the Act) or on the occasion of the marriage of the individual or under a will or by way of inheritance or in contemplation of death of the payer or donor, as the case may be or from any local authority as defined in the explanation to section 10(20) of the Act or from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 of the Act or from any trust or institution registered under section 12AA of the Act.

b) NON-RESIDENT SHAREHOLDERS INCLUDING NON RESIDENT INDIANS (NRIs) AND FOREIGN INSTITUTIONAL INVESTORS (FIIs):

1. Dividends earned on shares of the Bank are exempt in accordance with and subject to the

provisions of section 10(34) read with Section115-O of the Act. However, as per section 94(7) of the Act, losses arising from sale/ transfer of shares, where such shares are purchased within three months prior to the record date and sold within three months from the record date, will be disallowed to the extent such loss does not exceed the amount of dividend claimed exempt.

2. Long term capital gain, as defined under section 2(29A) of the Act, arising on sale of Bank’s

share is fully exempt from tax in accordance with the provisions of section 10(38) of the Act, where the sale is made on or after October, 1 2004 on a recognized stock exchange and the transaction is chargeable to securities transaction tax.

3. Section 14A of the Act restricts claim for deduction of expenses incurred in relation to

incomes which do not form part of the total income under the Act. Thus, any expenditure incurred to earn tax exempt income is not tax deductible expenditure.

4. Under section 36(1)(xv) of the Act, securities transaction tax paid by a shareholder in respect

of taxable securities transactions entered into in the course of its business, would be allowed as a deduction if the income arising from such taxable securities transactions is included in the income computed under the head “Profit and gains of business or profession.

5. Under section 54EC of the Act, long term capital gain arising on sale of Bank`s share {other

than sale referred to in section 10(38) of the Act} is exempt from tax to the extent the same is invested in certain notified bonds within a period of six months from the date of such transfer (upto a maximum limit of Rs 50 lakhs) and held for a minimum period of three years.

6. Under section 54F of the Act, long term capital gain arising to an individual or a HUF on sale

of the Bank’s shares [other than the sale referred to in section 10(38) of the Act], is exempt from tax if the net consideration is invested to purchase a residential house property within a period of one year before or two years after the date of sale/ transfer or invested in the construction of a residential house property within a period of three years after the date of

48

sale/transfer. If only a part of the net consideration is invested in the new asset then the exemption will be available proportionately.

7. Long term capital gains would arise [if not exempt under section 10(38) or any other section

of the Act] to a non-resident shareholder where the equity shares are held for a period of more than 12 months prior to the date of transfer of the shares. In accordance with and subject to the provisions of section 48 of the Act, in order to arrive at the quantum of capital gains, the following amounts would be deductible from the full value of consideration:

(a) Cost of acquisition/ improvement of the shares as adjusted by the cost inflation index

notified by the Central Government; and 00

(b) Expenditure incurred wholly and exclusively in connection with the transfer of the shares

Section 48 of the Act further provides that capital gains arising from the transfer of equity shares acquired by the non-resident in foreign currency, are to be computed by converting the cost of acquisition/ improvement, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of the shares and the capital gains so computed in such foreign currency shall be reconverted into Indian currency. Indexation will not be available in this case.

8. Under Section 111A of the Act, Short term capital gains on the transfer of equity shares,

where the shares are held for a period of not more than 12 months would be taxed at 15% (plus applicable surcharge and education cess), where the sale is made on or after October 1, 2004 on a recognized stock exchange and the transaction is chargeable to securities transaction tax. In all other cases, the short term capital gains would be taxed at the normal rates of tax (plus applicable surcharge and education cess). Cost indexation benefits would not be available in computing tax on short term capital gain.

9. Under section 112 of the Act, long-term capital gains are subject to tax at a rate of 20% (plus

applicable surcharge and cess) after indexation, as provided in the second proviso to section 48 of the Act. However, in case of listed securities or units, the amount of such tax could be limited to 10% (plus applicable surcharge and cess), without indexation, at the option of the shareholder in cases where securities transaction tax is not levied.

10. Option available to Non-resident Indian[s] (NRI) as per Chapter XII-A of the Act:

(i) Under section 115E of the Act, long term capital gains arising to a NRI on transfer of

specified capital assets (including on the Bank`s equity share) are taxable at the rate of 10% (plus education cess) without indexation. Short-term capital gains are however, taxable at the normal rates of tax.

(ii) Under section 115F of the Act, long-term capital gains arising to a NRI from the

transfer of shares of the Bank subscribed to in convertible foreign exchange shall be exempt from tax, if the net consideration is reinvested in specified asset or in any savings certificate as defined by section 10(4B) of the Act, within six months of the date of transfer. If only part of the net consideration is so reinvested, the exemption shall be proportionately reduced. The amount so exempted shall be chargeable to tax subsequently, if the specified assets are transferred or converted into money within three years from the date of their acquisition.

(iii) Under section 115G of the Act, a NRI is not required to file a return of income under

section 139(1) of the Act, if his only income is from foreign exchange asset investments or long-term capital gains in respect of those assets or both, provided that tax has been deducted at source from such income as per the provisions of Chapter XVII-B of the Act.

49

(iv) As per the provisions of section 115-I of the Act, a NRI may elect not to be governed by the provisions of Chapter XII-A for any assessment year by furnishing his return of income for that assessment year under section 139 of the Act to the effect that the provisions of Chapter XII-A shall not apply to him for that assessment year and accordingly his total income for that assessment year will be computed and tax on such total income shall be charged in accordance with the other provisions of the Act.

11. As per section 115AD of the Act, long term capital gains arising on transfer of shares

purchased by FIIs, are taxable at the rate of 10% (plus applicable surcharge and education cess) if such long term capital gains are not exempt under section 10(38) of the Act.

Short term capital gains earned by FIIs are taxable at the rate of 15% (plus applicable surcharge and education cess) if the transaction is chargeable to securities transaction tax [proviso to section 115AD(1)(ii)]. In all other cases the short term capital gains shall be taxed at 30% (plus applicable surcharge and education cess). Indexation benefits are not available. Further, the provisions of the first proviso of section 48 of the Act will not apply.

12. Under section 195 of the Act, dividends paid by the Bank in accordance with the provisions of

Section 115-O of the act, are not subject to deduction of tax at source. 000

13. Under Section 196D of the Act, no deduction of tax at source shall be made in respect of capital gains arising on sale proceeds to FIIs on transfer of shares.

14. Under section 90(2) of the Act, the provisions of the Act would prevail over the provisions of

the Double tax avoidance agreement (tax treaty) entered into between India and the country of physical domicile of the non-resident, if any, to the extent they are more beneficial to the non-resident. Thus, a non-resident (including NRIs) can opt to be governed by the provisions of the Act or the applicable tax treaty, whichever is more beneficial.

3. MUTUAL FUNDS:

Under section 10(23D) of the Act, exemption is available in respect of income (including capital gains arising on transfer of shares of the Bank) of a Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or such other Mutual fund set up by a public sector bank or a public financial institution or authorized by the Reserve Bank of India and subject to the conditions as the Central Government may specify by notification.

II. WEALTH TAX ACT, 1957

Shares are not treated as assets within the meaning of Section 2(ea) of the Wealth-tax Act, 1957. Accordingly, shares purchased in the issue are not liable to Wealth-tax in the hands of the shareholders.

Notes:

1. The above statement of possible tax benefits sets out the provisions of the direct tax law in a summary

manner only and is not a complete analysis or list of all potential tax consequences of the purchase, ownership and disposal of shares.

2. The stated benefits will be available only to the sole/ first named holder in case the shares are held by joint holders.

3. In respect of non-residents, the tax rates and the consequent taxation mentioned above shall be further subject to any benefits available under the tax treaty, if any, between India and the country in which the non-resident has fiscal domicile.

4. No assurance is given that the Revenue authorities / Courts will concur with the view expressed herein. Our view is based on the existing provisions of law and its interpretation which is subject to change from time to time. We do not assume responsibility to update our view consequent to such changes.

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5. Any liability relating to this assignment that may be judicially determined to have resulted primarily from bad faith or intentional misconduct on our part shall be limited to the extent of fees paid relating to this assignment. We will not be liable to any other person in respect of this statement.

for Vishnu Daya & Co., for R.K. Kumar & Co., Chartered Accountants Chartered Accountants F.R.No.-008456S F.R.No.-001595S

(Venkatesh Kamath S V.) (B.R.Ashok) Partner M.No.023313

Date: October 15, 2010

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REGULATIONS AND POLICIES The main legislation governing commercial banks in India is the Banking Regulation Act, 1949. Other important laws include RBI Act, 1932, the Negotiable Instruments Act, 1881 and the Banker’s Books Evidence Act, 1891. Additionally, RBI, from time to time, issues guidelines to be followed by the banks. Compliance with all regulatory requirements is evaluated with respect to financial statements under Indian GAAP. Banking companies are also subject to the purview of the Companies Act and if such companies are listed on a stock exchange in India then various regulations of SEBI would additionally apply to such companies. No new regulations are applicable for the proposed objects of the issue since the objects is to augment our capital base to meet our capital adequacy requirements arising out of growth in our business.

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HISTORY OF OUR BANK AND OTHER CORPORATE MATTERS

Our Bank was incorporated on February 18, 1924 as The Karnataka Bank Limited at Mangalore in Karnataka state to cater to the banking needs of the South Kanara Region. The certificate to commence business was obtained on May 23, 1924. Towards achievement of this, our Bank is committed to the best practices in corporate governance to protect the interest of shareholders, depositors and customers. Our Bank was promoted by Late Shri B.R. Vysarayachar and other leading members of the South Kanara Region. Under the able guidance of Shri K.S.N. Adiga, the second Chairman of our Bank who held the post for a period of 21 years, our Bank made significant progress thereby providing a strong foundation and as a result grew in stature in terms of number of branches, deposits, advances etc. Over the years bank grew with the merger of Sringeri Sharada Bank Limited, Chitladurg Bank Limited And Bank of Karnataka. At present our Bank provides wide gamut of financial services to cater to the needs of trade, industry, commerce and agriculture. Our Bank has set its vision statement to be ‘A technology savvy, customer centric progressive Bank with a national presence, driven by highest standards of corporate governance and guided by sound ethical values’. Key Milestones of our Bank

Year Milestone/Achievements 1995 Public cum Rights Issue aggregating Rs. 81 crores 1998-99 Platinum Jubilee Year 2000 Signed Memorandum of Understanding with Infosys Technologies for implementation of

FINACLE - Core Banking Solution 2000 First FINACLE branch operationalised 2002 Maiden Bonus Issue of shares in the ratio 1:1 2002 Pact with Corporation Bank for sharing ATM’s 2002 Bank took up Corporate Agency for distribution of products of MetLife Insurance Co. 2003 Rights Issue in the ratio 1:2 aggregating Rs. 33.72 crores 2003 Registered and Head Office of our Bank shifted to the present premises. 2003 Bank took up Corporate Agency for distribution of products of Bajaj Allianz General Insurance

Co Limited 2003 Banks ATM Moneyplant launched 2004 Completion of FINACLE at 200 branches 2005 Launching Bank`s internet. Bank was the 19th Best bank as per KPMG Survey

2005 Rights issue of equity shares aggregating Rs. 161.83 crores in March 2005

2006 Tie up with Franklin Templeton (I) Private Limited for distribution of their mutual funds. 2007 Bank signed Memorandum of Understanding for setting up of an insurance joint venture. 2008 100% net working of branches under core banking platform. 2009 Our Bank won the prestigious Sun and NDTV Green IT award instituted by Sun Microsystems

and NDTV for use of eco efficient green technologies to run business. 2010 Bank issued shares under Qualified Institutions Placement (QIP)

Bank bagged "Special Award for use of IT for Internal effectiveness” for the year 2009, instituted by Institute for Development and Research in Banking Technology (IDRBT).

Our Main Objects The main objects of our Bank as per our Memorandum of Association are as under: a) To establish and carry on the business of our Bank, where of the Head office or place of business shall

be in Mangalore with such branches or agencies as may from time to time be determined upon.

b) To carry on the business of banking in all its branches and departments including the borrowing or raising or taking up of money, the discounting, buying and selling of and dealing in Government

53

securities, bills of exchange, hundies, promissory notes and other negotiable and transferable instruments and securities, the granting and issuing of letters of credit and circular notes, buying and selling of the and dealings in bullion and specie, such as gold, silver etc , the negotiating of loans and advances, the receiving of money and valuables on deposit, or for safe custody or otherwise the lending or advancing of money on promotes, on the security of jewels, Government Securities, Port Trust Bonds, Municipal debentures, shares or debentures of any other companies, insurance policies , or other valuable securities, or merchandise or any other movable property and also on the security of immovable property, by deposit of title deeds or otherwise the collecting and transmitting of money and securities and the transacting of all kinds of agency business, commonly transacted by Bankers.

c) To take or acquire the whole or any part of any business similar to that this Bank or any business which this Bank is authorized to carry on and such other business which is capable of being conducted to the benefit directly or indirectly of this Bank.

d) To purchase or otherwise acquire any sites with or without building thereon, erect or construct buildings and repair and improve them for the purpose of investment or otherwise as may be determined upon.

e) Generally to purchase, take on lease or in Exchange, hire or otherwise acquire any immovable or

movable property and any rights or privileges which our Bank may think necessary or convenient with reference to any of the objects, for which is established or acquisition of which may seem calculated to facilitate to the realization of any securities held by our Bank or to prevent or diminish any apprehended loss or liability.

f) To take shares or otherwise acquire shares in Banking Companies or in other joint stock business companies or guaranteed corporations at the discretion of the Directors.

g) To encourage, assist and finance any and every description of financial, commercial, mercantile, industrial, manufacturing and agency business undertakings, and operations at the discretion of the Directors.

h) To take or concur in the taking up of all such steps and proceedings as may seem best calculated to uphold and support the credit of our Bank.

i) To establish and support or aid in the establishment and support of associations, institutions, funds, trusts, and conveniences calculated to benefit employees or ex employees of our Bank, or the dependents or connections of such persons, to grant pensions and allowances and to make payments towards insurance and to set apart and appropriate from the annual net profits, towards the general, mental, moral and physical advancement of the members of the Dravida Brahmin Community, such sums as may be deemed fit.

j) To sell and dispose of the entire undertaking of our Bank but not part of it only for such consideration as our Bank may think fit either for cash or shares, debentures, or securities of any other company having objects all together or in part similar to those of this Bank.

k) To sell, manage, develop, exchange, lease, mortgage, dispose of, turn to account, or otherwise deal with all or any part of the property and rights of the bank.

l) To do all or any of the above things as principals, agents, contractors, trustees or otherwise and by or through trustees, agents or otherwise.

m) To do all such other things as are incidental or conducive to the attainments of the above objects.

n) To engage in all or any one or more of the forms of business enumerated in Section 6 (1) of the

Banking Regulation Act, 1949.

o) To open, establish, maintain and operate currency chests and small coins depots on such terms and conditions as may be required by the Reserve Bank of India established under the Reserve Bank of India Act, 1934, and enter into all administrative or other arrangements for undertaking such functions with the Reserve Bank of India.

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The main object clause of the Memorandum of Association of our Bank enables it to undertake the activities for which the funds are being raised and the activities which it has been carrying on till date. There have been no changes in object clause since the previous rights issue of bank in the year 2005. Corporate Structure

55

OUR MANAGEMENT

As per the Articles of Association of our Bank, our Bank must have a minimum of 3 and a maximum of 15 Directors. At present, our Bank has 11 Directors. The constitution of our Board conforms to sections 10A and 10B of Banking Regulation Act, 1949 and the Corporate Governance requirements under clause 49 of the listing agreement/s entered into with the Stock Exchanges. As on date, we have 1 Executive and 10 Non Executive Directors. Out of 10 Non Executive Directors, 9 are Independent. The following table sets forth our Board of Directors. The following table sets forth details regarding the Board of Directors as on the date of this Draft Letter of Offer:

Name, Father’s Name,

Address, Designation and DIN

Nationality Age Other Directorships

Date of Appointment

Date of Completion of Term#*

Mr. Ananthakrishna S/o Mr. Narayana Rao G-6, Swarna Deepa Apartments, Church Road, Bejai, Mangalore - 575 004 Part time - Non Executive Chairman and Non Independent DIN: 00018423

Indian 63 • Universal Sompo General Insurance Co. Limited

• Indian Institute of Banking and Finance

July 13, 2009 July 12, 2017 (Term as Non Executive Chairman for three years)

Mr. P. Jayarama Bhat S/o Mr. Vasudeva Bhat Chaitanya, Manjushree Layout, Kadri Temple Road, Mangalore - 575 002 Managing Director and Chief Executive Officer, Non Independent DIN: 00041500

Indian 58 Nil July 13, 2009 July 12, 2017 (Term as Managing Director for three years)

Mr. S.R. Hegde S/o Mr. Ramakrishna Hegde D1-707, White House, 6th Main, 15th Cross, R T Nagar, Bangalore 560 032 Non Executive and Independent Director DIN: 00018648

Indian 68 Nil June 26, 2005 June 25, 2013

Mr. R.V. Shastri S/o Mr. Venkatarama Shastri

Indian 65 • National Housing Board

• Nagarjuna

January 28, 2006

January 27, 2014

56

Name, Father’s Name,

Address, Designation and DIN

Nationality Age Other Directorships

Date of Appointment

Date of Completion of Term#*

Flat No B- 2-4, Oakyard, 8th Cross, East End Main, 9th Block, Jayanagar, Bangalore 560 069 Non Executive and Independent Director DIN: 00026892

Construction Company Limited

• Religare Trustee Company Limited

Mr. U.R. Bhat S/o Dr. U V Krishna 3A-203, Green Acres (W), Lokhandwala Complex, Andheri (W), Mumbai - 400 053 Non Executive and Independent Director DIN: 00008425

Indian 59 • Dalton Capital Advisors (India) Private Limited

• Repro India Limited

• Edelweiss Asset Management Limted

• Subhkam Capital Ventures Limited

• Axis Asset Management Company Limited

• IRIS Business Services Limited

January 28, 2006

January 27, 2014

Mr. T.S. Vishwanath S/o Late Mr. T J Sitaram C-131, Sarvodaya Enclave, New Delhi – 110017 Non Executive and Independent Director DIN: 00023065

Indian 63 • LIC Mutual Fund Asset Management Company Limited

• Mangalam Cement Limited

January 5. 2007

January 4, 2015

Mr. Sitarama Murty M. S/o Mr. Hanumantha Rao Mandavilli Flat No. 401, Siva Sai Apts, RoadNo. 9, West Marredpally,Secunderabad - 500 026 Non Executive and Independent Director DIN: 01694236

Indian 66 • Aurobindo Pharma Limited

• G.K.C. Projects Limited

November 30, 2007

November 29, 2015

Mr. S.V. Manjunath Indian 59 Nil October 25, October 24,

57

Name, Father’s Name,

Address, Designation and DIN

Nationality Age Other Directorships

Date of Appointment

Date of Completion of Term#*

S/o Mr. Sargod Gowda Venkatappa Kaskekhan Esate, Jenagadde Post, Chikmagalore - 577 136 Non Executive and Independent Director DIN: 02354102

2008 2016

Mr. D. Harshendra Kumar S/o Mr. D Ratnavarma Heggade Dharmasthala, Dakshina Kannada Dist, Dharmasthala - 574 216 Non Executive and Independent Director DIN:02336746

Indian 57 Nil October 25, 2008

October 24, 2016

Dr. H. Rama Mohan S/o Mr. Halsnad Venkatrmanayya Prema Clinic, Ramamandira Road, Kundapura - 576 201 Non Executive and Independent Director DIN: 02331431

Indian 58 Nil October 25, 2008

October 24, 2016

Mr. Tirupathur Ramaswamy Chandrasekaran S/o Mr. Ramaswamy T R A/3 SICAL Race View Apartments No.2, Racecourse Inner Road Guindy, Chennai 600032 Non Executive and Independent Director DIN: 00399104

Indian 64 Nil October 15, 2010

October 14, 2018

# As per the Banking Regulation Act, 1949, no director of a banking company, other than its chairman or whole-time director, by whatever name called, shall hold office continuously for a period exceeding eight years * Term - Liable to retire by rotation and reappointment Relationship between Directors

58

None of the Directors of our Bank are related to each other. Brief biography of our Directors Mr. Ananthakrishna, aged 63 years, is the part time Non executive Chairman of our Bank with effect from July 13, 2009. He is a post-graduate in Mathematics from Mysore University. He began his career as a teacher and later served as a Lecturer at Manipal Institute of Technology. He moved over to Hindustan Aeronautics Limited as a Junior Programmer before joining our Bank as an Officer in 1971. At our Bank he has worked in different capacities both at the operational level and in key management positions in various functional areas like treasury and accounts, corporate taxation, information technology and credit administration. Excellent performance in different capacities resulted in his promotion as General Manager of our Bank in 1994 and later as Chief General Manager in 1998. He was appointed as Chairman & CEO of our Bank in July 2000 and has successfully completed 9 years in office on July 12, 2009. Presently, he is a part time Non-Executive Chairman of our Bank w.e.f July 13, 2009. He is currently the President of the Bankers' Club, Mangalore He is the recipient of PR Person of the year - 2002 awarded by Public Relations Society of India, Mangalore, Manipal Chapter; Outstanding Manager Award for the Districts of Dakshina Kannada and Udupi for the year 2004 by Mangalore Management Association, and "Purushothama" by Shri Shri Raghaveshwara Swamiji of Shri Ramachandrapura Mutt, Hosanagara in recognition of his contribution to the society. Mr. P. Jayarama Bhat, aged 58 years, is the Managing Director and Chief Executive Officer of our Bank w.e.f July 13, 2009. He is a post graduate in Science from University of Mysore and a Certified Associate of Indian Institute of Bankers. He has banking experience of over 36 years. He joined our Bank as an Officer in the year 1973 and over the period of time promoted to various positions. In the year 2005, he was promoted as Chief General Manager of our Bank and was entrusted with the responsibilities of overall supervision of operational areas. He has rich experience in all the facets of Banking operations. Before the present appointment, he was on the Board of Universal Sompo General Insurance Company Limited, a joint venture of our Bank since 2007. He has also served on various sub committees of Indian Banks` Association (“IBA”). He was also nominated as a member of IBA working group to prepare broad outlines of a policy on KYC norms and Anti-money laundering standards. He was a member of IBA working group on to study the recommendations of Raghuram Rajan Committee report on Financial Sector Reforms. He is also a member of the IBA`s Management Committee. Mr. S.R. Hegde, aged 68 years, has been on the Board of our Bank since March 26, 2005. He holds B.A. LL.B degrees from Karnataka University. He joined the Reserve Bank of India in the year 1974 as a Legal Officer and he retired from Reserve Bank of India as Legal Adviser-in-Charge, Legal Division DNBS in the year 2002. At present he is practicing as an Advocate in Bangalore besides being a Panel Advocate and Retainer for several Banks and National level institutions. He is also an independent trustee for Sahara Mutual Fund. Mr. R.V. Shastri, aged 65 years, has been on the Board of our Bank since January 28, 2006. He has over 36 years experience in banking sector. He is a former Chairman and Managing Director of Canara Bank and Indian Overseas Bank. He was holding a number of representative positions, prominent among them being Deputy Chairman- Indian Banks` Association, President - IBA Local Chapter, Bangalore, Advisor - Bankers` Training College (RBI). He was the Chairman of the Canara Bank`s subsidiaries and its sponsored entities.. He is also an Advisor - Specified Undertaking of UTI. Mr. U.R. Bhat, aged 59 years, has been on the Board of our Bank since January 28, 2006. He holds M.Sc. from Indian Institute of Technology, Kanpur and has attended advanced courses on Finance at the Harvard Business School, Boston. He is a fellow of the Chartered Institute of Bankers, London. He is presently Managing Director of Dalton Capital Advisors (India) Private Limited, an investment advisory company of the Dalton group, London He was earlier the Chief Investment Officer of Jardine Fleming in India that later became J.P. Morgan, India where he was for 7 years advising the India dedicated funds of the Flemings group. He has been closely involved in formulating policies for benchmark indices for the BSE as a member of its Index Committee.

Mr. T.S. Vishwanath, aged 63 years, has been on the Board of our Bank since January 05, 2007. He is a Bachelor of Commerce (Hons) from the Delhi University and a fellow member of the Institute of Chartered Accountants of India. His association with professional/public appointments include - Chair, India Side, Indo-UK Accountancy Taskforce – Current; Member on the Board of International Accounting Standards Committee from 1998 till October 2000; President, South Asian Federation of Accountants – 1999; President, The Institute of Chartered Accountants of India - 1996-97; Chairman, Northern India Regional Council of The Institute of Chartered Accountants of India - 1980-81; Government of India - Member, Working Group on Depreciation Rates constituted by the Department of Company Affairs, Government of India- 1994; Member, The Expert

59

Group constituted to rationalize and simplify the Income Tax Act by the Government of India - 1996-97; Member, Ad-hoc Task Force on Financial Parameters constituted by Bureau of Public Enterprises (Government of India) –1996; Insurance Regulatory and Development Authority – Chair, Committee on Accounting issues - Current; Member, Insurance Advisory Committee - 2000 to June 2005; Member, Committee constituted to study certain aspects and make recommendation on some specific and other areas of Insurance Act - 2005; Chair, Committee on Accounting and Auditing Standards and Regulations for Insurance Companies in India -1999-2000, Reserve Bank of India – Member, Technical Group on Bank`s Capital Adequacy Norms – 1996; Member, Working Group on Modification of Formats of Final Accounts of Banks – 1996; Securities and Exchange Board of India – Member, Committee on Substantial Acquisition of Shares & Takeover Regulations (Bhagawati Committee) – 1996; Member, Advisory Committee on Primary Markets - 1996; he has been a Member on various Committees, Accounting Standards Board of the Council of The Institute of Chartered Accountants of India from time to time. He has also been on the Committee on Corporate and Fiscal Laws of various Chambers of Commerce in India, from time to time. Mr. Sitarama Murty M., aged 66 years, has been on the Board of our Bank since November 30, 2007. He is B.Sc. (Hons), M.Sc.(Electronics) and a Certified Associate of Indian Institute of Bankers. He has over 37 years banking experience in five banks of the State Bank Group including 9 years at the Management level and as Managing Director of State Bank of Mysore. He has rich experience in international banking, foreign exchange, money markets and funds management. He participated in several international seminars and meets, including the G-15 meet in Jakarta in 2001. He is the co-author of the Book Computerisation of Banking Operations in India (1990). He also wrote a book 'Stones and Flowers- A Banker Looks Back (2006)'. Mr. S.V. Manjunath, aged 59 years, has been on the Board of our Bank since October 25, 2008. He is a B.Sc. graduate. He had earlier worked as Director of Co-operative Union and as president PCARD Bank and has rich experience of functioning of these Institutions. Mr. D. Harshendra Kumar, aged 57 years, has been on the Board of our Bank since October 25, 2008. He has graduate in Arts. He is well versed with all aspects of Agriculture and Rural Economy, cooperation and Self Help Group. He is the Secretary, Rural Development , Self Employment Training Institute, having branches all over India, Trustee Sri Dharmasthala Munjunatheshwara Trust, Dharmasthala and Secretary, SDM Educational Institutions, member, Council for Advancement of People’s and Rural Technology. Dr. H. Rama Mohan, aged 58 years, has been on the Board of our Bank since October 25, 2008. He holds MBBS, FCGP, FIAMS, DMag. He is in private practice as family Physician in Kundapura, Udupi District. He is a member of 'Govt. of Karnataka Sustainable Forest maintenance and bio-diversity preservation' committee for Mangalore circle, a programme of Japan Bank of International Cooperation. He is also the Chairman - IMA Academy of Medical Specialties, Kundapur Chapter, President - Amateur Artists` Association, Trustee - Seva Sangam Trust, Managing 20 Kindergarten schools, Treasurer - Seva Sangam Vidya Kendra, Thekkatte - A primary and High school, Treasurer - Coondapur Education Society-managing English medium school and PU college, Advisory Committee member - KMC Hospital, Manipal, Member of the Supreme governing body of the Academy of General Education, Manipal, Member - Quality Assessment and advisory committee, Bhandarkars` College, Kundapura, Vice President - Flora and Fauna Club (a nature club). Mr. T.R. Chandrasekaran, aged 64 years, has been on the Board of our Bank since October 15, 2010. He holds a degree of Bachelor of Commerce (FCA), Diploma in Labour Law and Adminstration Law. He is presently the Partner of M/s M.C Ranganathan & Co. Chartered Accountants, Chennai. He was earlier the Deputy General Manager (Accounts and Audit) in Indian Bank Mutual Fund. He has a rich experience in the field of Banking and Finance. He was a part of the Bank Audit faculty at Indian Bank Management Academy for Excellence and Growth (IMAGE), IOB Staff Training College, Chennai and Institute of Chartered Accountants of India. He has presented several papers on Bank Audit, LFAR, Tax audit relating to a bank, assessment of NPA’s and RBI Norms, Accounting Standards applicable to banks and disclosure requirements in bank accounts. He has also been a member of various committees of ICAI, New Delhi viz Corporate Governance, Guidance note on audit of banks, Long Form Audit Report etc. Compensation and benefits in kind granted to the Directors The Bank does not pay any remuneration to our Non-Executive Directors except sitting fees. Shri Ananthakrishna has been appointed as part time non-executive Chairman of the Board for a period of 3 years who has assumed office on July 13, 2009. The terms of his appointment and remuneration has been approved by

60

RBI under section 10B (1A) of the Banking Regulation Act, 1949 by RBI vide RBI letter bearing reference No. DBOD.No.20957/08.40.001/2008-09 dated June 08, 2009 and has been approved by the Government of India. Shri P Jayarama Bhat has been appointed as Managing Director of our Bank for a period of 3 years by the Board of Directors at the meeting held on June 26, 2009, who assumed charge on July 14, 2009. The terms of his appointment and the remuneration has been approved by Reserve Bank of India under section 35B of the Banking Regulation Act, 1949 by RBI vide RBI letter bearing reference No. DBOD.No.20953/09.40.001/2008-09 dated June 09, 2009. The payment of remuneration to both the above Directors has been approved by the members of our Bank at the Annual General Meeting held on August 8, 2009. Details of remuneration to the above Directors are as under: Mr. Ananthakrishna, part time Non executive Chairman Salary: Mr. Ananthakrishna is entitled to a consolidated salary of Rs 1,00,000 per month. However, Mr Ananthakrishna has foregone the payment of Rs 1 lakh per month w.e.f July 13, 2009 and the same has been accepted by the Board. Sitting fees: As paid to other non executive directors of our Bank for attending meetings of the Board & Committees of the Board. Others: (a) Free use of Bank’s car for official purpose. For personal use Rs. 250/- per month to be recovered; (b) Traveling and Halting allowance: Governed by the rules as applicable to other directors of our Bank. Mr. P. Jayarama Bhat, Managing Director Salary and other allowances: Mr. P. Jayarama Bhat is entitled to a salary of Rs. 2,00,000 per month and dearness allowance of 20% of basic salary. He is also provided house rent allowance @ 15% of the basic pay and entertainment allowance of Rs. 25,000 p.a. Perquisites: (a) Free use of Bank’s car for official purpose. For personal use Rs. 250/- per month to be recovered; (b) Provident Fund @ 10% of the basic pay; (c) Traveling and Halting allowance: As may be decided by the Board from time to time; (d) Medical benefits: Reimbursement upto Rs. 15,000/- per annum for self and family. Hospitalisation charges to be reimbursed to the extent of 100% in the case of self and 75% for dependant family members; (e) Other benefits: (i) Personal accident insurance cover upto Rs. 20,00,000/- p.a. & (ii) Telephone facility at his residence at Bank’s cost. Sitting fees All Directors except Mr. P. Jayarama Bhat (whose remuneration details are provided above) do not receive any remuneration except the sitting fees for attending Board and Committee meetings @ Rs. 15,000 and Rs. 10,000 for each meeting respectively. Further our bank has not entered into any service contracts with any of our directors providing for benefits upon termination of employment. Director’s Interest

Except as stated otherwise in this Draft Letter of Offer, our Bank has not entered into any contract, agreements or arrangements during the preceding two years from the date of this Draft Letter of Offer in which the directors are interested directly or indirectly and no payments have been made to them in respect of these contracts, agreements or arrangements which are proposed to be made to them.

All the Directors, including independent Directors, may be deemed to be interested to the extent of fees, if any, payable to them for attending meetings of the Board or a committee thereof and reimbursement of expenses payable to them under the Articles of Association. The Managing Director will be interested to the extent of remuneration paid to him for services rendered as officer or employee of our Bank. All the Directors, including independent Directors, may also be deemed to be interested to the extent Equity Shares held by them and any dividend payable to them and other distributions in respect of Equity Shares, if any, already held by them.

No stock options under ESOS have been granted to any of the Directors.

61

FINANCIAL STATEMENTS

Sr. No Contents Page Number

1 Audited Financial Statements for the year ended March 31, 2010 of our Bank

F-1 to F-41

2 Reviewed Financial Statements for the six months ended September 30, 2010 of our Bank

F-42 to F-58

F -1

AUDITORS REPORT

To,

The Board of Directors

The Karnataka Bank Ltd

Regd. & Head Office

Kankanady - Mangalore-575002

Mangalore-575002

Dear Sirs,

1. We are engaged to report on the financial statements (‘Financial Statements’) of The Karnataka Bank Limited (‘the ‘Bank’), for the year ended 31 March 2010 annexed to this report in Annexure I to IV for the purpose of inclusion in the Draft Letter of Offer and Letter of Offer (the ‘Offering Documents’) prepared by the Bank in connection with the Rights Issue (‘Rights Issue’) of its equity shares, in accordance with the provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘the Regulations’) as amended to date. Our responsibility is to report on such statements based on our procedures.

2. We have examined such statements taking into consideration:

(i) the terms of reference dated 9th September 2010 received from the Bank, requesting us to carry out the assignment, in connection with the Offering Documents being issued by the Bank for its proposed Rights Issue of equity shares having a face value of Rs. 10 each in the ratio of 2 (TWO) equity shares for every 5 (FIVE) equity shares, under the SEBI (ICDR) Regulations 2009 (‘Issue’); and

(ii) The Guidance Note on Reports in Company Prospectuses (Revised) issued by the Institute of Chartered Accountants of India.

3. We report that the figures disclosed in the ‘Financial Statements’ have been extracted by the management from the audited financial statements for the year ended 31 March 2010. The financial statements for the year ended 31 March 2010 have been audited by M/s Kamath & Rau, Chartered Accountants and M/s Vishnu Daya & Co, Chartered Accountants and in respect of which an unqualified audit opinion dated 17 May 2010, have been issued.

4. For the purpose of this report we have not performed any additional audit procedures on the above referred audited financial statements of the Bank for the year ended 31st March 2010 including evaluating the possible impact, if any, of subsequent events on the earlier audited financial statements of the Bank.

5. The ‘Financial Statements’ annexed to this report are extracted from the audited financial statements for the year ended 31 March 2010. These ‘Financial Statements’ have been prepared using the same set of accounting policies used for preparing the audited financial statements as at 31st March 2009 except in respect of appropriation of recoveries made in non-performing advances. In respect of financial year 2010, in respect of non-performing advances, recoveries made are appropriated towards the principal, interest and charges in their order of demand as against the earlier policy of first appropriating the recoveries made towards the principal and the balance towards the interest.. The impact of this change in accounting policy resulted in the Net Profit of the year ended 31st March 2010 being higher by Rs.4.97 crores. The accounting policies and notes to accounts have been reproduced as they were disclosed audited accounts for the year ended March 31, 2010 year.

F -2

6. Except as stated above, we have not audited any financial statement of the Bank as of any date or for any period subsequent to 31 March 2010. Accordingly, we express no opinion on the financial position, results of operations or cash flows of the Bank as of any date or for any period subsequent to 31 March 2010. However, for the purpose of proposed Rights issue, we have conducted a limited review of the Balance Sheet of the Bank as at September 30, 2010 and the Profit and Loss Account for the period ended on that date.

7. At the Bank’s request, we have also examined the following information proposed to be included in the Offering Documents prepared by the management and annexed to this report:

(i) Accounting Ratios enclosed as Annexure V and

(ii) Capitalization Statement enclosed as Annexure VI

8. In our opinion, the financial information contained in Annexure I to IV of this report read together with the Notes to Accounts & Significant Accounting Policies have been prepared in accordance with the provisions of Section 29 of the Banking Regulation Act, 1949 read with Section 211 of the Companies Act 1956 and requirements of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009 as amended till date.

9. This report should not be in any way construed as a re-issuance or re-dating of any of the previous audit report issued by above mentioned auditors nor should this report be construed as a new opinion on any of the financial statement referred to herein.

10. This report is intended solely for your information and for inclusion in the Offering Documents in connection with the proposed Issue by the Bank and is not to be used, referred to or distributed for any other purpose without our prior written consent.

for Vishnu Daya & Co., for R. K. Kumar & Co.,

Chartered Accountants Chartered Accountants

F.R.No.: 008456S F.R.No.: 001595S

(Venkatesh Kamath S V) (B.R.ASHOK)

Partner – M. No. 202626 Partner – M. No. 023313

Place: Bangalore

Dated: 15/10/2010

F -3

BALANCE SHEET AS ON 31ST MARCH , 2010 Annexure I

(Rs in Crore)

Schedule As on As on

No. 31.03.2010 31.03.2009

CAPITAL AND LIABILITIES Capital 1 133.99 121.58Reserves and Surplus 2 1,698.76 1,445.44Deposits 3 23,730.65 20,333.29Borrowings 4 341.64 3.97Other Liabilities and Provisions 5 1,130.11 953.52

TOTAL 27,035.15 22,857.80 ASSETS Cash and balances with Reserve Bank of India 6 1,743.10 1,364.98Balances with Banks and Money at Call & Short Notice 7 62.45 95.75Investments 8 9,992.05 8,961.49Advances 9 14,435.68 11,810.04Fixed Assets 10 148.07 138.49Other Assets 11 653.80 487.05

TOTAL 27,035.15 22,857.80 Contingent Liabilities 12 10,119.24 10,042.74Bills for Collection 1,032.24 928.93 Significant Accounting Policies 17 Notes on Account 18

F -4

Annexure II

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2010 (Rs in crore)

Schedule No. Year ended

31.03.2010 Year ended 31.03.2009

I. INCOME

Interest Earned 13 2,043.42 1,948.76

Other Income 14 311.26 321.79

Total 2,354.68 2,270.55

II. EXPENDITURE Interest Expended 15 1,707.79 1,443.83Operating Expenses 16 386.05 346.51

Provisions and Contingencies 93.72 213.51

Total 2,187.56 2,003.85

III.PROFIT Net profit for the year 167.12 266.70 Profit brought forward 0.03 0.10

Total 167.15 266.80 IV. APPROPRIATIONS Transfer to Statutory Reserve 88.00 100.00Transfer to Capital Reserve -- 60.67Transfer to Revenue Reserve 3.00 7.00Transfer to Special Reserve u/s 36 (i) (viii) of IT Act 6.68 12.31Transfer to Investment Reserve Account 5.70 -- Transfer to Other Funds 1.00 1.45

Transfer to Proposed dividend 53.63 72.94

Transfer to Tax on proposed dividend 9.11 12.40

Balance carried over to Balance Sheet 0.02 0.03

Total 167.14 266.80

F -5

Number of Shares outstanding during the year (weighted average) 12.37.79.973 12.14.44.753Earning per share (Rs per share of Rs10/- each - see note No: 7 of schedule 18 )

Basic Rs. 13.50 21.96

Diluted Rs 13.45 21.96

Significant Accounting Policies 17 Notes on Account 18

F -6

ANNEXURE III

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2010 Rs in crores

March 31, 2010 March 31, 2009

Rs Rs Rs Rs

A CASH FLOW FROM OPERATING ACTIVITIES

Net profit before tax and extra ordinary items 193.05 406.15

Adjustments for :

Depreciation on Fixed Assets including

Lease Adjustment charges 22.15 19.82

Provisions and Contingencies 71.08 80.50

Amortisation of premium on Held to Maturity Investments 28.86 11.95

122.09 112.27

Operating profit before working capital changes 315.14 518.42

Adjustment for :

i) Advances & Other Assets -2662.89 -919.27

ii) Investments -1041.20 -2650.43

iii) Deposits, Borrowings & Other Liabilities 3793.27 3166.36

89.18 -403.34

Cash generated from operations 404.32 115.08

Direct taxes paid 102.58 168.10

Net cash flow from operating activities (A) 301.74 -53.02

B CASH FLOW FROM INVESTING ACTIVITIES

Purchase of fixed assets -32.35 -39.04

F -7

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2010 Rs in crores

March 31, 2010 March 31, 2009

Sale of fixed assets 0.88 0.51

Net cash used in investing activities (B) -31.47 -38.53

C CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from issue of share capital (net of expenses) 158.84 1.06

Proceeds from long term borrowings 0.00 0.00

Dividend paid (Including Tax on Dividend) -84.30 -70.21

Net Cash generated from Financing Activities ( C ) 74.54 -69.15

Net increase in Cash & Cash equivalents (A+B+C) 344.81 -160.70

Cash & cash equivalents as at (opening) 1460.74 1621.43

Cash & cash equivalents as at (closing) 1805.55 1460.74

F -8

Annexure IV SCHEDULES FORMING PART OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT

SCHEDULE - 1 - CAPITAL

Rs in Crore

As on As on 31.03.2010 31.03.2009

Authorised Capital

20.00.00.000 Equity shares of Rs. 10/- each 200.00 200.00

(Previous Year 20.00.00.000 Equity shares of Rs. 10/- each)

Issued Capital

13.39.99.950 equity shares of Rs 10 each 134.00 121.60

(Previous year 12.15.98.506 Equity shares of Rs. 10/- each)

Subscribed Capital

13.39.92.872 Equity shares of Rs. 10/- each 133.99 121.60

(Previous year 12.15.91.428 Equity shares of Rs. 10/- each)

Called up/Paid-up Capital 133.98 121.57

13.39.76.322 Equity shares of Rs.10/- each

(Previous year12.15.74.878 Equity shares of Rs.10/- each)

Add : Forfeited Shares 0.01 0.01

Total 133.99 121.58

SCHEDULE -2- RESERVES & SURPLUS I. Statutory Reserve Opening balance 918.00 818.00 Additions during the year 88.00 100.00 1.006.00 918.00 Deductions during the year -- -- Total 1.006.00 918.00II. Capital Reserve Opening balance 63.69 3.02

F -9

Additions during the year ( pursuant to sale of securities -- 60.67 held under HTM category)

63.69 63.69 Deductions during the year -- -- Total 63.69 63.69 III. Share Premium Opening balance 162.94 159.61 Additions during the year 149.73 3.33 312.67 162.94 Deductions during the year -- -- Total 312.67 162.94 IV. Revenue and other Reserves a) Revenue Reserve Opening balance 267.00 260.00 Deductions at the beginning of the year -- -- 267.00 260.00 Additions during the year 3.00 7.00 Total 270.00 267.00 b) Special Reserve u/s 36(1)(viii) of IT Act Opening balance 23.56 11.25 Additions during the year 6.68 12.31 30.24 23.56 Withdrawn during the year -- -- Total 30.24 23.56 c) Employee Stock Option Outstanding

Opening balance 8.72 4.77

Additions during the year 3.83 6.45

12.55 11.22

Deductions during the year 3.61 2.50

Total 8.94 8.72 d) Investment Reserve Account Opening balance 1.50 1.50 Additions during the year 5.70 -- 7.20 1.50

F -10

Deductions during the year -- -- Total 7.20 1.50 V. Balance in Profit and Loss Account 0.02 0.03 TOTAL ( I. II. III.IV and V ) 1,698.76 1,445.44

SCHEDULE -3 DEPOSITS A.I. Demand Deposits 1. From Banks 2.44 2.21 2. From others 1,704.04 1,154.81 1,706.48 1,157.02 II. Savings Bank Deposits 3,813.68 2,899.43 III. Term Deposits 1. From Banks 32.05 55.04 2. From others 18,178.44 16,221.80 18,210.49 16,276.84 Total : (I. II and III) 23,730.65 20,333.29 B.1. Deposits of branches in India 23,730.65 20,333.29 2. Deposits of branches outside India -- -- Total (1+2) 23,730.65 20,333.29

Rs in CroreSCHEDULE -4 BORROWINGS

As on As on 31.03.2010 31.03.2009 I. Borrowings in India 1. Reserve Bank of India -- -- 2. Other Banks -- 0.06

F -11

3. Other Institutions and Agencies 250.16 3.91 Total 250.16 3.97II. Borrowings outside India 91.48 -- Total : (I and II) 341.64 3.97 Secured borrowings included in I & II above Rs. -- --

SCHEDULE - 5 OTHER LIABILITIES & PROVISIONS

Rs in Crore

As on As on

31.03.2010 31.03.2009 I. Bills Payable 198.66 145.30 II. Inter Office adjustments(Net) 3.51 1.21III. Interest accrued 72.12 65.05IV. Subordinated Debt for Tier II Capital 350.00 350.00V. Deferred Tax Liability (Net) 102.93 60.78VI. Others (including Provisions)* 402.90 331.18 Total 1,130.12 953.52

SCHEDULE - 6 CASH & BALANCES WITH THE RBI (Rs in crore) As on As on 31.03.2010 31.03.2009 I. Cash in hand 146.62 127.67 (including foreign currency notes) II. Balances with Reserve Bank of India 1. In Current Account 1,596.48 1,237.31 2. In Other Accounts -- -- Total : (I and II) 1,743.10 1,364.98 As on As on 31.03.2010 31.03.2009 I. IN INDIA

F -12

i. Balances with Banks a) In Current Accounts 39.53 44.74 b) In other deposit accounts 19.10 20.00 58.63 64.74 ii. Money at Call & Short Notice a) With Banks -- -- b) With other institutions -- -- Total 58.63 64.74 II. OUTSIDE INDIA i. In Current Accounts 3.82 31.01 ii. In Other Deposit Accounts -- -- iii. Money at Call & Short Notice -- -- Total : (i. ii and iii) 3.82 31.01 Grand Total (I & II) 62.45 95.75

SCHEDULE - 8 INVESTMENTS (Rs in crore) As on As on 31.03.2010 31.03.2009 I. Investments in India (Gross at cost) 10,021.65 9,009.32 Less: Provision for depreciation 29.60 47.83 Total 9,992.05 8,961.49 Break-up : 1. Government Securities 6,400.98 5,926.53 2. Other Approved Securities 4.98 9.67 3. Shares 139.77 85.07 4. Debentures and Bonds 809.39 1,442.26 5. Subsidiaries and/or Joint Ventures 22.50 22.50 6. Others 2,614.43 1,475.46 Total 9,992.05 8,961.49 II. Investments outside India -- -- Total (I+II) 9,992.05 8,961.49

F -13

SCHEDULE - 9 ADVANCES (Rs in crore)

As on As on 31.03.2010 31.03.2009 A) 1. Bills Purchased & discounted 691.19 650.48 2. Cash Credits. Overdrafts and Loans repayable on demand 7,728.29 6,322.20 3. Term Loans 6,016.20 4,837.36 Total 14,435.68 11,810.04 B) 1. Secured by Tangible Assets * 11,553.70 8,999.94 2. Secured by Bank/Government Guarantees 1,841.79 1,733.09 3. Unsecured 1,040.19 1,077.01 Total 14,435.68 11,810.04 * Includes Advances against Book Debts C) I. Advances in India 1. Priority Sectors 5,252.96 4,372.16 2. Public Sectors 1,228.68 557.19 3. Banks 0.15 0.52 4. Others 7,953.89 6,880.17 Total 14,435.68 11,810.04 C) II. Advances outside India 1. Due from Banks -- -- 2. Due from others -- -- a) Bills Purchased & Discounted -- -- b) Syndicated Loans -- -- c) Others -- -- Total -- -- GRAND TOTAL (C. I and C. II) 14,435.68 11,810.04

F -14

SCHEDULE - 10 FIXED ASSETS Rs in crore) As on As on 31.03.2010 31.03.2009 I. Premises At cost as on 31st March of preceding year 100.38 82.50 Additions during the year 5.79 17.88 106.17 100.38 Deductions during the year 0.14 -- 106.03 100.38 Depreciation to-date 23.10 20.24 Total 82.93 80.14 II. Other Fixed Assets (including Furniture & Fixtures) At cost as on 31st March of the preceding year 171.86 158.98 Additions during the year 26.57 21.16 198.43 180.14 Deductions during the year 5.94 8.28 192.49 171.86 Depreciation to date 128.34 114.51 Total 64.15 57.35 III. Leased Fixed Assets Cost as on 31st March of the preceding year 20.16 20.16 Additions during the year -- -- 20.16 20.16 Deductions during the year 4.84 -- 15.32 20.16 Depreciation to-date 6.05 7.77 9.27 12.39 Less Accumulated Lease Adjustment 8.15 11.22 1.12 1.17 Less Other Adjustments .13 0.17 Total 1.00 1.00 Total (I. II & III) 148.08 138.49

F -15

SCHEDULE -11 OTHER ASSETS Rs in crore) As on As on 31.03.2010 31.03.2009 I. Interest accrued 182.33 146.32 II. Tax paid in advance/tax deducted at source * 179.00 158.47III. Stationery and Stamps 2.94 2.33 IV. Non-Banking Assets acquired in satisfaction of claims 1.47 0.21 V. Others 288.06 179.72 Total 653.80 487.05 * Includes Rs 4280.00 lakhs being MAT Credit Entitlement.

SCHEDULE - 12 CONTINGENT LIABILITIES Rs in crore) As on As on 31.03.2010 31.03.2009 I. Claims against the Bank not acknowledged as debts 28.33 16.87II. Liability on account of outstanding Forward Exchange Contracts * 7,163.96 8,146.95 III. Guarantees given on behalf of constituents a) In India 1,030.37 909.85 b) Outside India -- -- IV. Acceptances. Endorsements & other Obligations 673.61 444.39 V. Other items for which the bank is contigently liable 1,222.97 524.68 Total 10,119.24 10,042.74 * Includes derivatives

SCHEDULES TO PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2010

SCHEDULE – 13 INTEREST EARNED (Rs in crore) Year ended Year ended 31.03.2010 31.03.2009 I. Interest/discount on advances/bills 1,388.98 1,390.93 II. Income on Investments 633.46 545.19 III. Interest on balances with R.B.I / other Inter-Bank funds 0.58 5.52 IV. Others 20.40 7.12 Total 2,043.42 1,948.76

F -16

SCHEDULE - 14 OTHER INCOME ( Rs in crore) Year ended Year ended 31.03.2010 31.03.2009 I. Commission. Exchange & Brokerage 126.28 103.21 II. Profit on sale of Investments (net) 114.76 159.31 III. Profit on Revaluation of Investments (net) -- -- IV. Profit on sale of Land. Buildings & Other Assets (net) 0.21 0.01 V. Profit on Exchange Transactions(net) 24.53 28.89 VI. Income earned by way of dividends etc.. from Subsidiaries/ Companies and /or Joint Ventures abroad/ in India -- -- VII. Lease Income -- -- VIII. Miscellaneous income 45.48 30.37 Total 311.26 321.79

SCHEDULE - 15 INTEREST EXPENDED (Rs in crore) Year ended Year ended 31.03.2010 31.03.2009 1. Interest on deposits 1,661.95 1,406.89 2. Interest on Reserve Bank of India/Inter-Bank Borrowings 4.39 10.32 3. Others 41.45 26.62 Total 1,707.79 1,443.83

SCHEDULE - 16 OPERATING EXPENSES (Rs in crore) Year ended Year ended 31.03.2010 31.03.2009 I. Payments to and provisions for employees 206.80 190.41 II. Rent. Taxes and Lighting 49.45 43.69 III. Printing and Stationery 3.99 3.56 IV. Advertisement and Publicity 3.18 2.95 V. Depreciation on Bank's property 22.23 19.83 VI. Directors' fees. allowances and expenses 0.57 0.44 VII. Auditors' fees and expenses (including branch auditors) 1.17 0.99 VIII. Law charges 1.36 1.31 IX. Postage. telegrams. telephones etc. 7.79 6.30 X. Repairs and Maintenance 12.27 11.94 XI. Insurance 24.07 20.98 XII. Other expenditure 53.17 44.11 Total 386.05 346.51

F -17

SCHEDULE - 17

SIGNIFICANT ACCOUNTING POLICIES 1. BASIS OF PREPARATION:

The accompanying financial statements have been prepared on historical cost convention on the accrual basis of accounting, unless otherwise stated, and comply with generally accepted accounting principles, statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (RBI) from time to time and notified accounting standards by Companies (Accounting Standards) Rules, 2006 to the extent applicable and current practices prevailing in banking industry in India.

2. USE OF ESTIMATES:

The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses along with disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. The Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. The differences if any between estimate and actual will be dealt appropriately in future periods.

3. REVENUE RECOGNITION:

Income and expenditure are accounted for on accrual basis except receipt of commission, exchange, rent on safe deposit lockers all of which are accounted on cash basis. In respect of Non Performing Assets, the bank has not recognised interest. Recoveries are appropriated towards the principal, interest and charges in the order of demand. In the case of matured Term Deposits, interest is provided at the rate of interest applicable to savings bank deposit pending renewal / discharge and the balance overdue interest is accounted for at the time of renewal.

4. INVESTMENTS:

Investments have been presently classified under the heads “Held to Maturity”, “Available for Sale” and “Held for Trading” categories and have been valued in accordance with the RBI guidelines. The value net of depreciation has been shown in the Balance Sheet. The excess of acquisition cost over the face value of securities under “Held to Maturity” is amortised over the remaining period to Maturity. Provision for non-performing investments has been made as per RBI guidelines.

5. ADVANCES:

All outstanding advances are reviewed and classified under 4 categories namely

a) Standard Assets b) Sub-Standard Assets c) Doubtful Assets and d) Loss Assets

Provision for Non-performing and Standard Advances has been made on the basis of asset classification and provisioning requirement over and above the prudential norms laid down by the Reserve Bank of India. Advances shown in the Balance Sheet are net of provisions (including Floating Provision) for Non Performing Advances and unrealised interest.

F -18

6. FIXED ASSETS

Premises and other fixed assets have been shown at cost as reduced by depreciation written off to date. Software is capitalised along with computer and included under Other Fixed Assets.

7. DEPRECIATION: - Depreciation on fixed assets has been provided on written down value method as per the rates and in the manner specified under Schedule –XIV of the Companies Act 1956, except in respect of computers (including software) where depreciation is provided at a flat rate of 33.33 % as per RBI guidelines which is more than the amount required under schedule –XIV of the Companies Act 1956.Depreciation on assets purchased during the year has been computed upto the end of the year including for the entire month in which the asset was capitalised, and on assets sold/scrapped, upto the end of the month in which it is sold/scrapped. Depreciation of leased assets has been calculated so as to spread the depreciable amount over the primary lease period as per RBI guidelines. Carrying amount of assets is reviewed at each balance sheet date for indication of impairment if any. An impairment loss is recognized wherever the carrying amount of an asset exceeds its recoverable value.

8. FOREIGN CURRENCY TRANSACTIONS:

a) Foreign currency transactions of FCNR/EEFC/RFC accounts are re-valued at the year end closing spot rates as published by Foreign Exchange Dealers Association of India (FEDAI).

b) Transactions other than FCNR/EEFC/RFC accounts: -

Foreign currency balances both under Assets and Liabilities and outstanding Forward Exchange Contracts and Swaps are evaluated at the year-end rates published by FEDAI. The resultant profit/loss is shown as Income/Loss.

The Gain or Loss on a trading forward exchange contract is computed by multiplying the forward rate available on the reporting date for the remaining maturity period of the contract, and the difference between that amount and the contracted forward amount is recognised as profit or loss for the period.

Revenue items are translated at the exchange rates ruling on the dates of transactions.

Contingent liabilities on account of acceptances, endorsements and other obligations including guarantees and letters of credit issued in foreign currencies are valued at the year end closing spot rates published by FEDAI.

9. STAFF BENEFITS:

Provision for payment of Gratuity and Pension are made on actuarial basis and paid to the concerned funds, Leave encashment benefit and leave fare concession payable at a future date to the employees has been accounted on accrual basis as per actuarial valuation. On the rest of the employee benefits, adhoc provisions have been made.

10. INCOME TAX :

The provision for tax for the year comprises of current tax liability and deferred tax assets and liabilities which recognise, subject to the consideration of prudence, timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods.

F -19

11. SHARE ISSUE EXPENSES:

Share issue expenses are adjusted from share premium account.

12. EMPLOYEE STOCK OPTION:

The Bank has elected to use intrinsic value method to account for compensation cost of stock options granted to employees of the Bank. Intrinsic value is the amount by which the quoted market price of the underlying shares exceeds the exercise price of the options.

13. SEGMENT REPORTING:

(i) The Bank has recognised the Business Segment as the Primary Reporting Segment and Geographical Segment as Secondary Segment in accordance with the RBI guidelines in compliance with the Accounting Standard 17.

(II)The Business Segment has been divided into (a) Treasury (b) Corporate and Wholesale Banking, (c) Retail Banking and (d) Other Banking Operations.

(iii) The Geographical Segment consists only of the Domestic Segment, as the Bank does not have any foreign branches.

14. NET PROFIT

The net profit disclosed in the Profit & Loss Account is after making necessary provisions for taxes, NPA, Standard Advances, and Investments without recognising unrealised interest on Non-Performing Assets as per RBI guidelines.

SCHEDULE – 18

NOTES ON ACCOUNTS FORMING PART OF THE BALANCE SHEET AS ON, THE PROFIT AND LOSS ACCOUNT AND THE CASH FLOW STATEMENT FOR THE YEAR ENDED 31st MARCH 2010.

1. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Reconciliation of branch adjustments/Inter Bank accounts has been completed upto 31-03-2010 and steps are being taken to give effect to consequential adjustments of pending items.

b) Balancing of Subsidiary Ledgers are completed in all branches/offices.

2. Net profit or Loss for the period, Prior period items and changes in Accounting policies (Accounting Standard 5): -

There are no significant prior period items which are required to be disclosed as per RBI guidelines. However during the year, the Bank has made some changes in Accounting Policies as detailed below:

Recoveries made in Non-Performing advances are appropriated towards the principal, interest and charges in their order of demand instead of first appropriating the same towards the principal and the balance towards interest as followed in previous years. Due to this change, the profit (net) for the year is higher by Rs 4.97 crore.

F -20

3 Share Issue Expenses

During the year, the Bank issued equity shares under Qualified Institutional Placement. The entire expenses including amount paid to Lead Merchant Bankers have been deducted from the share premium collected on the issue as per the provisions of section 78(2) (c) of The Company’s Act 1956..

4. Employee Benefits –Accounting Standard 15

Various Benefits made available to the Employees are:-

a) Pension: The Bank has defined benefit plan under Pension Trust to employees who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, by purchasing annuity for optants separated after completion of 20 years of service. The Benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (‘the gratuity Plan’) covering eligible employees. This plan provides for a lumpsum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State government bonds and debt instruments of government owned corporations.

c) Leave Encashment (PL): The bank permits encashment of leave accumulated by employees on retirement, resignation and during the course of service. The liability of encashment of such leave is determined and provided on the basis of actuarial valuation performed by an independent actuary at the balance sheet date

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the fund is recognised as expense and is charged to the profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2010, there was no liability due and outstanding to the fund by the Bank.

e) Other Long term Employee Benefits

Other than the employees benefits listed above, the Bank also gives certain long term benefits to the employees which include Medical aid, reimbursement of hospitalization expenses to the employees / their family members, compensated absence such as sick leave and casual leave etc. The bank has made provision for such liabilities on an adhoc basis.

The summarized position of Post-employment benefits and long term employee benefits recognized in the Profit & Loss Account and the Balance Sheet as required in accordance with Accounting Standard – 15 (Revised) are as under :

a) Changes in the present value of the obligations (Rs.in Crore)

Pension

(Funded) Gratuity (Funded)

Leave Encashment (Un Funded)

Present Value of obligation as at the beginning of the year 125.24 57.00 29.63

Interest Cost 9.71 4.42 2.30

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Pension

(Funded) Gratuity (Funded)

Leave Encashment (Un Funded)

Current Service Cost 5.65 1.45 1.35 Benefits Paid -- (5.56) -- Actuarial Loss/(Gain) on Obligations 6.79 1.39 (0.63) Present Value of obligation at year end 147.39 58.70 32.65

b) Change in Fair Value of Plan Asset (Rs.in Crore)

Pension

(Funded) Gratuity (Funded)

Leave Encashment

(Un Funded)

Fair Value of Plan Assets at the beginning of the year 125.75 57.40 29.63

Expected return on Plan Assets 9.75 4.45 -- Employer's contribution 19.76 5.00 2.63 Benefits Paid -- (5.56) -- Actuarial (Loss)/Gain on Obligations (7.48) (1.90) 0.39 Fair Value of Plan Asset at the end of the year 147.78 59.39 32.65

c) Net Actuarial Gain / Loss (Rs in crore)

Pension

(Funded) Gratuity (Funded)

Leave Encashment

(Un Funded)

Actuarial (Gain) / Loss on obligations (i) 6.79 1.39 (0.63) Actuarial Gain /(Loss )on assets (ii) (7.48) (1.90) 0.39

Net Actuarial Gain / (Loss) {(ii) – (i)} (14.27) (3.29) 1.02

Actuarial Gain / (Loss) recognised in the period (14.27) (3.29) 1.02

Actuarial Gain/ (Loss) unrecognised at the end of the year

-- -- --

F -22

d) Amount recognized in Balance Sheet (Rs. In Crore)

Pension

(Funded) Gratuity (Funded)

Leave Encashment (Un Funded)

Estimated Present value of deferred payment obligations as at the end of the year

147.39 58.70 32.65

Less Fair Value of Plan Assets as at the end of the Year 147.39 58.70 32.65

Funded in advance -- -- -- Unfunded Transitional Liability -- -- --

Unfunded Net Liability / (Assets) recognised in Balance Sheet

(0.39) (0.69) --

e) Expenses recognized in Profit & Loss Account (Rs. In Crore)

Pension

(Funded) Gratuity (Funded)

Leave Encashment (Un

Funded)

Current Service Cost 5.65 1.45 1.35 Interest Cost 9.71 4.42 2.30 Transitional Liability recognised during the year -- -- -- Less : Expected return on Plan Asset 9.75 4.45 --

Net Actuarial Gain/ (Loss) recognized in the year (14.27) (3.29) 1.02

Net Benefit Expense 19.88 4.71 2.63

f) Movement in Liability Recognised in the Balance Sheet ( Rs in Crore)

Pension (Funded) Gratuity (Funded) Leave Encashment

(Un Funded)

Opening Net Liability -- -- -- Net benefit expensed 19.88 4.71 2.63 Contribution Paid 19.88 4.71 2.63 Closing net liability (--) (--) (--)

F -23

g .Investment percentage maintained by Pension & Gratuity Trust

Pension Trust Gratuity Trust

Central Government Securities - 18.17 State Government Securities -- 12.05 PSU Bond -- 20.87 Others 0.06 48.91 Insure Managed fund 99.94 -- Total 100.00 100.00

h) Principal actuarial assumption at the Balance Sheet Date (expressed as weighted average)

Pension (Funded) Gratuity (Funded) Leave Encashment (Un

Funded)

Method of Valuation Projected unit Credit Projected unit Credit Projected unit Credit

Rate of Interest 8.00% 8.00% 8.00% Rate of Inflation 4.25% 4.25% 4.25%

Mortality LIC (94-96) –Table of

Mortality Rates LIC (94-96) –Table of Mortality Rates

LIC (94-96) –Table of Mortality Rates

Contribution 10% of basic Pay - -

Rate of Withdrawal - - 5%

Note:

1. The estimates of future salary increases considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in employee market.

2. The financial assumptions considered for the calculations are as under:

Discount Rate: The discount rate has been chosen by reference to market yield on government bonds as on the date of valuation. (Balance sheet dated 31.03.2010)

Expected Rate of Return: The expected rate of return is taken on the basis of yield on government bonds.

Salary Increase : On the basis of past data provided by the bank.

i) Other long term employee’s benefits (Un-Funded) (Rs.in Crore)

Other Benefits #

Liability as on 01.04.2009 3.07 Liability as on 31.03.2010 3.08 Transitional Liability -- Amount debited /(credited )to Profit & Loss Account 0.01

F -24

# Includes LFC Encashment, Medical Aid, Hospitalisation Reimbursement, Sick Leave etc. * LFC encashment has been taken at actuarial valuation and others on adhoc basis

5. Segment reporting (Accounting Standard 17).

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

Segmentwise Results for the year ended 31.03.2010

Part A – Business Segments

(Rs. in Crore)

(AUDITED) Business Segments

31.03.2010 31.03.2009

Revenue

Treasury 808.29 753.51

Corporate/Wholesale Banking 661.29 629.08

Retail Banking 839.41 850.46

Other Banking Operations 45.69 37.50

Total 2,354.68 2,270.55

Result

Treasury -77.68 34.15

Corporate/Wholesale Banking -51.35 21.72

Retail Banking 303.14 331.72

Other Banking Operations 37.88 31.96

Total 211.99 419.55

Unallocated expenses 22.23 19.84

Profit before Tax 189.76 399.71

Other information

Capital Employed (Segment Assets-Segment Liabilities)

(a)Treasury Operations 858.26 765.62

(b)Corporate Banking 594.64 472.77

(c)Retail Banking 379.34 327.83

(d) Other Banking Operations 0.51 0.81

Total 1,832.75 1,567.03

F -25

Part B - Geographic Segments: There is only one segment i.e. Domestic segment

6. Related Party Disclosure (Accounting Standard 18):

There is no related party transaction other than remuneration paid to Sri Ananthakrishna as Chairman and Chief Executive Officer upto 12.07.2009, a sum of Rs 9,14,516/- (Previous year Rs 32,40,000) and Sri P Jayarama Bhat as Managing Director and Chief Executive Officer from 13.07.2009, a sum of Rs. 23,16,774/- ( previous year Rs nil) as remuneration and contribution to Provident Fund etc. Sri Ananthakrishna, non executive chairman has forgone the payment of Rs 1 lakh per month effective from July 13, 2009 and the same has been accepted by the Board.

7. a) Earnings per Share (Accounting Standard 20):

31.03.2010 31.03.2009

i) Earnings per share Basic Rs. 13.50 21.96 ii) Earnings per share Diluted Rs 13.45 21.96 iii) Net Profit as per Profit and Loss Account (Rs. In crore) 167.12 266.70 iv) No of Equity Shares (weighted Avg.)-Basic 12,37,79,973 1,21,444,753 v) No of Equity Shares for Diluted earnings 12,42,36,031 1,21,444,753

The Net profit for the year has been used as the numerator and the weighted average number of equity shares as denominator in calculating the earning per share.

(b) 2800 equity shares (previous year 2800 equity shares) allotment of which is in abeyance, being sub judice.

8. Accounting for Taxes on Income - Accounting Standard 22:

The Bank has accounted for taxes on income in compliance with Accounting Standard 22 issued by the ICAI. Accordingly, deferred tax assets and liabilities are recognised. The major components of deferred tax are as under: -

Timing Differences:

( Rs. in crore)

Particulars As on 31.03.2010 As on 31.03.2009

A. Deferred Tax Liabilities 1. Depreciation on fixed assets 5.12 5.54 2. Depreciation on investments 88.93 30.78 3. Accrued Interest on Investments 55.51 49.48 Total 149.56 85.80 B. Deferred Tax Assets 1. PL/LFC Encashment 11.46 10.43 2. Arrears of Salary 15.52 7.82 3. Others 19.65 6.77 Total 46.63 25.02 Net deferred tax liabilities (A) – ((B) 102.93 60.78

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9. Impairment of Assets – Accounting Standard –28

Fixed Assets possessed by the bank are treated as “Corporate Assets” and are not “Cash Generating Units” as defined by AS – 28 issued by the Institute of Chartered Accountants of India (ICAI). In the opinion of the management, there is no impairment of the fixed assets of the Bank.

10. Provisions, Contingent Liabilities and Contingent Assets- Accounting Standard 29

a) Movement of provisions for liabilities*

( Rs. in Crore)

Particulars Legal cases /contingencies ** Balance as at 1st April 2009 15.41 Provided during the year 7.75 Amounts used during the year 11.25 Reversed during the year -- Balance as at 31st March 2010 11.91 Timing of outflow/uncertainties Outflow on settlement / crystallization

* excluding provisions for others.

** Including towards customary practices

b) Contingent Liabilities of schedule 12

Liabilities at Sl. No. (I) to (V) are dependent upon, the outcome of Court / arbitration / out of court settlement, disposal of appeals, the amount being called up, terms of contractual obligations, devolvement and raising of demand by concerned parties, respectively. Reimbursement is expected except in item no (I).

c) Contingent Assets:- Nil

11. ADDITIONAL DISCLOSURE:

In terms of RBI guidelines, the following additional disclosures have been made:

11.1 Capital Adequacy:

31.03.2010 31.03.2009 i) Capital Adequacy Ratio (%) - Basel –I 11.85% 13.54% - Basel II 12.37% 13.48% ii)Capital Adequacy Ratio -- Tier – I Capital (%) - Basel –I 9.56% 10.65% - Basel II 9.98% 10.60% ii)Capital Adequacy Ratio -- Tier – II Capital (%) - Basel -I 2.29% 2.89% - Basel II 2.39% 2.88%iii) Amount of subordinated debt raised as Tier II capital (Rs in crore) 350.00 350.00

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11.2 Investments (Rs in crore)

Items 31.03.2010 31.03.2009

(1) Value of Investments (i) Gross Value of Investments

(a) In India (b) Outside India

10,021.66 Nil

9,009.32Nil

(ii) Provisions for Depreciation (a) India (b) Outside India

29.61

Nil 47.83

Nil

(iii) Net Value of Investments (a) In India (b) Outside India

9,992.05

Nil 8,961.49

Nil(2) Movement of provisions held towards depreciation on investments

(i) Opening balance (ii) Add: Provisions made during the year (iii) Less : Write-off/write-back of excess provisions during the year (iv) Closing balance

47.83 0.00

18.22

29.61

44.3133.3529.83

47.83 11.3 Repo transactions :

The particulars of Repo transactions are as under: (Rs in crore)

Outstanding during the Year

Particulars Min Max

Daily Average

As on 31.03.2010

Securities sold under repos 50.00 50.00 0.41 -- Securities purchased under reverse repos 85.00 900.00 186.76 --

11.4 Issuer composition of Non-SLR Investments (Rs. In crore)

Sl.No. Issuer Amount Extent of Private placements

Extent of ‘below investment grade’ securities

Extent of ‘un-rated’ securities

Extent of ‘un-listed’ securities

01 PSUs 257.20 34.68 0.17 -- --02 Financial Institutions 2,569.71 2,402.88 -- -- --03 Banks 147.91 36.03 -- -- --04 Private Corporates 277.71 162.69 -- 24.54 0.7705 Subsidiaries / joint ventures 22.50 22.50 -- 22.50 22.5006 Others 319.81 8.26 -- -- --07 Less Provision held towards

deprecation/NPA -8.74 XXX XXX XXX XXX

TOTAL 3,586.10 2,667.04 0.17 47.04 23.27

F -28

11.5 Non Performing Non-SLR investments (Rs.in crore)

Particulars 2009-10 2008-09 Opening Balance -- 1.89Additions during the year -- --Deductions during the above period -- 1.89 Closing Balance -- --Total Provision Held -- --

11.6 Forward Rate Agreement/ Interest Rate Swaps/Exchange Traded Interest Rate Derivatives:

Forward Rate Agreements / Interest Rate Swap (Rs in Crore)

Items 31.03.2010 31.03.2009

i) The Notional principal of swap agreements 116.62 131.74 ii)Losses which would be incurred if counter parties failed to fulfill their obligations under the agreements

-- --

iii) Collateral required by the bank upon entering into swaps -- --

iv) Concentration of credit risk arising from swaps Client Client v) The fair values of the swap book -- --

Note: (i) Interest rate swap (fix v/s. fix) was undertaken for the purpose of client’s hedging requirements, the underlying for the transaction being FCCB and ECB exposures of the client.

(ii) The entire interest rate swap covered on back-to-back basis with counter party bank and there is no open position. However the contingent liability is recognised.

Exchange Traded Interest Rate Derivatives Rs in crore

Sl No

Particulars Amount

I Notional principal amount of exchange traded interest rate derivatives NilIi Notional principal amount of exchange traded interest rate derivatives

outstanding as on 31st March 2010 (instrument wise)Nil

Iii Notional principal amount of exchange traded interest rate derivatives outstanding and not “highly effective” (instrument wise)

Nil

iv Mark- to-market value of exchange traded interest rate derivatives outstanding and not “highly effective” (instrument wise)

Nil

F -29

11.7 Disclosure on Risk Exposures in Derivatives

(i) Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely. Front office, Mid office and Back office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is submitted to Risk Management department, which, in turn appraises the risks profile to the senior management on the assets and liability management.

The Bank ensures that the transactions with the corporate clients are undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank has adopted Current Exposure Method for monitoring the credit exposures.

The Bank also uses financial derivative transactions for hedging its on or off Balance Sheet exposures. The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. PV01 and VaR on these deals are reported to the ALCO every month.

The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

The customer related derivative transactions for notional value (at market rate) of Rs 187.01 crore are covered with counter party banks, on back- to- back basis for identical amount and tenure and the Bank does not have any market risk.

(ii) Quantitative Disclosure: (Rs in crore)

Sl.No Particulars Currency Derivatives

Interest Derivatives

1 Derivatives (Notional Principal Amount) a) Hedging 2,439.58 226.49 b) Trading 4,716.72 -- 2. Marked to Market Positions Assets(+) 178.40 88.87 Liabilities(-) -162.01 -88.87 3. Credit Exposure 327.93 91.24

F -30

Sl.No Particulars Currency Derivatives

Interest Derivatives

4. Likely impact of 1% change in interest Rates (100*PV01)

a) on hedging derivatives -- -- b) on trading derivatives -- -- 5. Maximum and Minimum of 100*PV01 observed during the year

a) on hedging- Maximum -- -- b) On hedging –minimum -- -- c) on trading- Maximum -- -- d) on trading – Minimum -- --

11.8 Non-Performing Asset (Rs. in Crore)

2009-10 2008-09

i) Net NPAs to Net Advances (%) 1.31 0.98ii) Movement of NPAs (Gross) a) Opening Balance 443.20 379.57b) Additions during the year 300.28 162.44Sub total i 743.48 542.01Less : a) Upgradations 49.80 19.23b) Recoveries (excluding recoveries made in upgraded accounts) 67.91 71.18c) Write off 76.13 8.40Sub total ii 193.84 98.81Closing Balance 549.64 443.20iii) Movement Of Net NPAs a) Opening Balance 116.10 106.48b) Additions during the year 202.03 93.39 318.13 199.87c) Reductions during the year 129.52 83.77d) Closing Balance 188.61 116.10iv) Movement of provisions for NPAs a)Opening balance 301.23 247.04b)Provisions made during the year 81.00 47.00c)Write off/write back of excess provisions (76.62) 7.19d) Closing balance 305.61 301.23v) Movement of Floating Provisions a) Opening Balance 11.69 13.00b) the quantum of floating provisions made during the year -- --c) Amount of draw down made during the year 1.31 1.31d) Closing balance 10.38 11.69

F -31

Note: Floating provision of Rs 1.31 crore was withdrawn during the year to meet the interest loss in respect of eligible accounts under Agricultural debt waiver / debt relief scheme as permitted by RBI.

11.9 Loans and advances subjected to restructuring etc., during the year:

Details of Loan assets subjected to Restructuring ( Rs in Crore)

CDR Mechanism

SME Debt Restructuring

Others Total

No of Borrowers 1 105 227 333

Amount Outstanding

45.28 52.74 766.78 864.80

Standard Advances Restructured

Sacrifice (diminution in the fair value)

2.91 0.16 1.51 4.58

No of Borrowers -- 5 4 9

Amount Outstanding

-- 1.04 0.79 1.83

Sub-Standard Advances Restructured

Sacrifice (diminution in the fair value)

-- -- 0.01 0.01

No of Borrowers -- -- 2 2

Amount Outstanding

-- -- 39.25 39.25

Doubtful Advances Restructured

Sacrifice (diminution in the fair value)

-- -- -- --

No of Borrowers 1 110 233 344

Amount Outstanding

45.28 53.78 806.82 905.88

Total

Sacrifice (diminution in the fair value)

2.91 0.16 1.51 4.58

F -32

11.10 Details of Assets sold to Securitisation Company / Re-construction Company

(Rs. in Crore)

Sl.No Particulars 2009-10 2008-09 01 No of Accounts Nil Nil 02 Aggregate Value (net of Provisions) of accounts sold to SC/RC -- --03 Aggregate consideration -- --04 Additional consideration realised in respect of accounts transferred in

earlier years -- --

05 Aggregate Gain / Loss over net book value -- --

11.11 Details of non-performing financial assets purchased (Rs in crore)

Sl no

Particulars 31.03.2010 31.03.2009

1 a) no. of accounts purchased during the year -- -- b) aggregate outstanding -- -- 2 a) Of these, number of accounts restructured during the year -- --

b) aggregate outstanding -- --

11.12 Details of non-performing financial assets sold: (Rs in crore)

Sl Particulars 31.03.2010 31.03.2009 1 No of accounts sold 1 -- 2 Aggregate outstanding -- -- 3 Aggregate consideration received 1.50 --

11.13 Provisions on Standard Asset (Rs in crore)

Item 31.03.2010 31.03.2009

Provisions towards Standard Assets 57.66 54.91

11.14 Significant performance indicators

31.03.2010 31.03.2009

I ) Interest Income to working funds 8.18% 8.99% ii) Non-interest income to working funds 1.25% 1.66% iii) Operating profits to working funds 1.04% 2.25%

iv) Return on Assets 0.67% 1.25% v) Business (Deposits Plus Advances) per employee (Rs. In crore) 7.27 6.49 vi) Profit per employee (Rs. In crore ) 0.03 0.05

F -33

11.15 Asset Liability Management

Maturity Pattern of certain item of asset and liabilities (Rs. in crore)

1 day 2 to 7 days

8 to 14 days

15-28 Days

29 Days to 3 Months

Over 3 Months to 6 Months

Over 6 Months to 12 Months

Over 1 Year to 3 years

Over 3 Years to 5 Years

Over 5 Years

Total

Loans & Advances 209.67 309.91 347.98 319.78 1,624.24 1,493.93 2,073.35 3,542.73 3,126.18 1,387.92 14,435.69

Investments 306.20 138.94 -- -- 188.54 104.06 46.89 910.05 902.13 7,395.23 9,992.04

Deposits 460.82 491.29 541.59 506.35 2,032.83 2,916.60 4,272.45 5,434.44 6,842.93 231.35 23,730.65

Borrowings 149.85 -- -- -- 27.81 63.68 50.15 50.15 -- -- 341.64

Foreign Currency Assets 40.49 370.85 127.46 89.12 1,838.25 602.16 659.73 27.50 -- -- 3,755.56

Foreign Currency Liabilities 39.70 377.72 79.58 42.72 1,808.41 628.93 717.85 46.45 12.20 0.10 3,753.66

11.16 Exposure to Sensitive Sectors:

i) Exposure to Real Estate (Rs. In Crore)

31.03.2010 31.03.2009

a) Direct exposure

(i) Residential Mortgages -

Lendings fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented.

872.87 781.51

(ii) Commercial Real Estates –

Lendings secured by mortgages on commercial real estates including Non-Fund Based Limits

682.53 879.06

F -34

(iii) Investments in Mortgage Backed Securities (MBS) and other securitised exposures –

a) Residential , b) Commercial Real Estate

2.34 --

3.70--

b) Indirect Exposure

Fund based and non fund based exposures on National Housing Bank (NHB) and Housing Finance Companies (HFCs)

338.63 566.32

Total Exposure to Real Estate Sector 1,896.37 2,230.59

ii) Exposure to Capital Market (Rs in crore)

Category 31.03.2010 31.03.2009

(i) Investments made in equity shares 160.27 138.10 (ii) Investments in convertible bonds / convertible debentures -- -- (iii)Investments in units of equity oriented mutual funds the corpus of which is not exclusively invested in corporate debt

11.52 24.20

iv) Application Money towards Rights issue -- -- v) Advances against shares/bonds./debentures or other securities or on clean basis to individuals for investment in shares (including IPOs/RSOPS), convertible bonds and convertible debentures and units of equity oriented mutual funds.

-- --

vi) advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity oriented mutual funds are taken as primary security;

0.02 --

vii) advances for any other purposes to the extent secured by the collateral security of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds i.e. where the primary security other than shares /convertible bonds /convertible debentures /units of equity oriented mutual funds ‘does not fully cover the advances’.

-- --

viii) Secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers:

66.01 51.58

ix) loans sanctioned to corporate against the security of shares /bonds/debentures or others securities or on clean basis for meeting promoters contribution to the equity of new companies in anticipation of raising resources:

-- --

x) bridge loans to companies against expected equity flows/issues -- -- xi)underwriting commitments taken up by the banks in respect of primary issue of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds

-- --

xii) Financing to Stockbrokers for margin trading -- --

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xiii)all exposures to Venture capital funds (both registered and unregistered) will be deemed to be on par with equity and hence will be reckoned for compliance with the capital market exposure ceilings (both direct and indirect)

-- --

Total capital market exposure 237.82 213.88

* Excluding loans for personal purpose to individuals against collateral of shares.

11.17 Exposure to Country Risk (Rs in crore)

Risk Category Exposure (net) as at 31.03.2010

Provision held as at 31.03.2010

Exposure (net) as at 31.03.2009

Provision held as at 31.03.2009

Insignificant 82.40 - 86.60 - Low 174.42 - 153.39 - Moderately Low 5.81 - 4.30 - Moderate 1.09 - 0.07 - Moderately High 0.90 - 0.75 - High -- - -- - Very High -- - -- - Restricted -- - -- - Off-Credit -- - -- - Total 264.62 - 245.11 -

The net funded exposure of the bank in respect of foreign exchange transactions with each country is within

1% of the total assets of the Bank and hence no country risk provision is required as per extant RBI

guidelines.

11.18 During the year, the bank has not raised any unsecured subordinated debts (Tier II Bond ). (Previous year Rs

200.00 crore)

11.19 Details of Single/Group Borrower limit exceeded by the Bank

During the year ended 31-03-2010 the Bank has not exceeded the exposure ceiling fixed by RBI to Individual

/Group borrowers of 15% /40% of capital funds except in the following cases of single borrower which has

been approved by the Board

( Rs in Crore)

Sl No Name of the Borrower Maximum Limit during the year

Exposure % Maximum Limit / Liability as on 31.03.2010

Exposure %

1 Jindal Saw Ltd 314.37 15.79 192.85 9.69

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11.20 Unsecured Advances (Schedule 9)

The Bank has not granted any advance against intangible securities such as charge over the rights, licences, authority etc.

11.21 Amount of provision made during the year Rs in crore

Particulars Current Year Previous year

Provision for Income Tax 48.50 194.00

11.22 Penalties imposed by RBI: During the year the RBI levied the penalty of Rs 4400/- on account of discrepancies detected while processing soiled note remittances received from currency chests in their CVPS / during inspection of the currency chests for non compliance with operational guidelines.

11.23 Provisions and contingencies comprise of: (Rs. in crore)

31.03.2010 31.03.2009

i) Provision made towards NPAs / Sacrifice for restructured Standard Advance/Provision for Standard assets as per RBI guidelines

88.56 47.00

ii) Provision towards Income tax (net) 23.18 153.93 iii) Provision towards deferred tax 42.15 -24.55 iv) Provision for Wealth tax 0.11 0.10 v) Provision for Fringe Benefit Tax -- 3.53 vi) Provision for depreciation on investments -18.23 33.35 vii) Provision for Others 0.75 0.15 vii) MAT Credit entitlement -42.80 -- Total 93.72 213.51

11.24 Customer Complaints:

(a) No. of Complaints pending at the beginning of the year (31.03.09) 42 (b) No. of complaints received during the year 4600 (c) No. of complaints redressed during the year 4616 (d) No. of complaints pending at the end of year (31.03.10) 26

11.25 Awards passed by the Banking Ombudsman

(a) No. of unimplemented awards at the beginning of the year(31.3.09) Nil (b) No. of awards passed by the Banking Ombudsman during the year Nil (c) No. of awards implemented during the year Nil (d) No. of unimplemented awards at the end of the year (31.03.10) Nil

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11.26 Employee Stock Options (ESOP)

The shareholders of the Bank have approved the Employees Stock Options Scheme (ESOS) at the Annual General Meeting held on 15.7.2006 for grant to eligible employee’s upto 1500000 stock options in aggregate. Accordingly stock options have been granted to the eligible employees at an exercise price of Rs 50 per share. As per the Scheme the stock options granted would vest in a graded manner i.e 40% after the first year, 30% in the second year and the remaining 30% before the end of the third year from the date of grant. The vested options, subject to other conditions, are exercisable within a period of 5 years from the respective dates of vesting. During the year ended March 31, 2010 the Bank has provided a sum of Rs 38261525 as employee compensation cost being the proportionate accounting value in respect of stock options.

11.27 Disclosure of Letter of comforts (LOCs) issued by Banks:

The Bank issues Letter of comforts on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and cumulative financial obligations have been assessed under LOCs issued by the Bank in the past, during the current year and still outstanding. Brief details of LOCs issued by the Bank are as follows:

(Rs in crore)

1 Letter of comforts issued during the year 266.45 2 Letter of comforts matured/cancelled during the year 277.39 3 Letter of comforts outstanding at the end of the year 82.56

11.28 Government of India has notified “Agricultural Debt Waiver and Debt Relief Scheme 2008” for giving debt waiver to marginal and small farmers and relief to other farmers who have availed direct agricultural loans. The claim for agricultural debt waiver amounting to Rs 23.13 crore lodged by the Bank subject to certification by statutory auditors of the Bank, Rs 14.98 crore being 65 % of the amount claimed has been reimbursed by the RBI during the year ending 31st March 2010.

11.29 Concentration of Deposits, advances, exposures and NPA’s

i) Concentration of Deposits

Sl No Particulars 1 Total deposits of 20 largest depositors ( Rs in Crore) 1,986.452 % age of deposits of 20 largest depositors to total deposits 8.37%

ii) Concentration of Advances

Sl No Particulars 1 Total advances of 20 largest borrowers ( Rs in Crore) 3,144.222 % age of advances of 20 largest borrowers to total advances (credit exposures 14.89%

iii) Concentration of exposures

Sl No Particulars

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1 Total exposures of 20 largest borrowers/Customers ( Rs in Crore) 3,145.53

2 Percentage of Exposures to twenty largest borrowers / customers to Total Exposure of the bank on borrowers / customers

14.03%

iv) Concentration of NPAs Rs in crore

Sl No Particulars

1 Total fund based Exposure to Top Four NPA accounts 155.34

v) Sectorwise NPAs Rs in Crore

Sl No Sector Percentage of NPAs to Total Advances in that sector

1 Agriculture & allied activities 3.10

2 Industry (Micro & small, Medium and Large) 1.87

3 Services 6.70 4 Personal Loans 2.94 vi) Overseas Assets, NPA and Revenue (Rs in crores)

Particulars Amount Total Assets NilTotal NPAs NilTotal Revenue Nil

Vii) Off- balance sheet SPVs sponsored (which are required to be consolidated as per accounting norms)

Name of the SPV Sponsored

Domestic Overseas Nil Nil

11.30 Income from Bancassurance business (Rs in crore)

Sl No Nature of Income March 2010

1 For selling Life Insurance Policies 18.352 For selling Non-Life Insurance Policies 3.083 For Mutual Fund Products 0.474 Others (Specify) 0.125 Total 22.02

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Note: Disclosures under 11.29 and 11.30 does not contain corresponding previous year figures as this is the first year of disclosure requirement mandated by RBI.

11.31 In respect of investment under ‘Held to Maturity ‘category as stated in the significant accounting policy no 4 the excess of acquisition cost over the face value of the security amortised during the year amounting to Rs 28.86 crore (previous year Rs 11.95 crore) has been netted off from interest on investments and shown under ‘Income from Investments’ in Profit and Loss account in terms of RBI direction. During the year with the intention to strengthen the trading portfolio, the Bank has shifted securities amounting to Rs 1639.91 crore from ‘Held to Maturity’ to Available for Sale’ category at book value or market value whichever is lower and a sum of Rs nil has been charged to provision for depreciation on investments. (previous year securities amounting to Rs 420.76 crore has been shifted from ‘Held to Maturity’ to Available for Sale’ category and securities amounting to Rs 634.44 crore have been shifted from ‘Available for Sale’ to ‘Held to maturity’ category by charging a sum of Rs 28.95 crore to provision for depreciation on investments).

12 (a) Tax demands under appeal: -

A sum of Rs 47.34 crore (Previous year Rs 101.76 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable appellate orders on identical issues for earlier assessment years.

(b) Provision for income tax for the year has been made after due consideration of decisions of appellate

authorities and advice of counsels.

13. Premises include buildings in possession and occupation of the Bank pending execution of title deeds and/or Co-

operative Societies yet to be formed amounting to Rs.0.22 crore (Previous year Rs.0.22 crore)

14. Draw down from Reserves

The Bank has not made any draw down during the year from the Reserves.

15. Previous year’s figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.

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Annexure V

Financial Ratios

Period ended 31.3.2010

Earning Per Share (Rs.) - Basic 13.50

Earning Per Share (Rs.) – Diluted 13.45

Net Asset Value per Share (Rs.) 136.80

Return on Net Worth after tax (%) 9.83

Definition of Key Terms:

1. Earnings per share: Net Profit Divided by weighted average number of equity shares outstanding at the end of the year

2. Net Asset Value: Net Worth ( excluding revaluation reserves and deferred tax asset ) divided by number of equity shares outstanding at the end of the year.

3. Return on Net worth: Net Profit / Average Net worth

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ANNEXURE VI

Capitalisation Statement (Rs. in Crore)

Pre-issue as at 31.03.2010 (Audited)

Post issue#

Borrowings Short Term Debt@@ 262.93 Long Term Debt@ 428.71 Total Debt 691.64

Shareholders funds Share capital - Equity 133.99 Less Calls in arrears -- - Preference -- Share premium 312.67 Reserves & Surplus 1,386.09 Less: Miscellaneous expenditure not written off --

Total Shareholders Funds 1,832.75

Long term Debt/Equity ratio 0.23:1

The above has been computed on the basis of the audited financial statements. @ Long term debt includes subordinate debt amounting to Rs 350 crore @@ Short term debts are debts maturing within next one year from the date of above statement and interest accrued thereon. # Information pertaining to Share Capital and Reserves post issue can be ascertained only after finalization of size and price of rights issue.

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AUDITORS REPORT

To,

The Board of Directors

The Karnataka Bank Ltd

Regd. & Head Office

Kankanady - Mangalore-575002

1. We have reviewed the accompanying Balance Sheet (Annexure 1) of The Karnataka Bank Limited (“the Bank”) as at 30 September, 2010 and the Profit and Loss (Annexure II) for the period ended on that date and the accompanying Schedules (Annexure III) (together comprising “Reviewed Financial Statements”). These statements are the responsibility of the Bank’s Management and have been approved by the Board of Directors. Our responsibility is to issue a report on these financial statements based on our review.

2. We conducted our review in accordance with the Revised Standard on Review Engagements (SRE) 2400 “Engagements to Review Financial Statements”, issued by the Institute of Chartered Accountants of India. This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatements. A review is limited primarily to inquiries of Company personnel and analytical procedures applied to financial data and thus provide less assurance than an audit. We have not performed an audit and accordingly we do not express an audit opinion.

3. In the conduct of our review, we have relied on the review reports in respect of non-performing assets received from concurrent auditors of 92 branches. These review reports cover 76.67 percent of the advance portfolio of the Bank. Apart from these review reports, in the conduct of our review, we have also relied upon various returns received from the branches of the bank, various information and explanation made to us.

4. Attention is drawn to Schedule No. 18 - Notes on Accounts, Note no. (1), regarding accounting for certain employee benefits and Note no. (2), regarding treatment of eligible advances under Coffee Debt Relief Package 2010. Based on our review nothing has come to our attention that causes us to believe that the accompanying statement of unaudited financial results prepared in accordance with applicable accounting policies stated therein and other recognized accounting practices contain any material misstatement.

for Vishnu Daya & Co., for R. K. Kumar & Co.,

Chartered Accountants Chartered Accountants

F.R.No.: 008456S F.R.No.: 001595S

(Venkatesh Kamath S V) (B.R.ASHOK)

Partner – M. No. 202626 Partner – M. No. 023313

Place: Bangalore

Dated: 15/10/2010

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Annexure I

BALANCE SHEET AS ON 30TH SEPTEMBER 2010 Schedule As on As on

No. 30.09.2010 31.03.2010 (Rs in Crore) (Rs in Crore) CAPITAL AND LIABILITIES Capital 1 134.21 133.99 Reserves and Surplus 2 1,775.90 1,698.76 Deposits 3 25,045.31 23,730.65 Borrowings 4 917.25 691.64 Other Liabilities and Provisions 5 727.22 780.11 TOTAL 28,599.89 27,035.15 ASSETS Cash and balances with Reserve Bank of India 6 1,774.83 1,743.10 Balances with Banks and Money at Call & Short Notice 7 40.75 62.45 Investments 8 10,435.04 9,992.05 Advances 9 15,683.07 14,435.68 Fixed Assets 10 146.08 148.07 Other Assets 11 520.12 653.80 TOTAL 28,599.89 27,035.15 Contingent Liabilities 12 9,286.60 10,119.24 Bills for collection 1,244.50 1,032.24 Significant Accounting Policies 17 Notes on Account 18

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Annexure II

PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED 30TH SEPTEMBER 2010

Schedule No.

Half year ended

30.09.2010

Half year ended

30.09.2009

Year ended 31.03.2010

Rs in Crore Rs in Crore Rs in Crore I. INCOME Interest Earned 13 1,116.47 971.65 2,043.42 Other Income 14 132.27 185.94 311.26 Total 1,248.74 1,157.59 2,354.68 II. EXPENDITURE Interest Expended 15 857.92 869.69 1,707.79 Operating Expenses 16 239.71 189.59 386.05 Provisions and Contingencies 75.91 41.89 93.72 Total 1,173.54 1,101.17 2,187.56 III.PROFIT Net profit for the year 75.20 56.42 167.12 Profit brought forward 0.02 0.10 0.03

Total 75.22 56.52 167.15 IV. APPROPRIATIONS Transfer to Statutory Reserve 0.00 0.00 88.00 Transfer to Capital Reserve 0.00 0.00 0.00 Transfer to Revenue Reserve 0.00 0.00 3.00 Transfer to Special Reserve u/s 36 (i) (viii) of IT Act 0.00 0.00 6.68 Transfer to Investment Reserve Account 0.00 0.00 5.70 Transfer to Other Funds 0.00 0.00 1.00 Transfer to Proposed dividend 0.00 0.00 53.63 Transfer to Tax on proposed dividend 0.00 0.00 9.11 Balance carried over to Balance Sheet 75.22 56.52 0.02

Total 75.22 56.52 167.14

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Annexure III

SCHEDULE - 1 – CAPITAL (Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 Authorised Capital 20,00,00,000 Equity shares of (Rs. in Crore). 10/- each 200.00 200.00 Issued Capital 13,42,22,840 equity shares of (Rs. in Crore) 10 each 134.22 134.00 Subscribed Capital 13,42,15,762 Equity shares of (Rs. in Crore). 10/- each 134.22 133.99 Called up/Paid-up Capital 134.20 133.98 13,41,99,212 Equity shares of (Rs. in Crore).10/- each Add : Forfeited Shares 0.01 0.01 Total 134.21 133.99

SCHEDULE -2- RESERVES & SURPLUS I. Statutory Reserve Opening balance 1,006.00 918.00 Additions during the year 0.00 88.00 1,006.00 1,006.00 Deductions during the year 0.00 0.00 Total 1,006.00 1,006.00 II. Capital Reserve Opening balance 63.69 63.69 Additions during the year ( pursuant to sale of securities 0.00 0.00 held under HTM category) 63.69 63.69 Deductions during the year 0.00 0.00 Total 63.69 63.69

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(Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 III. Share Premium Opening balance 312.67 162.94 Additions during the year 3.46 149.73 316.13 312.67 Deductions during the year 0.00 0.00 Total 316.13 312.67 IV. Revenue and other Reserves a) Revenue Reserve Opening balance 270.00 267.00 Deductions at the beginning of the year 0.00 0.00 270.00 267.00 Additions during the year 0.00 3.00 Total 270.00 270.00 b) Special Reserve u/s 36(1)(viii) of IT Act Opening balance 30.24 23.56 Additions during the year 0.00 6.68 30.24 30.24 Withdrawn during the year 0.00 0.00 Total 30.24 30.24 c) Employee Stock Option Outstanding Opening balance 8.94 8.72 Additions during the year 1.04 3.83 9.98 12.55 Deductions during the year 2.56 3.61 Total 7.42 8.94 d) Investment Reserve Account Opening balance 7.20 1.50 Additions during the year 0.00 5.70 7.20 7.20 Deductions during the year 0.00 0.00 Total 7.20 7.20 V. Balance in Profit and Loss Account 75.22 0.02 TOTAL ( I, II, III,IV and V ) 1,775.90 1,698.76

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SCHEDULE -3 DEPOSITS (Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 A.I. Demand Deposits 1. From Banks 3.37 2.44 2. From others 2,000.19 1,704.04 2,003.56 1,706.48 II. Savings Bank Deposits 4,418.78 3,813.68 III. Term Deposits 1. From Banks 24.83 32.05 2. From others 18,598.14 18,178.44 18,622.97 18,210.49 Total : (I, II and III) 25,045.31 23,730.65 B.1. Deposits of branches in India 25,045.31 23,730.65 2. Deposits of branches outside India 0.00 0.00 Total (1+2) 25,045.31 23,730.65

SCHEDULE -4 BORROWINGS I. Borrowings in India 1. Reserve Bank of India 125.00 0.00 2. Other Banks 32.54 35.00 3. Other Institutions and Agencies 705.02 565.16 Total 862.56 600.16

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(Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 II. Borrowings outside India 54.69 91.48 Total : (I and II) 917.25 691.64 Secured borrowings included in I & II above Nil Nil

SCHEDULE - 5 OTHER LIABILITIES & PROVISIONS I. Bills Payable 175.64 198.65 II. Inter Office adjustments (Net) 0.00 3.51 III. Interest accrued 77.53 72.12 IV. Subordinated Debt for Tier II Capital 0.00 0.00 V. Deferred Tax Liability (Net) 113.48 102.93 VI. Others (Rs. in Crore) (including Provisions)* 360.57 402.90 Total 727.22 780.11 * Includes Contingent provision of Rs.61.26 crore for Standard Advances

SCHEDULE - 6 CASH & BALANCES WITH THE RBI (Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 I. Cash in hand 163.10 146.62 (including foreign currency notes) II. Balances with Reserve Bank of India 1. In Current Account 1,611.73 1,596.48 2. In Other Accounts 0.00 0.00 Total : (I and II) 1,774.83 1,743.10

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SCHEDULE - 7 BALANCES WITH BANKS AND MONEY AT CALL & SHORT NOTICE

I. IN INDIA i. Balances with Banks a) In Current Accounts 24.95 39.53 b) In other deposit accounts 1.85 19.10 26.80 58.63 ii. Money at Call & Short Notice a) With Banks 0.00 0.00 b) With other institutions 0.00 0.00 Total 0.00 58.63 II. OUTSIDE INDIA i. In Current Accounts 13.95 3.82 ii. In Other Deposit Accounts 0.00 0.00 iii. Money at Call & Short Notice 0.00 0.00 Total : (i, ii and iii) 13.95 3.82 Grand Total (I & II) 40.75 62.45

SCHEDULE - 8 INVESTMENTS (Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 I. Investments in India (Gross at cost) 10,475.68 10,021.65 Less: Provision for depreciation 40.64 29.60 Total 10,435.04 9,992.05 Break-up : 1. Government Securities 6,724.17 6,400.98 2. Other Approved Securities 4.68 4.98 3. Shares 159.76 162.27

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4. Debentures and Bonds 873.11 809.39 5. Subsidiaries and/or Joint Ventures 0.00 0.00 6. Others 2,673.32 2,614.43 Total 10,435.04 9,992.05 II. Investments outside India 0.00 0.00 Total (I+II) 10,435.04 9,992.05

SCHEDULE - 9 ADVANCES (Rs. in Crore) (Rs. in Crore) As on As on 30.09.2010 31.03.2010 A) 1. Bills Purchased & discounted 537.74 691.19 2. Cash Credits, Overdrafts and 8,176.65 7,728.29 Loans repayable on demand 3. Term Loans 6,968.68 6,016.20 Total 15,683.07 14,435.68 B) 1. Secured by Tangible Assets * 12,192.97 11,553.70 2. Secured by Bank/Government Guarantees 1,651.68 1,841.79 3. Unsecured 1,838.42 1,040.19 Total 15,683.07 14,435.68 * Includes Advances against Book Debts C) I. Advances in India 1. Priority Sectors 5,889.66 5,252.96 2. Public Sectors 1,273.38 1,228.68 3. Banks 0.16 0.15 4. Others 8,519.87 7,953.89 Total 15,683.07 14,435.68

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C) II. Advances outside India 1. Due from Banks 0.00 0.00 2. Due from others 0.00 0.00 a) Bills Purchased & Discounted 0.00 0.00 b) Syndicated Loans 0.00 0.00 c) Others 0.00 0.00 Total 0.00 0.00 GRAND TOTAL (C. I and C. II) 15,683.07 14,435.68

SCHEDULE - 10 FIXED ASSETS As on As on 30.09.2010 31.03.2010 (Rs. in Crore) (Rs. in Crore) I. Premises At cost as on 31st March of preceding year 106.03 100.38 Additions during the year 0.15 5.79 106.18 106.17 Deductions during the year 0.08 0.14 106.10 106.03 Depreciation to-date 24.57 23.10 Total 81.53 82.93 II. Other Fixed Assets (including Furniture & Fixtures) At cost as on 31st March of the preceding year 192.49 171.86 Additions during the year 9.18 26.57 201.67 198.43 Deductions during the year 0.23 5.94 201.44 192.49 Depreciation to date 137.88 128.34 Total 63.56 64.15

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III. Leased Fixed Assets Cost as on 31st March of the preceding year 15.32 20.16 Additions during the year 0.00 0.00 15.32 20.16 Deductions during the year 0.00 4.84 15.32 15.32 Depreciation to-date 6.05 6.05 9.27 9.27 Less Accumulated Lease Adjustment 8.15 8.15 1.12 1.12 Less Other Adjustments 0.13 0.13 Total 0.99 0.99 Total (I, II & III) 146.08 148.07

SCHEDULE -11 OTHER ASSETS I. Interest accrued 170.10 182.33 II. Tax paid in advance/tax deducted at source * 150.27 179.00 III. Stationery and Stamps 3.34 2.94 IV. Non-Banking Assets acquired in satisfaction of claims 1.47 1.47 V. Others 194.94 288.06 Total 520.12 653.80 * Includes Rs 4280.00 lakhs being MAT Credit Entitlement.

SCHEDULE - 12 CONTINGENT LIABILITIES I. Claims against the Bank not acknowledged as debts 28.03 28.33 II. Liability on account of outstanding Forward Exchange Contracts* 6,163.67 7,163.96 III. Guarantees given on behalf of constituents

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a) In India 1,024.34 1,030.37 b) Outside India 0.00 0.00 IV. Acceptances, Endorsements & other Obligations 724.95 673.61 V. Other items for which the bank is contingent liable 1,345.61 1,222.97 Total 9,286.60 10,119.24 * Includes derivatives

SCHEDULE - 13 INTEREST EARNED Half year ended Half year ended Year ended 30.09.2010 30.09.2009 31.03.2010 Rs in Crore Rs in Crore Rs in Crore I. Interest/discount on advances/bills 780.29 655.06 1,388.98 II. Income on Investments 326.86 315.95 633.46 III. Interest on balances with R.B.I / other Inter-Bank funds 0.38 0.49 0.58

IV. Others 8.94 0.15 20.40 Total 1,116.47 971.65 2,043.42 SCHEDULE - 14 OTHER INCOME I. Commission, Exchange & Brokerage 75.37 49.92 126.28 II. Profit on sale of Investments (net) 17.35 105.11 114.76 III. Profit on Revaluation of Investments (net) 0.00 0.00 0.00 IV. Profit on sale of Land, Buildings & Other Assets (net) 0.41 0.09 0.21

V. Profit on Exchange Transactions(net) 9.46 10.98 24.53 VI. Income earned by way of dividends etc., from Subsidiaries/ Companies and /or Joint Ventures abroad/ 0.00 0.00 0.00

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in India VII. Lease Income 0.00 0.00 0.00 VIII. Miscellaneous income 29.68 19.84 45.48 Total 132.27 185.94 311.26

SCHEDULE - 15 INTEREST EXPENDED Half year ended Half year ended Year ended 30.09.2010 30.09.2009 31.03.2010 Rs in Crore Rs in Crore Rs in Crore 1. Interest on deposits 829.78 847.05 1,661.95 2. Interest on Reserve Bank of India/Inter-Bank Borrowings 2.40 0.09 4.39

3. Others 25.74 22.55 41.45 Total 857.92 869.69 1,707.79 SCHEDULE - 16 OPERATING EXPENSES I. Payments to and provisions for employees 140.15 104.05 206.80 II. Rent, Taxes and Lighting 30.27 23.14 49.45 III. Printing and Stationery 1.80 1.18 3.99 IV. Advertisement and Publicity 1.11 1.76 3.18 V. Depreciation on Bank's property 11.01 10.65 22.23 VI. Director fees, allowances and expenses 0.24 0.25 0.57 VII. Audit fees and expenses (including branch auditors) 0.80 0.78 1.17

VIII. Law charges 0.66 0.58 1.36

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IX. Postage, telegrams, telephones etc. 4.96 4.66 7.79 X. Repairs and Maintenance 6.15 6.18 12.27 XI. Insurance 13.51 11.71 24.07 XII. Other expenditure 29.05 24.65 53.17 Total 239.71 189.59 386.05

SCHEDULE – 17 - SIGNIFICANT ACCOUNTING POLICIES

1. BASIS OF PREPARATION:

The accompanying financial statements is prepared on historical cost convention on the accrual basis of accounting, unless otherwise stated, and comply with generally accepted accounting principles, statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (RBI) from time to time, notified accounting standards by Companies (Accounting Standards) Rules, 2006 to the extent applicable and current practices prevailing in banking industry in India.

2. USE OF ESTIMATES:

The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses along with disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. The Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. The differences if any between estimate and actual will be dealt appropriately in future periods.

3. REVENUE RECOGNITION:

Income and expenditure are accounted for on accrual basis except receipt of commission, exchange, rent on safe deposit lockers all of which are accounted on cash basis. In respect of Non Performing Assets, the bank has not recognised interest. Recoveries are appropriated towards the principal, interest and charges in the order of demand. In the case of matured Term Deposits, interest is provided at the rate of interest applicable to savings bank deposit pending renewal / discharge and the balance overdue interest is accounted for at the time of renewal.

4. INVESTMENTS:

Investments are classified under the heads “Held to Maturity”, “Available for Sale” and “Held for Trading” categories and are valued in accordance with the RBI guidelines. The value of Investments stated in the Balance Sheet is net of depreciation. The excess of acquisition cost over the face value of securities under “Held to Maturity” category is amortised over the remaining period to Maturity. Provision for non-performing investments is made as per RBI guidelines.

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5. ADVANCES:

All outstanding advances are reviewed and classified under 4 categories namely

e) Standard Assets f) Sub-Standard Assets g) Doubtful Assets and h) Loss Assets

Provision for Non-performing and Standard Advances is made on the basis of asset classification and

provisioning requirement over and above the prudential norms laid down by the Reserve Bank of India. Advances shown in the Balance Sheet are net of provisions (including Floating Provision) for Non Performing Advances and unrealised interest.

6. FIXED ASSETS

Premises and other fixed assets are shown at cost as reduced by depreciation written off to date. Software is capitalised along with computer and included under Other Fixed Assets.

7. DEPRECIATION:

Depreciation on fixed assets is provided on written down value method as per the rates and in the manner specified under Schedule –XIV of the Companies Act 1956, except in respect of computers (including software) where depreciation is provided at a flat rate of 33.33 % as per RBI guidelines which is more than the amount required under Schedule–XIV of the Companies Act 1956. Depreciation on assets is purchased is computed for the entire month in which the asset is capitalised, and on assets sold/scrapped, up to the end of the month in which it is sold/scrapped. Depreciation of leased assets is calculated so as to spread the depreciable amount over the primary lease period as per RBI guidelines. Carrying amount of assets is reviewed at each balance sheet date for indication of impairment if any. An impairment loss is recognized wherever the carrying amount of an asset exceeds its recoverable value.

8. FOREIGN CURRENCY TRANSACTIONS:

a) Foreign currency transactions of FCNR/EEFC/RFC accounts are re-valued at the closing spot rates on the Balance Sheet date as published by Foreign Exchange Dealers Association of India (FEDAI).

b) Transactions other than FCNR/EEFC/RFC accounts: -

Foreign currency balances both under Assets and Liabilities and outstanding Forward Exchange Contracts and Swaps are evaluated at the published by FEDAI as on the Balance Sheet Date. The resultant profit/loss is shown as Income/Loss.

The Gain or Loss on a trading forward exchange contract is computed by multiplying the forward rate available on the reporting date for the remaining maturity period of the contract, and the difference between that amount and the contracted forward amount is recognised as profit or loss for the period.

Revenue items are translated at the exchange rates ruling on the dates of transactions.

Contingent liabilities on account of acceptances, endorsements and other obligations including guarantees and letters of credit issued in foreign currencies are valued at the closing spot rates published by FEDAI as on the Balance Sheet Date.

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9. STAFF BENEFITS:

Retirement benefits like Gratuity, Pension, Leave encashment, leave fair concession etc., are made on estimated basis.

10. INCOME TAX :

The Provision for tax comprises of current tax and deferred tax.

11. SHARE ISSUE EXPENSES:

Share issue expenses are adjusted from share premium account.

12. EMPLOYEE STOCK OPTION:

Employee Stock Option (ESOP) is valued by using the “Intrinsic Value Method” to account for compensation cost of stock options granted to employees of the Bank. Intrinsic value is the amount by which the quoted market price of the underlying shares exceeds the exercise price of the options.

13. SEGMENT REPORTING:

(ii) The Business Segment is the Primary Reporting Segment and Geographical Segment is Secondary Segment, in accordance with the RBI guidelines and in compliance with the Accounting Standard 17.

(iii) The Business Segment is classified into (a) Treasury (b) Corporate and Wholesale Banking, (c) Retail Banking and (d) Other Banking Operations.

(iv) The Geographical Segment consists only of the Domestic Segment, as the Bank does not have any foreign branches.

14. NET PROFIT

The net profit disclosed in the Profit & Loss Account is after making necessary provisions for taxes, NPA, Standard Advances, and Investments without recognising unrealised interest on Non-Performing Assets as per RBI guidelines.

SCHEDULE – 18 – NOTES ON ACCOUNTS:

1. The Working results for the period ended September 30, 2010 have been arrived at after considering

provision for loan losses, depreciation on investments and fixed assets on actual basis. The bank has

made provisions for various employee benefits like pension, gratuity, etc on an estimated basis. The

impact of additional liability on (i) pension benefits arising on account of the 9th Bipartite settlement

and (ii) the amendment made to the Payment of Gratuity Act, 1972 has been estimated and amortized

over a period of 5 years on pro-rata basis. Provision for Income-tax and other contingencies are on an

estimated basis subject to adjustment if any.

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2. The Bank has implemented the decision taken at the meeting of State Level Bankers’ Committee

(SLBC), Karnataka held on 29.09.2010 to restructure eligible advances under Coffee Debt Relief

Package 2010 and treat them as Standard assets pending receipt of clarifications /directions from

Reserve Bank of India in this regard.

3. Corresponding previous period figures have been regrouped / rearranged wherever necessary.

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STOCK MARKET DATA FOR EQUITY SHARES OF OUR BANK

Our Bank’s Equity Shares are listed on the BSE and the NSE. As our Bank’s Equity Shares are actively traded on the BSE and NSE, stock market data has been given separately for BSE and NSE only. The monthly high and low price and the volume of shares of our Bank traded at the BSE and NSE during the past six months are stated below: BSE

Month High (Rs.) Date of High Low (Rs.) Date of Low

April, 2010 139.50 April 12, 2010 125.85 April 1, 2010 May, 2010 170.60 May 31, 2010 129.45 May 7, 2010 June, 2010 185.50 June 24, 2010 155.15 June 9, 2010 July, 2010 181.85 July 6, 2010 169.00 July 30, 2010 August, 2010 178.60 August 19, 2010 168.10 August 30, 2010 September, 2010 182.45 September 29, 2010 170.75 September 21, 2010 (Source: www.bseindia.com) NSE

Month High (Rs.) Date of High Low (Rs.) Date of Low

April, 2010 139.25 April 12, 2010 125.65 April 1, 2010 May, 2010 171.00 May 31, 2010 129.90 May 7, 2010 June, 2010 185.25 June 24, 2010 155.50 June 9, 2010 July, 2010 181.85 July 6, 2010 168.85 July 30, 2010 August, 2010 178.50 August 19, 2010 168.00 August 30, 2010 September, 2010 182.95 September 29, 2010 170.30 September 21, 2010 (Source: www.nseindia.com) The high and low closing prices recorded on the BSE and NSE for the preceding three years are stated below. BSE

Fiscal Year High (Rs.) Date of High Low (Rs.) Date of Low 2010 168.85 October 20, 2009 68.35 April 1, 2009 2009 212.25 May 5, 2008 55.90 March 9, 2009 2008 276.00 February 5, 2008 163.15 April 23, 2007

(Source: www.bseindia.com) NSE

Fiscal Year High (Rs.) Date of High Low (Rs.) Date of Lows 2010 169.20 October 20, 2009 67.95 April 1, 2009 2009 213.00 May 5, 2008 56.20 March 9, 2009 2008 276.25 February 5, 2008 163.60 April 23, 2007

(Source: www.nseindia.com) The closing price of our Equity Shares as on August 2, 2010 (the trading day immediately following the day on which the Board resolution was passed approving the Rights Issue) was Rs. 169.95 on the BSE and Rs. 170.00 on the NSE. Week end prices of Equity Shares of our Bank for the last four weeks on BSE and NSE along with the highest and lowest price are as below:

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BSE NSE

Week ended on Closing

Price Highest

Price Lowest Price

Closing Price

Highest Price

Lowest Price

October 15, 2010 182.40 191.35 182.40 182.45 191.10 182.45 October 8, 2010 185.80 185.80 180.50 186.20 186.20 180.50 October 1, 2010 183.65 183.65 174.05 184.00 184.00 174.10 September 24, 2010 179.10 179.10 170.75 178.95 178.95 170.30

Note: High/Low prices based on closing quotations of BSE & NSE (Source: www.bseindia.com and www.nseindia.com) The market capitalization of our Equity Shares as on September 30, 2010 was Rs. 2,443.77 crores on the BSE based on a market price of Rs. 182.1/- and the market capitalization of our Equity Shares on the NSE was Rs. 2,450.48 crores based on a market price of Rs. 182.60/- The Issue price of Rs. [•]/- has been arrived at in consultation between our Bank and the Lead Manager.

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LEGAL AND OTHER INFORMATION

Except as described below, there are no outstanding litigations, suits, civil or criminal prosecutions, proceedings before any judicial, quasi-judicial, arbitral or administrative tribunals, including pending proceedings for violation of statutory regulations or, alleging criminal or economic offences or tax liabilities or any other offences (including past cases where penalties may or may not have been awarded and irrespective of whether they are specified under paragraph (i) of Part 1 of Schedule XIII of the Companies Act) against our Bank and our Directors that would have a material adverse effect on our business. Further there are no defaults, non-payments or overdue of statutory dues, institutional/bank dues and dues payable to holders of debentures, bonds and arrears of cumulative preference shares that would have a material adverse effect on our business. Further, none of our directors are on the RBI’s list of willful defaulters. Summary of total 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 tax claims 31 213.33 2. Suits involving our Bank which are not acknowledged as debts. 73 31.26 3. Criminal proceedings against our Bank 10 Not quantifiable 4. Labour cases against our Bank 25 0.016

Summary of total 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

In view of our Bank, all outstanding civil, labour, consumer and tax related litigations and disputes of value more than Rs. 18.32 crores are material to our Bank. As on September 30, 2010, our Bank had the following litigation, suits, and cases pending before various courts and authorities. In terms of the Schedule VIII Part E (XII), the following legal proceedings have been disclosed: I. Litigation involving our Bank as on September 30, 2010 A. Outstanding proceedings initiated against our Bank (i) Criminal Proceedings Sr. No.

Forum Filed by Brief Particulars Quantum (Rs. in Crore

approx.)

Current Status

1. Judicial Magistrate, First Class, Belur C.C No. 441/2002

Mr. V.D. Souza (“Complainant”)

The Complainant had filed a complaint under Sections 409, 418 and 420 of the IPC with the Judicial Magistrate alleging that proceeds of a cheque that he had deposited in his account with the Bikkodu branch of the Bank were not credited to his account. The Judicial Magistrate, by an order dated July 20, 2002, issued summons to the Bank. The Bank’s Bikkodu branch filed a

NA The matter is pending before the Court of Judicial Magistrate.

65

Sr. No.

Forum Filed by Brief Particulars Quantum (Rs. in Crore

approx.)

Current Status

Criminal Revision Petition No 3612/2002 in the Karnataka High Court for quashing the proceedings initiated by the Complainant. The High Court, by an order dated January 22, 2008, remanded the matter back to the Judicial Magistrate, asking him to reconsider the matter and pass a fresh order.

2. Additional Judicial Magistrate, First Class, Sagar C.C No. 229/2000

Mr. Tukaram Anantha Shet (“Complainant”)

The Complainant deposited his property deeds as co-obligation towards credit facilities obtained by a trading firm. Due to irregularities in the account, the dues were paid by the Manager, the account closed, and the loan documents assigned to the Manager, following which the Complainant filed a complaint under Sections 406 and 420, read with Section 34 of the IPC alleging that the assignment of the loan was fraudulent. The Bank filed a revision petition before the Karnataka High Court to quash the order of the Judicial Magistrate taking cognizance of the matter in this matter which was dismissed. Against this order, a Special Leave petition was filed before the Supreme Court on August 20, 2009 (SLP(Crl) No 9204/2009).

N.A. The Supreme Court has stayed further proceedings in the matter

3. Railway Mobile Court, Andheri, Mumbai C.C. No. 2064/S/2000

Mr. Vishnu Mordani (“Complainant”)

In the year 1995, a portion of the office premises in Andheri, Mumbai measuring 288 sq. ft. used as a record room by the Bank and forming a portion of Gala No.101 was sold to the Complainant under a sale agreement (“Sale Agreement”). In the Sale Agreement, the portion of premises sold was referred to as ‘Record Room’ and the Gala Number of which it formed a part was not mentioned. The Manish Nagar Shopping Centre Premises Cooperative Society Limited which was approached by the Complainant for membership of the Society has denied the same on the ground that the premises does not have an independent Gala

N.A. The case is pending before the Railway Mobile Court

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Sr. No.

Forum Filed by Brief Particulars Quantum (Rs. in Crore

approx.)

Current Status

Number. The Complainant filed a criminal complaint under Sections 405, 406, 409 and 420 of the IPC against the Bank and its officials before the Railway Mobile Court. The Bank has filed discharge application/s before the Railway Mobile Court.

4. Judicial Magistrate, First Class, Udupi C.C. 34/2004

Chitrakala Investment Trade & Business & Finance Ltd. (“Complainant”)

The Bank’s Udupi branch had granted credit facilities to Commercial Corporation of India Ltd. on various securities, including a corporate guarantee of the Complainant. Upon breach of repayment terms, the Bank realized the security and liquidated the shares of the Complainant pursuant to which the Complainant filed a complaint under Sections 406, 409, 306, 420 and 34 of the IPC alleging breach of trust and cheating against the Bank. The Bank filed a Writ Petition No. 2024/2005 before the Karnataka High Court to quash the complaint which was dismissed by the High Court. 1590/2007. The Bank has filed a Writ Appeal No 1590/2007 before the High Court and the High Court has stayed proceedings in the matter.

N.A. The Karnataka High Court has stayed the proceedings and the matter is currently pending.

5. Judicial Magistrate First Class, Kalyan C.C No 60/2006

Mr. Jaichand Keswani (“Complainant”)

The Complainant mortgaged his property as co-obligant to credit facilities granted by the Bank to Mr. K. Sethuraman. Mr. Sethuraman defaulted in repayment of his overdraft facilities and had absconded, which was brought to the notice of the Bank by the Complainant, who requested the Bank to thus cancel his guarantee. Upon refusal of the Bank to do so, the complainant filed a complaint under Sections 193, 420, 421, 426, 468 and 477A of the IPC against the Bank, the Branch Manager and Mr. Sethuraman. The Bank has filed a discharge

N.A. Matter pending for hearing before the Judicial Magistrate for hearing of discharge application.

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Sr. No.

Forum Filed by Brief Particulars Quantum (Rs. in Crore

approx.)

Current Status

application before the Court of Judicial Magistrate.

6. Additional Chief Judicial Magistrate, Dharwad P.C.R. No. 334/2006; WP 241/2008

Jagdish (“Complainant”)

The Bank had advanced credit facilities to the Complainant’s firm against properties as security. Upon default by the Complainant’s company, the Bank initiated recovery proceedings under the SARFAESI Act upon which the complainants filed a complaint under Sections 120A, 191, 192, 420, 425, 463 and 468 of the IPC alleging cheating and fraud in the recovery proceedings initiated by the Bank. The Bank has filed a Writ Petition before the Karnataka High Court to quash the complaint filed.

N.A. The proceedings have been stayed by the High Court of Karnataka and the matter is currently pending.

7. Additional Chief Metropolitan Magistrate, Bangalore C.C. No. 7474/2009

P.D. Devendranath (“Complainant”)

The Complainant filed a complaint under Sections 420 and 34 of the IPC alleging that an employee and a Manager of the Bank had perpetrated fraud and misappropriated his deposits in the Bangalore (Malleshawaram) branch of the Bank. The Magistrate issued process against two of the accused, viz. Mr. Vikram Rajwade (dismissed since then) and Mr. Krishna Bhat (Manager, Bangalore- Malleshawaram Branch) (“Order”). Mr. Krishna Bhat filed a petition to set aside the Order in the Karnataka High Court. The High Court has stayed the proceedings in the matter.

N.A. The Bank has taken a stand that there is no fraud and the deposits were adjusted to the deposit loans of the Complainant. The matter is pending before the Magistrate’s Court, awaiting the order of the Karnataka High Court.

8. IInd Additional Chief Judicial Magistrate, Mangalore C.C. No No. 215/2005

Mrs. Gracy Emilda Mascarenhas (“Complainant”)

The Complainant filed a complaint under Sections 406, 386, 506(ii) 418, 420(B) R/w Sec 34 of IPC alleging that Sri. Ravindra S. Baglodi, (then Branch Manager) has conspired, connived and abetted in creating fake document and fabricated records with sole intention of causing wrongful loss to her.

N.A. The case is pending before the court.

9. Judicial Magistrate First Class, Kalyan. C.C No

Mr. Om Prakash Sarjuprasad Mishra (“Complainant”)

The Complainant filed a complaint under Sections 196, 198, 211, 406, 500 read with Section 34 of the IPC before the Court of Judicial Magistrate, kalian alleging that the

N.A The matter is currently pending.

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Sr. No.

Forum Filed by Brief Particulars Quantum (Rs. in Crore

approx.)

Current Status

413/2004 Bank filed a false Criminal Complaint No 271/2004 against him to defame him. It was further alleged that the Bank flouted all RBI rules and regulations before giving credit facility to him and alleged that he did not give consent/NOC to mortgage his property.

10. Judicial Magistrate, Patna

C.C NO

1660/2010

Dr. Nirmal Prakash narain (“Complainant”)

The Complainant has filed a Criminal Complaint under Sections 420, 406, 467, 468, 471 and 120 B of IPC against the Bank before the Court of Judicial Magistrate, Patna. The Complainant has alleged that an account payee demand draft dated May 29, 2009 purchased by him for Rs. 6,53,785 at Union Bank of India, Patna in favour of Registrar, RGUHS, (Rajeev Gandhi University of Health Science) Bangalore, was fraudulently credited in the account of Director, Administration, Patel Group of Institution on July 9, 2009 at the Bank’s Bangalore - Bellandur branch and its proceeds were withdrawn. The Complainant further alleged that the Bank authorities, connivance with Shri. S.N. Ramdas, an employee of Patel group of Institutions misappropriated this amount by playing fraud upon him and they did the same for their wrongful gain and causing huge loss to the Complainant. The Bank filed a petition under Section 205 of Cr.P.C on August 7, 2010 for dispensing of the requirement of a personal appearance. The same was allowed on September 17, 2010. The Bank is currently taking steps to file the application under Section 492 of the Cr.P.C to quash the application.

N.A The case is currently pending before the court of judicial magistrate.

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B. Outstanding proceedings initiated by our Bank (i) Civil Proceedings Sr. No.

Forum Filed Against Brief Particulars Quantum (Rs. in Crores approx.)

Current Status

1. DRT, Coimbatore O.A. 38/2002 dated May 2, 2002 transferred to DRT, Madurai due to change of jurisdiction

Karnataka Bank Limited and Lakshmi Vilas bank (“LVB”) (now substituted by Kotak Mahindra bank) v. LSP Agro Limited

LSP Agro Ltd (“Agro”), a public Limited Company engaged in manufacture of vanaspathi, bakery shortening, refining and trading of edible oil applied for a loan from our Bank. Consortium consisting of our Bank and LVB, wherein LVB was the lead bank, sanctioned working capital loans under consortium arrangement on parripassu charge over the securities. IDBI bank had also sanctioned term loans to Agro for purchase of machineries. The Consortium had second charge over the securities of Agro. Initially, Agro faced problem from labour and the Pollution Control Board. Thereafter, Agro expanded its unit by installing technically advanced machineries. Agro incurred heavy losses in business and became a NPA on June 4, 2001. On default of payment by Agro, our Bank and LVB filed joint application before DRT, Coimbatore for recovery of dues which got transferred to DRT, Coimbatore due change of territorial jurisdiction.

21.73 The matter is currently pending before the DRT, Madurai

2. DRT-II, Mumbai O.A 35/2004

Karnataka Bank Limited v. Roofit Industries Ltd.

Roofit Industries Limited (“RIL”), a Public Limited Company engaged in manufacture of AC sheets, pipes and other building materials, availed credit from consortium of Banks. The Consortium consisted of our Bank with eleven other banks.

44.83 The DRT, Mumbai has stayed further proceedings on account of the application of RIL pending before the Board of Industrial and Financial Reconstruction (“BIFR”).

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On account of losses incurred by RIL, it closed down the unit for which the working capital loan was availed. On default of payment by RIL, the Consortium filed an application before the DRT, Mumbai on February 6, 2004 for recovery of dues.

3. DRT-III, Mumbai O.A 163/2008

Karnataka Bank Limited v. Brown Paper Technologies Limited

Brown Paper Technologies Limited (“BPTL”), a Public Limited Company, engaged in manufacturing of specialty paper, availed working capital loan from the Consortium of Banks led by our Bank. On account of hike in the cost of raw materials, BPTL suffered losses and applied to BIFR for declaring it a sick company. The BIFR, vide its order dated July 17, 2006, declared BPTL a sick company. The rehabilitation proposal submitted by BPTL was rejected by the Consortium. Our Bank filed an application before the DRT-III, Mumbai for recovery of dues on August 14, 2008.

4238.10 The application is currently pending before the DRT-III. Mumbai. State Industrial and Investment Corporation of Maharashtra (“SICOM”), on behalf of all the consortium members, has issued demand notice dated February 13, 2008 to BPTL under the SARFAESI Act.

4. DRT-I, Mumbai O.A 36/2008

Karnataka Bank Limited v. Ventron Chemicals

Ventron Chemicals (“Ventron”), a Public Limited Company, engaged in manufacturing of specialty chemicals used mainly in textile industry availed working capital loan from our Bank. On account of recession in the textile industry, the company was not able to recover its receivables in time and defaulted in payment of the loan. Our Bank has filed an application before the DRT-I on June 6, 2008 for recovery of dues.

36.24 The DRT, Mumbai allowed the application and issued a recovery certificate on December 16, 2009. Recovery proceeding is currently pending.

5. DRT-II, Mumbai Allotment No: 401/2010) filed on August 16, 2010 (O.A to be

Karnataka Bank Limited v. Kalsaria Diamonds Private Limited

Bank of India, on behalf of the Consortium Banks, filed a joint application before the DRT-II, Mumbai against Kalsaria Diamonds Private Limited (“KDPL”).

60.97

The matter is pending before the DRT-II, Mumbai.

The recovery action initiated under the SARFAESI Act is under process.

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received) KDPL, a private limited company, availed credit facilities in the Mumbai overseas branch of our Bank and defaulted in payment, following which our Bank along with the Consortium members, filed an application for recovery of such dues. Proceedings under the SARFAESI Act 2002 have been initiated by the Consortium lead bank on behalf of the consortium members vide demand notice dated March 12, 2010 which is currently pending for obtaining orders/permission under Section 14 of the SARFAESI Act by the DC/CMM Court. KDPL has filed a counterclaim in the matter.

C. Other Litigations 1. As on the date September 30, 2010, there are 191 civil cases and 65 consumer complaints pending

against our Bank. The total claim involved in these matters is Rs. 4.52 Crore

2. As of September 30, 2010, the Bank has filed 4304 cases for recovery of Book Balance amounting to Rs. 223.53 Crore

3. As on September 30, 2010, there are 25 cases involving labour, employment and industrial disputes that are currently pending in various forums. The total quantifiable amount is 0.016 Crores.

4. There are 2 cases involving transfer of shares where the bank has been made a party and has been asked not to transfer shares involved in such disputes

D. Securities Related Cases Our Bank was granted registration as a Banker to an Issue on 23.1.1995, for a period of three years. On expiry of the said registration, our Bank applied for renewal of the same. However, from the particulars submitted for the purpose, the Securities and Exchange Board of India (the “SEBI”) noticed that the Appellant had failed to comply with the requirements of regulation 14 of the SEBI (Banker to an Issue) Regulations, 1994 and referred the matter to the Adjudicating Officer for inquiry and adjudication vide its order dated March 31, 1998. The Adjudicating Officer vide his letter dated May 21, 1998 asked our Bank to show cause as to why action should not be taken against it by way of imposing penalty in accordance with section 15B and section 15I of the Act, for contravention of the said regulation 14. Our Bank filed a written reply thereto and also made oral submissions before the Adjudicating Officer denying the charges. However, the Adjudication Officer after enquiry, came to the conclusion that our Bank was guilty of the charge and imposed a monetary penalty of Rs. 25,000/- vide his order dated November 9, 1998. In terms of Rule 9, our Bank was required to deposit the amount of penalty, as a precondition for entertaining the appeal. Our Bank challenged Adjudication Officer’s order before SAT which vide its order dated April 26, 1999 held that our Bank had complied with the requirements of regulation 14(1) and 14(2) while acting as Banker to the public issues and hence set aside the Adjudication Officer’s order imposing penalty.

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E. Contingent Liabilities The contingent liabilities not provided for as on September 30, 2010 (as disclosed in our Bank’s restated standalone financial statements) are as set out below: Contingent Liabilities As on September 30, 2010

(Rs. in Crore) Claims against the Bank not acknowledged as debts 28.03 Liability on account of outstanding Forward Exchange Contacts* 6,163.67 Guarantees given on behalf of constituents a) In India 1024.34 b) Outside India 0 Acceptances, Endorsements & other Obligations 724.95 Other items for which the bank is contingently liable 1345.61 Total 9,286.60 * Includes derivatives F. Working results

For Information relating to our Bank on sales, gross profit etc as required by the Ministry of Finance Circular No F2/5/SE/76 dated February 5, 1977 read with amendments of even number dated March 8, 1977 please refer to “Reviewed Financial Statements for Six months ended September 30, 2010” under chapter titled “Financial Statements” starting on page 42 of this Draft Letter of Offer

G. In the opinion of the Directors of our Bank, there has not arisen any circumstances since the date of the last financial statements as disclosed in this Draft Letter of Offer which will materially and adversely affect or is likely to affect the trading or profitability of our Bank, or the value of its assets, or our ability to pay our liabilities within the next twelve months.

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LICENSES AND APPROVALS

On the basis of the existing approvals, our Bank may undertake this Issue and our Bank's current business activities and no further major approvals from any government authority/RBI are required to continue these activities. Further, there is no new line of activity/project. It must be distinctly understood that, in granting these licences, the Government and/or the RBI does not take any responsibility for our Bank's financial soundness or for the correctness of any of the statements made or opinions expressed in this behalf. Licenses applied and pending approval for existing business and expansion plans of our Bank Our Bank has submitted an application bearing No HO:DEV:BEP:OR No. 1210/2010-11 dated August 11, 2010 to the Chief General Manager, Department of Banking Operations and Development, Reserve Bank of India, to obtain a license for opening of 35 new branches in terms of Section 23 of the Banking Regulation Act, 1949. The said application is currently pending.

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STATUTORY AND OTHER INFORMATION

Authority for the Issue

Pursuant to the resolution passed by the Board of Directors of our Bank under Section 81(1) of the Companies Act at the meeting held on July 30, 2010 and the members of our Bank at the Extra-ordianry General Meeting held on September 9, 2010, it has been decided to make the following offer to the Eligible Equity Shareholders of our Bank, with a right to renounce. Prohibition by SEBI

Neither our Bank, nor its Directors or companies with which our Bank’s Directors are associated with as directors or promoters, have been prohibited from accessing or operating in the capital markets or restrained from buying, selling or dealing in securities under any order or direction passed by SEBI. Further neither our Bank, nor its Directors have been declared as willful defaulters by RBI or any other governmental authority and there have been no violations of securities laws committed by them in the past or no such proceedings are pending against them for violation of securities laws. Securities Related Business

Given below are the details regarding our Directors/ Group/ Associate company/ entity of our Bank, and/ or any company/ entity with which any of the above is associated as promoter/ director/ partner/ proprietor that is/ was associated with securities related business and registered with SEBI:

1. Name of our Director Mr. R.V. Shastri 2. Name of the Entity Religare Trustee Company Limited 3. a. Previously associated as Independent director b. Currently Associated as Independent director 4. Registration No. of companies which are / were registered

with SEBI

Religare Mutual Fund – MF/052/06/01 dated July 24, 2006 under the SEBI (Mutual Funds) Regulations, 1996

5. If registration has expired, reasons for non renewal Not applicable 6. Details of any enquiry/ investigation conducted by SEBI at

any time Not applicable

7. Penalty imposed by SEBI (Penalty includes deficiency / warning letter, adjudication proceedings, suspension / cancellation / prohibition orders)

In case of tv commercial of Religare PSU Equity Fund, an open ended equity scheme, SEBI issued a show cause notice dated November 13, 2009 to Religare Mutual Fund, Religare Asset Management Company Ld. (Religare AMC) and CEO of Religare AMC stating that the display and voice over for standard warning was less than 5 seconds and was unintelligible. Religare AMC filed its responses with relevant supporting documents stating that display and voice over for standard warning in the TVC was 5 seconds and intelligible. SEBI granted personal hearing before the Whole Time Member, SEBI. After considering the submission made by Religare AMC, Whole Time Member, SEBI vide its order dated February 9, 2010 disposed of the proceeding initiated vide the show cause notice dated November 13,

75

2009 with a direction to Religare Mutual Fund, Religare AMC and CEO of Religare AMC to abide strictly by the stipulations on advertisement by mutual funds, issued by SEBI from time to time, both in letter and spirit.

8. Outstanding fees payable by SEBI by these persons/ entities, if any

Not applicable

1. Name of our Director Mr. U. R. Bhat 2. Name of the Entity Axis Asset Management Company

Limited (Axis AMC) 3. a. Previously associated as Not Applicable

b. Currently Associated as Independent Director 4. Registration No. of companies which are / were registered

with SEBI

SEBI vide letter no. IMD/NS/175723/2009 dated September 4, 2009 has granted approval to Axis AMC to act as the Asset Management Company for Axis Mutual Fund. Axis Mutual Fund is a registered intermediary with registration no. MF/061/09/02 dated September 4. Further, SEBI vide letter no. IMD/DOF 1/JN/189481/2010 dated January 4, 2010 has granted certificate of registration to Axis AMC to act as Portfolio Manager under SEBI (Portfolio Managers) Regulations 1993. PMS Registration no. INP000003534 dated January 4, 2010.

5. If registration has expired, reasons for non renewal Not Applicable 6. Details of any enquiry/ investigation conducted by SEBI at

any time No enquiry/investigation conducted by SEBI at any time

7. Penalty imposed by SEBI (Penalty includes deficiency / warning letter, adjudication proceedings, suspension / cancellation / prohibition orders)

No penalty imposed by SEBI

8. Outstanding fees payable by SEBI by these persons/ entities, if any

Nil

1. Name of our Director Mr. U. R. Bhat 2. Name of the Entity Edelweiss Asset Management

Limited 3. a. Previously associated as --

b. Currently Associated as Independent Director 4. Registration No. of companies which are / were registered

with SEBI

Registration no. of Edelweiss Mutual Fund: MF/057/08/02 (Edelweiss Asset Management Limited is the asset management company for Edelweiss Mutual Fund)

5. If registration has expired, reasons for non renewal N.A. 6. Details of any enquiry/ investigation conducted by SEBI at

any time Nil

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7. Penalty imposed by SEBI (Penalty includes deficiency / warning letter, adjudication proceedings, suspension / cancellation / prohibition orders)

Nil

8. Outstanding fees payable by SEBI by these persons/ entities, if any

Nil

1. Name of our Director Mr. T.S. Vishwanath 2. Name of the Entity LIC Mutual Fund Asset Management

Company Limited 3. a. Previously associated as NA

b. Currently Associated as Director 4. Registration No. of companies which are / were registered

with SEBI

MF/012/94/5 dated 09/05/1994

5. If registration has expired, reasons for non renewal NA 6. Details of any enquiry/ investigation conducted by SEBI at

any time NIL

7. Penalty imposed by SEBI (Penalty includes deficiency / warning letter, adjudication proceedings, suspension / cancellation / prohibition orders)

Penalty of Rs.1 lakh each was imposed on LIC Mutual Fund and LIC MF AMC Limited (earlier known as Jeevan Bima Sahayog AMC Ltd) for violation of investment norms as per SEBI (Mutual Funds) Regulations, 1996 vide adjudication order dated 31/12/2002 and the same stands paid by both LIC Mutual Fund and Jeevan Beema Sahayog AMC Limited.

8. Outstanding fees payable by SEBI by these persons/ entities, if any

NIL

Except as indicated above, there are no other entities related to Directors or Associate company/ entity of our Bank, and/ or any company/ entity with which any of the above is associated as promoter/ director/ partner/ proprietor that is/ was associated with securities related business and registered with SEBI. Eligibility for the Issue Our Bank is an existing listed company registered under the Companies Act whose Equity Shares are listed on BSE and NSE. It is eligible to offer this issue in terms of Chapter IV of the SEBI ICDR Regulations. Our Bank is eligible to make disclosures in the Draft Letter of Offer as per Part E of Schedule VIII of the SEBI ICDR Regulations as it is in compliance with the following: (a) our Bank has been filing periodic reports, statements and information in compliance with the listing

agreement for the last three years immediately preceding the date of filing this Draft Letter of Offer with the Board;

(b) the reports, statements and information referred to in sub-clause (a) above are available on the website of any recognised stock exchange with nationwide trading terminals or on a common e-filing platform specified by the Board;

(c) our Bank has investor grievance-handling mechanism which includes meeting of the Shareholders’ or Investors’ Grievance Committee at frequent intervals, appropriate delegation of power by the Board of Directors as regards share transfer and clearly laid down systems and procedures for timely and satisfactory redressal of investor grievances.

DISCLAIMER CLAUSE OF SEBI AS REQUIRED, A COPY OF THE DRAFT LETTER OF OFFER HAS BEEN SUBMITTED TO SEBI. IT IS TO BE DISTINCTLY UNDERSTOOD THAT THE SUBMISSION OF THE DRAFT LETTER OF OFFER TO SEBI SHOULD NOT, IN ANY WAY BE DEEMED / CONSTRUED THAT THE SAME

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HAS BEEN CLEARED OR APPROVED BY SEBI. SEBI DOES NOT TAKE ANY RESPONSIBILITY EITHER FOR THE FINANCIAL SOUNDNESS OF ANY SCHEME OR THE PROJECT FOR WHICH THE ISSUE IS PROPOSED TO BE MADE, OR FOR THE CORRECTNESS OF THE STATEMENTS MADE OR OPINIONS EXPRESSED IN THIS DRAFT LETTER OF OFFER. THE LEAD MANAGER, EDELWEISS CAPITAL LIMITED HAVE CERTIFIED THAT THE DISCLOSURES MADE IN THE DRAFT LETTER OF OFFER ARE GENERALLY ADEQUATE AND ARE IN CONFORMITY WITH SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009 IN FORCE FOR THE TIME BEING. THIS REQUIREMENT IS TO FACILITATE INVESTORS TO TAKE AN INFORMED DECISION FOR MAKING INVESTMENT IN THE PROPOSED ISSUE. IT SHOULD ALSO BE CLEARLY UNDERSTOOD THAT WHILE THE ISSUER COMPANY IS PRIMARILY RESPONSIBLE FOR THE CORRECTNESS, ADEQUACY AND DISCLOSURE OF ALL RELEVANT INFORMATION IN THE DRAFT LETTER OF OFFER, THE LEAD MANAGER IS EXPECTED TO EXERCISE DUE DILIGENCE TO ENSURE THAT THE BANK DISCHARGES ITS RESPONSIBILITY ADEQUATELY IN THIS BEHALF AND TOWARDS THIS PURPOSE THE LEAD MANAGER, EDELWEISS CAPITAL LIMITED WILL FURNISH TO SEBI A DUE DILIGENCE CERTIFICATE DATED OCTOBER 15, 2010 WHICH WILL READ AS FOLLOWS: 1. WE HAVE EXAMINED VARIOUS DOCUMENTS INCLUDING THOSE RELATING TO

LITIGATION LIKE COMMERCIAL DISPUTES, PATENT DISPUTES, DISPUTES WITH COLLABORATORS, ETC. AND OTHER MATERIAL IN CONNECTION WITH THE FINALISATION OF THIS DRAFT LETTER OF OFFER PERTAINING TO THE RIGHTS ISSUE;

2. ON THE BASIS OF SUCH EXAMINATION AND THE DISCUSSIONS WITH THE BANK, THE DIRECTORS AND OTHER OFFICERS, OTHER AGENCIES, AND INDEPENDENT VERIFICATION OF THE STATEMENTS CONCERNING THE OBJECTS OF THE ISSUE, PRICE JUSTIFICATION AND THE CONTENTS OF THE DOCUMENTS AND OTHER PAPERS FURNISHED BY THE BANK, WE CONFIRM THAT:

(a) THE DRAFT LETTER OF OFFER FILED WITH THE BOARD IS IN CONFORMITY WITH THE DOCUMENTS, MATERIALS AND PAPERS RELEVANT TO THE RIGHTS ISSUE;

(b) ALL THE LEGAL REQUIREMENTS RELATING TO THE RIGHTS ISSUE AS ALSO THE REGULATIONS GUIDELINES, INSTRUCTIONS, ETC. FRAMED/ISSUED BY THE BOARD, THE CENTRAL GOVERNMENT AND ANY OTHER COMPETENT AUTHORITY IN THIS BEHALF HAVE BEEN DULY COMPLIED WITH; AND

(c) THE DISCLOSURES MADE IN THE DRAFT LETTER OF OFFER ARE TRUE, FAIR AND ADEQUATE TO ENABLE THE INVESTORS TO MAKE A WELL INFORMED DECISION AS TO THE INVESTMENT IN THE PROPOSED RIGHTS ISSUE AND SUCH DISCLOSURES ARE IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT, 1956, THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009 AND OTHER APPLICABLE LEGAL REQUIREMENTS.

3. WE CONFIRM THAT BESIDES OURSELVES, ALL THE INTERMEDIARIES NAMED IN THE DRAFT LETTER OF OFFER ARE REGISTERED WITH THE BOARD AND THAT TILL DATE SUCH REGISTRATION IS VALID.

4. WE HAVE SATISFIED OURSELVES ABOUT THE CAPABILITY OF THE UNDERWRITERS TO FULFIL THEIR UNDERWRITING COMMITMENTS – NOT APPLICABLE

5. WE CERTIFY THAT WRITTEN CONSENT FROM SHAREHOLDERS HAS BEEN OBTAINED FOR INCLUSION OF THEIR SPECIFIED SECURITIES AS PART OF PROMOTERS’ CONTRIBUTION SUBJECT TO LOCK-IN AND THE SPECIFIED SECURITIES PROPOSED TO FORM PART OF PROMOTERS’ CONTRIBUTION SUBJECT TO LOCK-IN SHALL NOT BE DISPOSED / SOLD / TRANSFERRED BY THE PROMOTERS DURING THE PERIOD STARTING FROM THE DATE OF FILING THE DRAFT LETTER

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OF OFFER WITH THE BOARD TILL THE DATE OF COMMENCEMENT OF LOCK-IN PERIOD AS STATED IN THE LETTER OF OFFER – NOT APPLICABLE

6. WE CERTIFY THAT REGULATION 33 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009, WHICH RELATES TO SPECIFIED SECURITIES INELIGIBLE FOR COMPUTATION OF PROMOTERS CONTRIBUTION, HAS BEEN DULY COMPLIED WITH AND APPROPRIATE DISCLOSURES AS TO COMPLIANCE WITH THE SAID REGULATION HAVE BEEN MADE IN THE DRAFT LETTER OF OFFER/LETTER OF OFFER – NOT APPLICABLE

7. WE UNDERTAKE THAT SUB-REGULATION (4) OF REGULATION 32 AND CLAUSE (C) AND (D) OF SUB-REGULATION (2) OF REGULATION 8 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009 SHALL BE COMPLIED WITH. WE CONFIRM THAT ARRANGEMENTS HAVE BEEN MADE TO ENSURE THAT PROMOTERS’ CONTRIBUTION SHALL BE RECEIVED AT LEAST ONE DAY BEFORE THE OPENING OF THE ISSUE. WE UNDERTAKE THAT AUDITORS’ CERTIFICATE TO THIS EFFECT SHALL BE DULY SUBMITTED TO THE BOARD. WE FURTHER CONFIRM THAT ARRANGEMENTS HAVE BEEN MADE TO ENSURE THAT PROMOTERS’ CONTRIBUTION SHALL BE KEPT IN AN ESCROW ACCOUNT WITH A SCHEDULED COMMERCIAL BANK AND SHALL BE RELEASED TO THE ISSUER ALONG WITH THE PROCEEDS Of THE PUBLIC ISSUE – NOT APPLICABLE

8. WE CERTIFY THAT THE PROPOSED ACTIVITIES OF THE ISSUER FOR WHICH THE FUNDS ARE BEING RAISED IN THE PRESENT RIGHTS ISSUE FALL WITHIN THE ‘MAIN OBJECTS’ LISTED IN THE OBJECT CLAUSE OF THE MEMORANDUM OF ASSOCIATION OR OTHER CHARTER OF THE ISSUER AND THAT THE ACTIVITIES WHICH HAVE BEEN CARRIED OUT UNTIL NOW ARE VALID IN TERMS OF THE OBJECT CLAUSE OF ITS MEMORANDUM OF ASSOCIATION.

9. WE CONFIRM THAT NECESSARY ARRANGEMENTS HAVE BEEN MADE TO ENSURE THAT THE MONEYS RECEIVED PURSUANT TO THE ISSUE ARE KEPT IN A SEPARATE BANK ACCOUNT AS PER THE PROVISIONS OF SUB-SECTION (3) OF SECTION 73 OF THE COMPANIES ACT, 1956 AND THAT SUCH MONEYS SHALL BE RELEASED BY THE SAID BANK ONLY AFTER PERMISSION IS OBTAINED FROM ALL THE STOCK EXCHANGES MENTIONED IN THE LETTER OF OFFER. WE FURTHER CONFIRM THAT THE AGREEMENT ENTERED INTO BETWEEN THE BANKERS TO THE ISSUE AND THE ISSUER SPECIFICALLY CONTAINS THIS CONDITION. – NOT APPLICABLE

10. WE CERTIFY THAT A DISCLOSURE HAS BEEN MADE IN THE DRAFT LETTER OF OFFER THAT THE INVESTORS SHALL BE GIVEN AN OPTION TO GET THE SHARES IN DEMAT OR PHYSICAL MODE.

11. WE CERTIFY THAT ALL THE APPLICABLE DISCLOSURES MANDATED IN THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009 HAVE BEEN MADE IN ADDITION TO DISCLOSURES WHICH, IN OUR VIEW, ARE FAIR AND ADEQUATE TO ENABLE THE INVESTOR TO MAKE A WELL INFORMED DECISION.

12. WE CERTIFY THAT THE FOLLOWING DISCLOSURES HAVE BEEN MADE IN THE DRAFT LETTER OF OFFER:

(a) AN UNDERTAKING FROM THE ISSUER THAT AT ANY GIVEN TIME, THERE SHALL BE ONLY ONE DENOMINATION FOR THE EQUITY SHARES OF THE ISSUER AND

(b) AN UNDERTAKING FROM THE ISSUER THAT IT SHALL COMPLY WITH SUCH DISCLOSURE AND ACCOUNTING NORMS SPECIFIED BY THE BOARD FROM TIME TO TIME.

13. WE UNDERTAKE TO COMPLY WITH THE REGULATIONS PERTAINING TO ADVERTISEMENT IN TERMS OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009 WHILE MAKING THE RIGHTS ISSUE.

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14. WE ENCLOSE A NOTE EXPLAINING HOW THE PROCESS OF DUE DILIGENCE HAS

BEEN EXERCISED BY US IN VIEW OF THE NATURE OF CURRENT BUSINESS BACKGROUND OR THE ISSUER, SITUATION AT WHICH THE PROPOSED BUSINESS STANDS, THE RISK FACTORS, PROMOTERS EXPERIENCE ,ETC.

15. WE ENCLOSE A CHECKLIST CONFIRMING REGULATION-WISE COMPLIANCE WITH THE APPLICABLE PROVISIONS OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009, CONTAINING DETAILS SUCH AS THE REGULATION NUMBER, ITS TEXT, THE STATUS OF COMPLIANCE, PAGE NUMBER OF THE DRAFT LETTER OF OFFER WHERE THE REGULATION HAS BEEN COMPLIED WITH AND OUR COMMENTS, IF ANY.

The filing of this Draft Letter of Offer does not, however, absolve our Bank from any liabilities under Section 63 or Section 68 of the Companies Act or from the requirement of obtaining such statutory or other clearance as may be required for the purpose of the proposed issue. SEBI further reserves the right to take up, at any point of time, with the lead manager any irregularities or lapses in this draft letter of offer. Disclaimer from our Bank and Lead Manager

Our Bank and the Lead Manager accept no responsibility for statements made otherwise than in this Draft Letter of Offer or in any advertisement or other material issued by our Bank or by any other persons at the instance of our Bank and anyone placing reliance on any other source of information would be doing so at his own risk.

The Lead Manager and our Bank shall make all information available to the Eligible Equity Shareholders and no selective or additional information would be available for a section of the Eligible Equity Shareholders in any manner whatsoever including at presentations, in research or sales reports etc. after filing of the Draft Letter of Offer with SEBI.

Investors who invest in the issue will be deemed to have been represented by our Bank and Lead Manager and our respective directors, officers, agents, affiliates and representatives that they are eligible under all applicable laws, rules, regulations, guidelines and approvals to acquire equity shares of our Bank, and are relying on independent advice / evaluation as to their ability and quantum of investment in this issue. Disclaimer with respect to jurisdiction

This Draft Letter of Offer has been prepared under the provisions of Indian Laws and the applicable rules and regulations there under. Any disputes arising out of this Issue will be subject to the jurisdiction of the appropriate court(s) in Mangalore, India only. Designated Stock Exchange The Designated Stock Exchange for the purpose of the Issue will be the [•]. Disclaimer Clause of the BSE

As required, a copy of the Draft Letter of Offer has been submitted to the BSE. The Disclaimer Clause as intimated by BSE to us, post scrutiny of this Draft Letter of Offer, shall be included in the Letter of Offer prior to the Stock Exchange filing. Disclaimer Clause of the NSE As required, a copy of the Draft Letter of Offer has been submitted to the NSE. The Disclaimer Clause as intimated by NSE to us, post scrutiny of this Draft Letter of Offer, shall be included in the Letter of Offer prior to the Stock Exchange filing. Disclaimer Clause of the RBI A license authorising our Bank to carry on banking business has been obtained from the Reserve Bank of India in terms of Section 22 of our Banking Regulation Act, 1949. It must be distinctly understood, however, that in issuing the license the Reserve Bank of India does not undertake any responsibility for the financial soundness of our Bank or for the correctness of any of the statements made or opinion expressed in this connection

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Delisting of Equity Shares from Bangalore Stock Exchange Limited Pursuant to the application made under SEBI (Delisting of Securities) Guidelines, 2003, the Equity Shares of our Bank stands delisted from Bangalore Stock Exchange Limited with effect from November 24, 2004 vide their letter 03/2004/ 971 dated November 24, 2004. Delisting of Equity Shares from Mangalore Stock Exchange Limited Pursuant to the application made under SEBI (Delisting of Securities) Guidelines, 2003, the Equity Shares of our Bank stands delisted from Mangalore Stock Exchange Limited with effect from June 25, 2005 vide their letter Mg.SE/LCF12/2005-06/118 dated June 24, 2005. Filing The Draft Letter of Offer has been filed with SEBI, Plot No. C4 A, ‘G’ Block, Bandra Kurla Complex Bandra (East), Mumbai and also with BSE and NSE. All the legal requirements applicable till the date of filing the Draft Letter of Offer with the Stock Exchanges shall be complied with. Selling restrictions The distribution of this Draft Letter of Offer and the Issue of Rights Equity Shares to persons in certain jurisdictions outside India may be restricted by the legal requirements prevailing in those jurisdictions. Persons into whose possession the Draft Letter of Offer may come are required to inform themselves about and observe such restrictions. Our Bank is making this Issue of Rights Equity Shares to the Eligible Equity Shareholders of our Bank and will dispatch the Draft Letter of Offer / Abridged Letter of Offer and CAFs to the Eligible Equity Shareholders who have provided an Indian address. No action has been or will be taken to permit this Issue in any jurisdiction where action would be required for that purpose, except that the Draft Letter of Offer has been filed with SEBI for observations. Accordingly, the Rights Equity Shares represented thereby may not be offered or sold, directly or indirectly, and the Draft Letter of Offer may not be distributed in any jurisdiction, except in accordance with the legal requirements applicable in such jurisdiction. Receipt of the Draft Letter of Offer will not constitute an offer in those jurisdictions in which it would be illegal to make such an offer and, under those circumstances, the Draft Letter of Offer must be treated as sent for information only and should not be copied or redistributed. Accordingly, persons receiving a copy of the Draft Letter of Offer should not, in connection with the Issue of the Rights Equity Shares or the Rights Entitlements, distribute or send the same in or into the United States or any other jurisdiction where to do so would or might contravene local securities laws or regulations. If the Draft Letter of Offer is received by any person in any such territory, or by their agent or nominee, they must not seek to subscribe to the Rights Equity Shares or the Rights Entitlements referred to in the Draft Letter of Offer. Neither the delivery of this Draft Letter of Offer nor any sale hereunder, shall under any circumstances create any implication that there has been no change in our Bank’s affairs from the date hereof or that the information contained herein is correct as of any time subsequent to this date. United States Restrictions NEITHER THE RIGHTS ENTITLEMENTS NOR THE EQUITY SHARES THAT MAY BE PURCHASED PURSUANT THERETO HAVE BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY U.S. STATE SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, RESOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OF AMERICA OR THE TERRITORIES OR POSSESSIONS THEREOF (THE “UNITED STATES” OR THE “U.S.”) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, “US PERSONS” (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT (“REGULATION S”)), EXCEPT IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE RIGHTS REFERRED TO IN THIS LETTER OF OFFER ARE BEING OFFERED IN INDIA, BUT NOT IN THE UNITED STATES. THE OFFERING TO WHICH THIS LETTER OF OFFER RELATES IS NOT, AND UNDER NO CIRCUMSTANCES IS TO BE CONSTRUED AS, AN OFFERING OF ANY SHARES OR

81

RIGHTS FOR SALE IN THE UNITED STATES OR AS A SOLICITATION THEREIN OF AN OFFER TO BUY ANY OF THE SAID SHARES OR RIGHTS. ACCORDINGLY, THIS LETTER OF OFFER SHOULD NOT BE FORWARDED TO OR TRANSMITTED IN OR INTO THE UNITED STATES AT ANY TIME, EXCEPT IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. NEITHER OUR BANK NOR ANY PERSON ACTING ON BEHALF OF OUR BANK WILL ACCEPT SUBSCRIPTIONS FROM ANY PERSON, OR THE AGENT OF ANY PERSON, WHO APPEARS TO BE, OR WHO OUR BANK OR ANY PERSON ACTING ON BEHALF OF OUR BANK HAS REASON TO BELIEVE IS, A RESIDENT OF THE UNITED STATES AND TO WHOM AN OFFER, IF MADE, WOULD RESULT IN REQUIRING REGISTRATION OF THIS LETTER OF OFFER WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Impersonation Attention of the Investors is specifically drawn to the provisions of subsection (1) of Section 68A of the Companies Act which is reproduced below: “Any person who makes in a fictitious name an application to a Bank for acquiring, or subscribing for, any shares therein, or otherwise induces a Bank to allot, or register any transfer of shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years” Listing The Equity Shares of our Bank are listed on the BSE and NSE. Our Bank has made applications to the Stock Exchanges for permission to deal in and for an official quotation in respect of the Rights Equity Shares being offered in terms of the Draft Letter of Offer. Our Bank has received in-principle approvals from the BSE by its letter dated [●], 2010 and the NSE by its letter dated [●], 2010. Our Bank will apply to the BSE and the NSE for listing of the Rights Equity Shares to be issued pursuant to this Issue. If the permission to deal in and for an official quotation of the Rights Equity Shares is not granted by any of the Stock Exchanges mentioned above, our Bank shall forthwith repay, without interest, all monies received from Investors in pursuance of the Draft Letter of Offer. If such money is not paid within 8 days after our Bank becomes liable to repay it, then our Bank and every Director of our Bank who is an officer in default shall, on and from expiry of 8 (eight) days, be jointly and severally liable to repay the money with interest as prescribed under the Section 73 of the Companies Act. Compliances Our Bank has complied during the financial year immediately preceding the date of the Draft Letter of Offer with respect to the following: • provisions of the Listing Agreement with respect to reporting and compliance under clause 35, 41 and 49. • provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 with respect to

reporting in terms of Regulation 8(3) pertaining to disclosure of changes in shareholding. • provisions of SEBI(Prohibition of Insider Trading)Regulations, 1992 with respect to reporting in terms of

Regulation 13 Further, clause 40A of the Listing Agreement and Regulation 8(A) of the SEBI (SAST) Regulations are not applicable to our Bank as there are no identifiable promoters of our Bank. Consents Consents in writing of the Auditors, Lead Manager, Legal Advisor, Registrar to the Issue and Bankers to the Issue to act in their respective capacities have been obtained and filed with Stock Exchanges, along with a copy of the Draft Letter of Offer and such consents have not been withdrawn up to the time of delivery of the Draft Letter of Offer for registration with the Stock Exchanges. The Auditors of our Bank have given their written consent for the inclusion of their Report in the form and content as appearing in this Draft Letter of Offer and such consents and reports have not been withdrawn up to the time of delivery of this Draft Letter of Offer for registration with the Stock Exchanges.

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To the best of our knowledge there are no other consents required for making this Issue. However, should the need arise, the necessary consents shall be obtained by us. Estimated Issue Expenses

The total expenses of the Issue are estimated to be approximately Rs. [●] crores. The Issue related expenses include, among others, Issue management fees, Registrar fees, printing and distribution expenses, fees of the legal counsels, advertisement, listing fees to the Stock exchanges etc. The break-up of total issue expenses is as under –

Category Estimated expenses* (Rs. In crores)

% of the Issue Expenses

% of total Issue Size

Fees to the Lead Manager [●] [●] [●] Fees to the Registrar to the Issue [●] [●] [●] Fees to the Legal advisors [●] [●] [●] Fees to the Auditors [●] [●] [●] Advertising and Publicity Expenses [●] [●] [●] Printing, Postage, Stationery Expenses [●] [●] [●] Contingency, Stamp duty, Listing Fees, etc [●] [●] [●] Total [●] [●] [●]

* - to be updated on finalization of Issue Price Expert Opinion, if any Except for the Auditors’ Report and the Statement of Tax Benefits on page F-1 and F-2 for March 31, 2010 and F-42 and 43 of this Draft Letter of Offer, no expert opinion has been obtained by our Bank in relation to this Draft Letter of Offer. Fees Payable to the Lead Manager to the Issue The fee payable to the Lead Manager to the Issue is set out in the Engagement Letter entered into by our Bank with Edelweiss Capital Limited, copy of which is available for inspection at the Registered Office of our Bank. Fees Payable to the Registrars to the Issue The fee payable to the Registrars to the Issue is as set out in the relevant documents, copies of which are kept open for inspection at the Registered Office of our Bank. Minimum Subscription If our Bank does not receive the minimum subscription of 90% of the Issue, the entire subscription amount shall be refunded to the Investors within fifteen days from the date of closure of the Issue. If there is delay in the refund of subscription by more than 8 days after our Bank becomes liable to pay the subscription amount (i.e. fifteen days after closure of the issue), our Bank will pay interest for the delayed period, at rates prescribed under sub-sections (2) and (2A) of Section 73 of the Companies Act. Issue Schedule

Issue Opening Date: [●], 2010 Last date for receiving requests for split forms: [●] , 2010 Issue Closing Date: [●] , 2010

The Board may however decide to extend the Issue period as it may determine from time to time but not exceeding 30 days from the Issue Opening Date. Allotment Advices / Refund Orders Our Bank will issue and dispatch allotment advice / share certificates/ demat credit and/or letters of regret along with refund order or credit the allotted securities to the respective beneficiary accounts, if any, within a period of

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15 days from the date of closure of the Issue. If such money is not repaid within eight days from the day our Bank becomes liable to pay it, our Bank shall pay that money with interest as stipulated under section 73 of the Companies Act. Investors residing in the 68 cities specified by SEBI pursuant to its circular dated February 1, 2008, will get refunds through ECS only except where Investors are otherwise disclosed as applicable / eligible to get refunds through direct credit and RTGS provided the MICR details are recorded with the Depositories or the Bank. In case of those Investors who have opted to receive their Rights Equity Share in dematerialized form using electronic credit under the depository system, and advice regarding their credit of the Rights Equity Shares shall be given separately. Investors to whom refunds are made through electronic transfer of funds will be sent a letter through certificate of posting intimating them about the mode of credit of refund within 15 working days of closure of the Issue. In case of those Investors who have opted to receive their Rights Equity Share in physical form, our Bank will issue the corresponding share certificates under Section 113 of the Companies Act or other applicable provisions. Refund orders exceeding Rs.1,500 would be sent by registered post / speed post to the sole / first Investors' registered address. Refund orders up to the value of Rs.1,500 would be sent under certificate of posting. Such refund orders would be payable at par at all places where the applications were originally accepted. The same would be marked ‘Account Payee only’ and would be drawn in favour of the sole / first Investor. Adequate funds would be made available to the Registrar to the Issue for this purpose. Disputed Shares Equity Shares which are the subject matter of a dispute or sub-judice will not be allotted to the claimant’s account pending resolution of the dispute in accordance with our Bank's policy or receipt of an order from the relevant court or authority removing the restriction thereon. Entitlement for such shares will be held in abeyance and retained separately by our Bank Investor Grievances and Redressal System Our Bank has adequate arrangements for redressal of Investor complaints as well as a well-arranged correspondence system developed for letters of routine nature. The share transfer and dematerialization for our Bank is being handled by our Registrar, Integrated Enterprises India Limited. Letters are filed category wise after being attended to. The Redressal norm for response time for all correspondence including shareholders complaints is 7-10 days. The Shareholders/Investors Grievances Committee consists of three directors comprising of Mr. R.V. Shastri, Mr. U.R. Bhat and Mr. T.S. Vishwanath. All investor grievances received by our Bank has been handled by the Registrar which is monitored by the Company Secretary The contact details of our Registrar are as follows Integrated Enterprises India Limited No 30 Ramana Residency 4th Cross, Sampige Road, Malleswaram, Bangalore 560 003 Telephone: 080-23460815-818 Facsimile: 080-23460189 E-mail: alfint@vsnl.com Investor Grievance E-mail: ktkbankrights@vsnl.net Website:www.iepindia.com Contact Person: Mr. S. Vijayagopal SEBI Reg. No: INR 000000544 Status of Complaints

(a) No. of shareholders complaints outstanding as of March 31, 2010: Nil (b) Total number of complaints received during last financial year (Fiscal 2009): 92

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(c) Total number of complaints received during Fiscal 2010: 132 (d) Status of the complaints: Out of the 132 complaints received our Bank in Fiscal 2010, we have

resolved all 132 complaints. (e) Time normally taken for disposal of various types of investor grievances: 5-10 days Investor Complaints for the period 01 April 2010 to 30 September 2010:

Complaints pending at the beginning of the period

Complaints received during the period

Complaints redressed during the period

Complaints pending at the end of the period

NIL 47 47 NIL

Investor Grievances arising out of this Issue

The investor grievances arising out of the Issue will be handled by Mr. Y V Balachandra, Compliance Officer and Company Secretary, and Integrated Enterprises India Limited, Registrars to the Issue. The Registrar to the Issue will have a separate team of personnel handling only our post-Issue correspondence. The agreement between us and the Registrar to the Issue will provide for retention of records with the Registrars for a period of at least one year from the last date of dispatch of letter of allotment/ share certificates / warrant/ refund order to enable the Registrars to redress grievances of Investors. All grievances relating to the Issue may be addressed to the Registrar to the Issue giving full details such as folio no., name and address, contact telephone / cell numbers, email id of the first Investors, number and type of shares applied for, application form serial number, amount paid on application and the name of the bank and the branch where the application was deposited, along with a photocopy of the acknowledgement slip. In case of renunciation, the details of the Renouncees should be furnished. The average time taken by the Registrar to the Issue for redressal of to routine grievances will be 7 days from the date of receipt. In case of non-routine grievances where verification at other agencies is involved, it would be the endeavour of the Registrar to the Issue to attend to them as expeditiously as possible. We undertake to resolve the Investor grievances in a time bound manner.

Investors may contact the Compliance Officer / Company Secretary in case of any pre-Issue/ post -Issue related problems such as non-receipt of letters of allotment/share certificates/demat credit/refund orders etc. His address is as follows:

Mr. Y V Balachandra Company Secretary and Compliance Officer P.B. No. 599, Mahaveera Circle, Kankanady, Mangalore - 575 002 India Telephone: +91 (0824) 2228222 Fascimile: +91 (0824) 2225588 Website: www.karnatakabank.com E-mail: comsec@ktkbank.com

The contact particulars of the Registrar to the Issue are as under: Integrated Enterprises India Limited No 30 Ramana Residency 4th Cross, Sampige Road, Malleswaram, Bangalore 560 003 Telephone: 080-23460815-818 Facsimile: 080-23460189 E-mail: alfint@vsnl.com Investor Grievance E-mail: ktkbankrights@vsnl.net Website:www.iepindia.com Contact Person: Mr. S. Vijayagopal SEBI Reg. No: INR 000000544

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TERMS AND PROCEDURE OF THE ISSUE

The Equity Shares proposed to be issued on rights basis, are subject to the terms and conditions contained in this Draft Letter of Offer, the Letter of Offer, the Abridged Letter of Offer, the Composite Application Form (“CAF”), the Memorandum of Association and Articles of Association of our Bank, the provisions of the Companies Act, the terms and conditions as may be incorporated in the Foreign Exchange Management Act, 1999, as amended ("FEMA"), guidelines and regulations issued by SEBI, guidelines, notifications and regulations for issue of capital and for listing of securities issued by Government of India and/or other statutory authorities and bodies from time to time, the listing agreements entered into by our Bank with the stock exchanges, terms and conditions as stipulated in the allotment advice or letter of allotment or security certificate and rules as may be applicable and introduced from time to time. Authority for the Issue

Pursuant to the resolution passed by the Board of Directors of our Bank under Section 81(1) of the Companies Act, 1956 at the meeting held on July 30, 2010 and subsequently approved by the members of our Bank at the Extra-Ordinary General Meeting held on September 9, 2010, it has been decided to make the offer to the Eligible Equity Shareholders of our Bank on rights basis, with a right to renounce. Basis for the Issue

The Equity Shares are being offered for subscription for cash to those existing Equity Shareholders whose names appear as beneficial owners as per the list to be furnished by the Depositories in respect of the Equity Shares held in the Electronic Form and on the Register of Members of our Bank in respect of the Equity Shares held in physical form at the close of business hours on the Record Date i.e. [●], fixed in consultation with the Designated Stock Exchange. Rights Entitlement Ratio As your name appears as beneficial owner in respect of the shares held in the electronic form or appears in the register of members as an Equity Shareholder of our Bank as on the Record Date i.e. [●], you are entitled to the number of shares in Block I of Part A of the enclosed CAF. The Eligible Equity Shareholders are entitled to 2 (two) Equity Share for every 5 (five) fully paid up Equity Share held on the Record Date i.e. [●]. For Eligible Equity Shareholders wishing to apply through the ASBA process for the Rights Issue, kindly refer to the section titled “Procedure for Application through the Applications Supported by Blocked Amount (“ASBA”) Process” on page 106 of this chapter. I General Terms of the Issue 1. Market lot The Equity Shares of our Bank are tradable only in dematerialized form, and the market lot is one Equity Share. In case of holding of Equity Shares in physical form, our Bank would issue to the allottees separate certificate for the Equity Shares allotted on rights basis with a split performance. Our Bank would issue one certificate for the entire allotment. However, our Bank would issue split certificates on written requests from the shareholders. Our Bank shall not charge a fee for splitting any of the share certificates. Investors may please note that the Equity Shares of our Bank can be traded on the Stock Exchange in dematerialized form only. 2. Nomination facility In terms of Section 109A of the Act, nomination facility is available in case of Equity Shares. The applicant can nominate any person by filling the relevant details in the CAF in the space provided for this purpose.

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A sole Equity Shareholder or first Equity Shareholder, along with other joint Equity Shareholders being individual(s) may nominate any person(s) who, in the event of the death of the sole holder or all the joint-holders, as the case may be, shall become entitled to the Equity Shares. A person, being a nominee, becoming entitled to the Equity Shares by reason of the death of the original Equity Shareholder(s), shall be entitled to the same advantages to which he would be entitled if he were the registered holder of the Equity Shares. Where the nominee is a minor, the Equity Shareholder(s) may also make a nomination to appoint, in the prescribed manner, any person to become entitled to the Equity Share(s), in the event of death of the said holder, during the minority of the nominee. A nomination shall stand rescinded upon the sale of the Equity Share by the person nominating the said share. A transferee will be entitled to make a fresh nomination in the manner prescribed. When the Equity Share is held by two or more persons, the nominee shall become entitled to receive the amount only on the demise of all the Equity Shareholders. Fresh nominations can be made only in the prescribed form available on request at the Registered Office of our Bank or such other person at such addresses as may be notified by our Bank. Only one nomination would be applicable for one folio. Hence, in case the Equity Shareholder(s) has/have already registered the nomination with our Bank, no further nomination needs to be made for Equity Shares to be allotted in this Issue under the same folio. In case the allotment of Equity Shares is in dematerialised form, there is no need to make a separate nomination for the Equity Shares to be allotted in this Issue. Nominations registered with respective Depository Participant of the applicant would prevail. If the applicant wishes to change the nomination, they are requested to inform their respective DP. 3. Joint-Holders Where two or more persons are registered as the holders of any Equity Share, they shall be deemed to hold the same as joint-holders with benefits of survivorship subject to provisions contained in the Articles of Association of our Bank.

4. Minimum Subscription If our Bank does not receive the minimum subscription of 90% of the Issue, or the subscription level falls below 90%, after the Issue Closing Date on account of cheques being returned unpaid or withdrawal of applications, our Bank shall refund the entire subscription amount received within 15 days from the Issue Closing Date. If there is delay in the refund of the subscription amount by more than eight days after our Bank becomes liable to pay the subscription amount (i.e. 15 days after the Issue Closing Date), our Bank will pay interest for the delayed period at 15% per annum as prescribed under sub-sections (2) and (2A) of Section 73 of the Companies Act. Other than meeting the requirements indicated in the section titled “Objects of the Issue” on page 42 of this Draft Letter of Offer, there is no other intention or purpose for the Issue. Presently, our Bank is complying with clause 40A of the Listing Agreement and the minimum public shareholding required to be maintained for continuous listing is 25% of the total paid up Equity Capital of our Bank. For further details of under subscription and allotment, please refer to “Basis of Allotment” below under this chapter titled “Terms and Procedure of the Issue” on page 85 of this Draft Letter of Offer. 5. Notices All notices to the Equity Shareholder(s) required to be given by our Bank shall be published in one English national daily with wide circulation, one Hindi national daily with wide circulation and one regional daily newspaper in Mangalore with wide circulation and/or will be sent by registered post or speed post to the registered holders of the Equity Share at the address registered with the registrar/ depository from time to time.

6. Listing and trading of the Equity Shares proposed to be issued Our Bank's existing Equity Shares are currently traded on the Stock Exchanges under the ISIN INE614B01018 and with Scrip Code No 590002 on BSE and script name of KTKBANK on NSE. The fully paid up Equity

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Shares proposed to be issued on a rights basis shall be listed and admitted for trading on the Stock Exchanges under the existing ISIN INE614B01018. All steps for the completion of the necessary formalities for listing and commencement of trading of the Equity Shares pursuant to the Issue shall be taken within seven working days of the finalization of the Basis of Allotment. Our Bank has made an application for "in-principle" approval for listing of the Equity Shares respectively to the BSE and the NSE through letters dated [●] and has received such approval from the BSE pursuant to the letter no. [●], dated [●] and from the NSE pursuant to letter no. [●], dated, [●]. Our Bank will apply to the Stock Exchanges for final approval for the listing and trading of the Equity Shares. No assurance can be given regarding the active or sustained trading in the Equity Shares or the price at which the Equity Shares offered under the Issue will trade post listing. 7. Offer to Non-Resident Equity Shareholders/Applicants/ Foreign Institutional Investors As per Regulation 6 of Notification No. FEMA 20/200-RB dated May 3, 2000, the RBI has given general permission to Indian companies to issue rights shares to non-resident shareholders including additional shares. Applications received from NRIs and non-residents for allotment of Equity Shares shall be inter alia, subject to the conditions imposed from time to time by the RBI under the FEMA Act in the matter of refund of application moneys, allotment of Equity Shares and issue of letter of allotment. The Abridged Letter of Offer and CAF shall be dispatched to non-resident Eligible Equity Shareholders at their Indian address only. The Board of Directors may at its absolute discretion, agree to such terms and conditions as may be stipulated by RBI while approving the allotment of Equity Shares, payment of dividend etc. to the non-resident shareholders. The Rights Shares purchased by non-residents shall be subject to the same conditions including restrictions in regard to the repatriation as are applicable to the original shares against which Equity Shares are issued on rights basis. CAFs will be made available for eligible NRIs at our Registered Office and with the Registrar to the Issue. No single FII can hold more that 10% of the Bank’s post-Issue paid-up share capital. In respect of an FII investing in the Equity Shares on behalf of its sub-accounts, the investment on behalf of each sub-account shall not exceed 5% of the total paid-up share capital of the Bank. In case of change of status of holders i.e. from Resident to Non-Resident, a new demat account shall be opened for the purpose. DETAILS OF SEPARATE COLLECTING CENTRES FOR NON-RESIDENT APPLICATIONS SHALL BE PRINTED ON THE CAF. 8. No Offer in the United States Neither the Rights Entitlements nor entitlements to apply for the issue of Equity Shares that may be purchased pursuant thereto have been, and will be, registered under the United States Securities Act of 1933, as amended (the “Securities Act”), or any U.S. state securities laws, and may not be offered, sold, resold or otherwise transferred within the United States of America or the territories or possessions thereof or to, or for the account or benefit of, “U.S. Persons” (as defined in Regulation S under the Securities Act), except in a transaction exempt from, or in a transaction not subject to, the registration requirements of the Securities Act. The Equity Shares referred to in this Draft Letter of Offer are being offered in India but not in the United States of America. The offering to which this Draft Letter of Offer relates is not, and under no circumstances is to be construed as, an offering of any shares or rights for sale in the United States of America, the territories or possessions thereof, or as a solicitation therein of an offer to buy any of the said shares or rights. Accordingly, the Letter of Offer, Abridged Letter of Offer and the CAF should not be forwarded to or transmitted in or to, and the Letter of Offer, Abridged Letter of Offer and the CAF shall not be dispatched to, the United States of America at any time, except in a transaction exempt from, or in a transaction not subject to, the registration requirements of the Securities Act. None of our Bank, the Registrar, the Lead Manager or any other person acting on behalf of our Bank will accept subscriptions from any person, or the agent of any person, who appears to be, or who our Bank, the Registrar, the Lead Manager or any other person acting on behalf of our Bank has reason to believe is, a resident of the United States of America and to whom an offer, if made, would result in requiring registration of this Draft Letter of Offer with the United States Securities and Exchange Commission. Rights Entitlements or entitlements to apply for the issue of Equity Shares may not be transferred or sold to any U.S. Persons.

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9. Utilisation of Issue Proceeds

The Board of Directors declare that: (i) The funds received against this Issue will be transferred to a separate bank account other than our Bank

account referred to sub-section (3) of Section 73 of the Companies Act, 1956 and our Bank will not have any access to such funds unless only after the basis of allotment is finalized.

10. Undertakings by our Bank 1. The complaints received in respect of the Issue shall be attended to by our Bank expeditiously and

satisfactorily.

2. All steps for completion of the necessary formalities for listing and commencement of trading at the Stock Exchange where the equity shares are to be listed are taken within seven working days of finalization of basis of allotment.

3. The funds required for dispatch of refunds to unsuccessful applicants as per the modes disclosed shall be made available to the Registrar to the Issue by our Bank.

4. Where refunds are made through electronic transfer of funds, a suitable communication shall be sent to the investors within 15 days of closure of the Issue giving details of the Bank where refunds shall be credited along with the amount and expected date of electronic credit of refund.

5. Adequate arrangements shall be made to collect all ASBA applications and to treat all ASBA applications similar to non – ASBA applications while finalizing the basis of allotment.

6. Our Bank accepts full responsibility for the accuracy of information given in this Draft Letter of Offer and confirms to the best of his knowledge and belief, there are no other facts or the omission of which makes any statement made in this Draft Letter of Offer misleading and further confirms that it has made all reasonable inquiries to ascertain such facts.

11. Arrangements for disposal of odd lots

Since the market lot for our Bank’s Equity Shares is one (1), there is no question of disposal of odd lots.

II Principal Terms and Conditions of the Issue of Equity Shares 1. Face value Each Equity Share shall have the Face Value of Rs. 10. 2. Fractional entitlements For Equity Shares being offered on a rights basis under this Issue, the shareholders holding 1 Equity Share on the Record Date will be offered 1 entitlement. In all other cases, the shareholders fractional entitlements on the Record Date will be ignored if such entitlement is less than 0.5 and will be rounded off to the next integer if the entitlement is 0.5 or more. For example, a shareholder holding 1 Equity Share on the Record Date will be given 1 entitlement for rights. In case he holds 2 Equity Shares on the Record Date his entitlement will be 0.8 which is rounded off to the next integer i.e. 1 share. A shareholder holding 3 Equity Shares on the Record Date is eligible for 1.2 rights entitlements where 0.2 will be ignored and he will be offered 1 share only. An illustration stating the rights entitlement for number of Equity Shares is set out below: No of Equity Shares held on Record Date

Eligible Entitlement Final Entitlement (Rounding off to next integer)

1 1 1

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No of Equity Shares held on Record Date

Eligible Entitlement Final Entitlement (Rounding off to next integer)

2 0.8 1 3 1.2 1

3. Issue Price

Each Equity Share shall be offered at an Issue Price of Rs. [●] for cash at a premium of Rs. [●] per Equity Share. The Issue Price will be arrived at in consultation with the Lead Manager. 4. Terms of payment The entire amount of Rs. [●] per Equity Share shall be payable on application. The payment on Application would be applied as under:

Towards Share Capital Towards share premium account On Application Rs. 10 per Equity Share Rs. [●] per Equity Share A separate cheque/ demand draft/ pay order must accompany each application form. All payments should be made by cheque/bank demand draft/ pay order drawn on any bank (including a co-operative bank) which is situated at and is a member or a sub-member of the bankers clearing house located at the center where the CAF is accepted. Outstation cheques /money orders/postal orders will not be accepted and CAFs accompanied by such cheque/money orders/postal orders are liable to be rejected. The Registrar to the Issue will not accept any payments against applications, if such payments are made in cash. Pursuant to the RBI Circular DBOD No. FSC BC 42/24.47.00/2003-04 dated November 5, 2003, the Stockinvest scheme has been withdrawn and accordingly, payment through Stockinvest will not be accepted in the Issue. Where an applicant has applied for additional shares and is allotted lesser number of shares than applied for, the excess application money shall be refunded. The excess application monies would be refunded within 15 days from the closure of the Issue, and if there is a delay beyond 8 days from the stipulated period, our Bank and every Director of our Bank who is an officer in default shall be jointly and severally liable to repay the money with interest for the delayed period at 15% per annum as stipulated under sub-sections (2) and (2A) of section 73 of the Companies Act, 1956. 5. Ranking of Equity Shares

The Rights Equity Shares allotted pursuant to this Issue shall rank pari passu with the existing Equity Shares in all respects including dividend. 6. Rights of Equity Shareholders Subject to applicable laws, Equity Shareholders shall have the following rights: 1. Right to receive dividend, if declared

2. Right to attend general meetings and exercise voting power, unless prohibited by law;

3. Right to vote on poll, either in person or proxy;

4. Right to receive offer for right shares and be allotted bonus shares if announced;

5. Right to receive surplus on liquidation;

6. Right of free transferability of share; and

7. Such other rights as may be available to a shareholder of a Banking Company incorporated under the Companies Act and Memorandum and Articles of Association of our Bank and the terms of the listing agreements entered into with the Stock Exchange.

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Subject to such restrictions as may be imposed by RBI from time to time or as contained in the Banking Regulation Act, 1949. 7. Issue of Duplicate Share Certificates

If any Share Certificate is mutilated or defaced or the pages for recording transfers of the Equity Shares are fully utilized, our Bank against the surrender of such Share Certificate may replace the Share Certificate, provided that it shall be replaced as aforesaid only if the Share Certificate number and the distinctive numbers are legible. If any Share Certificate is destroyed, stolen, lost or misplaced, then upon production of proof thereof to the satisfaction of our Bank and upon furnishing such indemnity/surety and/or such other documents as our Bank may deem adequate, a duplicate Share Certificate shall be issued. 8. Quoting of Permanent Account Number (PAN) Mandatory As per the circular no. SEBI/CFD/DIL/DIP/28/2007/29/11 dated November 29, 2007, quoting of PAN has been made mandatory for all primary market transactions. Further, in accordance with the circular no. SEBI/CFD/DIL/MB/IS/1/2008/11/03 dated March 11, 2008, SEBI has stated that the applicants are not required to submit the photocopies of PAN. III How to Apply? 1. Procedure for Application

The CAF will be printed in black ink for all Equity Shareholders. In case the original CAFs are not received by the Investor or is misplaced by the Investor, the Investor may request the Registrars to the Issue, for issue of a duplicate CAF, by furnishing the registered folio number, DP ID Number, Client ID Number and their full name and address. In case the signature of the Equity Shareholder(s) does not agree with the specimen registered with our Bank, the application is liable to be rejected. The CAF consists of four parts: Part A: Form for accepting the Equity Shares offered and applying for additional Equity Shares; Part B: Form for renunciation of Equity Shares; Part C: Form for application for Equity Shares by renouncees; and Part D: Form for request for split application forms. 2. Option available to the Equity Shareholders The CAF clearly indicates the number of Equity Shares that an Equity Shareholder is entitled to. An Equity Shareholder will have the following five options: A. Apply for his Rights Entitlement in full; B. Apply for his Rights Entitlement in part (without renouncing the other part); C. Apply for his Rights Entitlement in full and apply for additional Equity Shares; D. Renounce his entire Rights Entitlement; or E. Apply for his Rights Entitlement in part and renounce the other part. Options A and B: Acceptance of the Rights Entitlement The Equity Shareholders may accept their Rights Entitlement and apply for the Equity Shares offered, either (i) in full or (ii) in part, without renouncing the other part, by completing Part A of the CAF. For details in relation to submission of the CAF and mode of payment please refer to the sub-section titled “Submission of Application and Modes of Payment for the Issue” under this section titled “Terms and Procedure of the Issue” on page 85 of this Draft Letter of Offer.

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Option C: Acceptance of the Rights Entitlement and Application for Additional Equity Shares The Equity Shareholders are eligible to apply for additional Equity Shares, over and above their Rights Entitlements, provided that such Equity Shareholders have applied for all the Equity Shares without renouncing some or all of them in favor of any other person(s). The application for the additional Equity Shares shall be considered and allotment shall be made at the sole discretion of the Board of Directors, in consultation, if necessary, with the Designated Stock Exchange. Where the number of Equity Shares applied for exceeds the number of Equity Shares available for allotment, the allotment of additional Equity Shares shall be made on a fair and equitable basis with reference to the number of Equity Shares held by the applicant on the Record Date. For details of the manner in which applications for additional Equity Shares with shall be considered and allotment completed, please refer to the sub-section titled “Basis of Allotment” under this section titled ““Terms and Procedure of the Issue” on page 85 of this Draft Letter of Offer. If you desire to apply for additional Equity Shares, please indicate your requirement in the place provided for additional Equity Shares in Part A of the CAF. Options D and E: Renunciation of the Rights Entitlement As an Equity Shareholder, you have the right to renounce your entitlement to the Equity Shares, in full or in part, in favor of one or more persons. Your attention is drawn to the fact that our Bank shall not allot and/or register any Equity Shares, in favor of:

• More than three persons, including joint holders; • Partnership firms or their nominees; • Minors; • Hindu Undivided Families (HUFs); or • Trusts or societies (unless registered under the Societies Registration Act, 1860 or the Indian Trusts Act,

1882 or any other law applicable to trusts and societies and is authorised under its constitution or bye-laws to hold equity shares of a company).

The person(s) in whose favor any Equity Shares are renounced should complete and sign Part C of the CAF and submit the CAF to the Bankers to the Issue on or prior to the Issue Closing Date along with the Application Money. Renouncees need not be existing Equity Shareholders of our Bank. Renouncees who have subscribed for all the Equity Shares renounced in their favor may also apply for additional Equity Shares. A Renouncee cannot further renounce. However, the right of renunciation is subject to the express condition that the Board of Directors shall be entitled, in its absolute discretion, to reject the request from the renouncees for the allotment of Equity Shares without assigning any reason therefore. Renunciation by and/or in favor of Non Residents Any renunciation (i) from a resident Indian Equity Shareholder to a Non Resident, or (ii) from a Non Resident Equity Shareholder to a resident Indian, or (iii) from a Non Resident Equity Shareholder to a Non Resident, in light of RBI Master circular on Foreign Investment in India dated July 01, 2010;RBI Notification No. FEMA 20/2000-RB dates May 03, 2000 and RBI circular No. 38 dated December 03, 2003 would not require approval from RBI. Procedure for Renunciation (a) To renounce the entire Rights Entitlement in favor of one renouncee If you wish to renounce the Rights Entitlement indicated in Part A, in whole, please complete Part B of the CAF and send it to the renouncee. In case of joint holding, all joint holders must sign Part B of the CAF. The renouncee should complete and sign Part C of the CAF. In case of joint renouncees, all joint renouncees must sign Part C of the CAF. Renouncees shall not be entitled to further renounce their entitlement in favor of any other person.

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(b) To renounce a part of the Rights Entitlement or the entire Rights Entitlement to more than one person If you wish to either (i) accept the Rights Entitlement in part and renounce the balance or (ii) renounce the entire Rights Entitlement in favor of two or more renouncees, the CAF must be first split into the requisite number of forms. For this purpose, you shall have to apply to the Registrar to the Issue. Please indicate your requirement of split application forms in the space provided for this purpose in Part D of the CAF and return the CAF to the Registrar to the Issue so as to reach them at the latest by the close of business hours on the last date for receiving requests for split application forms. On receipt of the required number of split application forms from the Registrar to the Issue, the procedure as set out in paragraph (a) above will have to be followed. In case the signature of the Equity Shareholder, who has renounced the Equity Shares, does not tally with the specimen registered with our Bank, the application is liable to be rejected. A summary of the options available to the Equity Shareholders is set out below. You may exercise any of the following options with regard to the Equity Shares, using the CAF: Option Option Available

Action Required

A. Accept your Rights Entitlement in full Complete and sign Part A. (All joint holders must Sign)

B. Accept your Rights Entitlement in part without renouncing the balance Complete and sign Part A. (All joint holders must sign)

C. Accept your Rights Entitlement in full and apply for additional Equity Shares

Complete and sign Part A including Block III relating to the acceptance of the Rights Entitlement and Block IV relating to additional Equity Shares (All joint holders must sign)

Renounce your Rights Entitlement in full to: 1. One person (Joint renounces

are considered as one)

1) Complete and sign Part B (all joint holders must sign) indicating the number of Equity Shares renounced and hand it over to the renounce. The renounce must complete and sign Part C. (All joint renounces must sign)

D.

2. More than one person

2) Complete and sign Part D (all joint holders must sign) requesting for split application forms. Send the CAF to the Registrar to the issue, so as to reach the Registrar on or prior to the last date for receiving requests for split application forms. Splitting will be permitted only once Upon receipt of the split application form, take action as indicated below: 1. Complete and sign Part B indicating the number of Equity

Shares renounced and hand it over to the renounces. 2. Each of the renounces should complete and sign Part C for

the Equity Shares with accepted by them

E. Accept a part of your Rights Complete and sign Part D (all joint holders must sign)

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Option Option Available

Action Required

Entitlement and renounce the balance to one or more person(s)

requesting for split application forms. Send the CAF to the Registrar to the Issue, so as to reach the Registrar on or prior to the last date for receiving requests for split application forms, Splitting will be permitted only once. Upon receipt of the split application form, take action as indicated below 1. For the Equity Shares you wish to accept, complete and

sign Part A ( All joint holders must sign) 2. For the Equity Shares you wish to renounce, complete

and sign Part B indicating the number of Equity Shares with renounced and hand it over to the renounces

3. Each of the renounces should complete and sign Part C for the Equity Shares being accepted by them

F Introduce a joint holder or change the sequence of joint holders

This will be treated as a renunciation. Fill in and sign Part B and the Renouncee must fill in and sign Part C.

3. Change and/ or introduction of additional holders If you wish to apply for the Equity Shares jointly with any other person(s), not more than three, who is/are not already a joint holder(s) with you, it shall amount to a renunciation and the procedure for renunciation, as applicable, set out above will have to be followed. Even a change in the sequence of the names of joint holders shall amount to a renunciation and the procedure for renunciation, as applicable, set out above will have to be followed. Please note that: 1. Part A of the CAF must not be used by any person(s) other than the Equity Shareholder to whom this DLOF

has been addressed. If used, this will render the application invalid. 2. While applying for or renouncing their Rights Entitlement, joint holders must sign in the same order and as

per the specimen signatures registered with our Bank.

3. Request for split application form should be made for a minimum of one (1) Equity Share or in multiples of one (1) Equity Share;

4. Request by the applicant for the Split Application Form should reach our Bank on or before [●].

5. Only the person to whom the Abridged Letter of Offer has been addressed to and not the renouncee(s) shall

be entitled to renounce and to apply for Split Application Forms. Forms once split cannot be split again.

6. Split form(s) will be sent to the applicant(s) by post at the applicant’s risk. 7. In the case of a renunciation, the submission of the CAF to the Bankers to the Issue at the collecting

branches specified on the reverse of the CAF together with Part B of the CAF duly completed shall be conclusive evidence of the right of the person applying for the Equity Shares to receive allotment of such Equity Shares.

For details on completing the CAF and other general instructions, please follow the instructions indicated on the reverse of the CAF. In addition, please refer to the sub-section titled “General Instructions for Applicants” under this chapter titled “Terms and Procedure of the Issue” on page 85 of this Draft Letter of Offer.

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Availability of duplicate CAF In case the original CAF is not received, or is misplaced by the applicant, the Registrar to the Issue will issue a duplicate CAF on the request of the applicant who should furnish the registered folio number/ DP and Client ID number and his/ her full name and address to the Registrar to the Issue. Please note that the request for duplicate CAF should reach the Registrar within 8 days from the Issue opening date. Please note that those who are making the application in the duplicate form should not utilize the original CAF for any purpose including renunciation, even if it is received/ found subsequently. Thus in case the original and duplicate CAFs are lodged for subscription, allotment will be made on the basis of the duplicate CAF and the original CAF will be ignored. If any Investor’s request is in contravention of the above stipulation, he/ she shall face the risk of rejection of both the applications. Our Bank or the Registrar to the Issue will not be responsible for postal delays or loss of duplicate CAF in transit, if any. Application on Plain Paper An Equity Shareholder who has neither received the original CAF nor is in a position to obtain the duplicate CAF may make an application to subscribe to the Issue on plain paper, along with Demand Draft (after deducting banking and postal charges) payable at Mangalore which should be drawn in favour of [●] in case of resident shareholders and non-resident shareholders applying on non-repatriable basis and in favour of [●] in case of non-resident shareholders applying on repatriable basis and send the same by registered post directly to the Registrar to the Issue so as to reach them on or before the closure of the Issue. The envelope should be superscribed "THE KARNATAKA BANK LIMITED -Rights Issue" in case of resident shareholders and non-resident shareholders applying on non-repatriable basis, and in favour of "THE KARNATAKA BANK LIMITED -Rights Issue - NR" in case of non-resident shareholders applying on repatriable basis. Application on plain paper will not be accepted from any U.S. address. The application on plain paper, duly signed by the applicant(s) including joint holders, in the same order as per specimen recorded with our Bank, must reach the office of the Registrar to the Issue before the Issue Closing Date and should contain the following particulars: 1. Name of Issuer, The Karnataka Bank Limited 2. Name and address of the Equity Shareholder including joint holders 3. Registered Folio Number/ DP ID No. and Client ID No. 4. Number of shares held as on Record Date 5. Certificate numbers and distinctive numbers, if held in physical form. 6. Number of Rights Equity Shares entitled 7. Number of Rights Equity Shares applied for 8. Number of additional Equity Shares applied for, if any 9. Total number of Equity Shares applied for 10. Total amount paid on application at the rate of Rs. [•] per Equity Share 11. Particulars of =demand draft 12. In case of Equity Shares allotted in physical form, Savings/Current Account Number and name and

address of the bank where the Equity Shareholder will be depositing the refund order. In case of equity shares allotted in demat code, the bank account details will be obtained from the information available with the depositories

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13. The permanent account number (PAN) of the Equity Shareholder and where relevant, for each joint holder, except in respect of central and state government officials, residents of Sikkim and officials appointed by the court (e.g. official liquidators and court receivers) who, in terms of a SEBI circular dated June 30, 2008, may be exempt from specifying their PAN for transaction in the securities market, subject to submitting sufficient documentary evidence in support of their claim for exemption, provided that such transactions are undertaken on behalf of the central and State Government and not in their personal capacity

14. Signature of Equity Shareholders to appear in the same sequence and order as they appear in the records

of our Bank. 15. In case of Non Resident Shareholders, NRE/ FCNR/ NRO A/c No. Name and Address of our Bank and

Branch; 16. If payment is made by a draft purchased from NRE/ FCNR/ NRO A/c No., as the case may be, an

Account debit certificate from the bank issuing the draft, confirming that the draft has been issued by debiting NRE/ FCNR/ NRO Account.

17. A representation that the Equity Shareholder is not a “U.S. Person” (as defined in Regulation S under the

Securities Act); 18. Additionally, Non Resident applicants shall include the representation in writing that:

“I/We understand that the Rights Entitlement have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the “US Securities Act”) or any United States state securities laws, and may not be offered, sold, resold or otherwise transferred within the United States or to the territories or possessions thereof or to, or for the account or benefit of, “U.S. Persons” (as defined in Regulation S under the US Securities Act), except in a transaction exempt from, or in a transaction not subject to, the registration requirements of the US Securities Act. The Equity Shares referred to in this application are being offered in India but not in the United States of America. None of our Bank, the Registrar, the Lead Manager or any other person acting on behalf of our Bank will accept subscriptions from any person, or the agent of any person, who appears to be, or who our Bank, the Registrar, the Lead Manager or any other person acting on behalf of our Bank has reason to believe is, a resident of the United States and to whom an offer, if made, would result in requiring registration of this application with the United States Securities and Exchange Commission.

I/We am/are both an institutional investor and an “accredited investor” within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the US Securities Act and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Equity Shares, and we are, and any accounts for which we are acting are each, able to bear the economic risk of our or its investment.

I/We will not offer, sell or otherwise transfer any of the Equity Shares which may be acquired by us in any jurisdiction or under any circumstances in which such offer or sale is not authorised or to any person to whom it is unlawful to make such offer, sale or invitation except under circumstances that will result in compliance with any applicable laws or regulations. We satisfy, and each account for which we are acting satisfies, all suitability standards for investors in investments of the type subscribed for herein imposed by the jurisdiction of our residence.

I/We understand and agree that the Equity Shares may not be reoffered, resold, pledged or otherwise transferred except in an offshore transaction in compliance with Regulation S, or otherwise pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act.”

Please note that Equity Shareholders who are making an application otherwise than on a CAF (i.e., on plain paper as stated above) shall not be entitled to renounce their rights and should not utilize the CAF for any purpose, including renunciation, even if it is received subsequently. If the Equity Shareholder does not comply with any of these requirements, he/she shall face the risk of rejection of both the applications and the Application Money received shall be refunded. However, our Bank and/or any

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Director of our Bank will not be liable to pay any interest whatsoever on the Application Money so refunded.

The Equity Shareholders are requested to strictly adhere to these instructions. Failure to do so could result in the application being rejected, with our Bank, the Lead Manager and the Registrar not having any liability to such Equity Shareholders.

IV. Submission of Application and Modes of Payment for the Issue (other than ASBA Applicants) 1. Resident Equity Shareholders/ Applicants 1. Applicants who are applying through CAF and residing at places where the bank collection centres

have been opened by our Bank for collecting applications, are requested to submit their applications at the corresponding collection centre together with cheque / bank demand draft drawn on any bank (including a co-operative bank), for the full application amount favouring [●] and marked ‘A/c Payee only’.

2. Applicants who are applying through CAF and residing at places other than places where the bank

collection centres have been opened for collecting applications, are requested to send their applications together with a =demand draft of amount after deducting bank and postal charges, for the full application amount favouring [●] and marked ‘A/c Payee only’ payable at Mangalore directly to the Registrar to the Issue by registered post so as to reach them on or before the Issue Closing Date. Our Bank or the Registrar to the Issue will not be responsible for postal delays or loss of applications in transit, if any.

3. Applicants who are applying on plain paper, are requested to send their applications on plain paper

together with a demand draft of amount after deducting bank and postal charges, for the Equity Shares favouring [●] and marked ‘A/c Payee only’ payable at Mangalore directly to the Registrar to the Issue by registered post so as to reach them on or before the Issue Closing Date. Our Bank or the Registrar to the Issue will not be responsible for postal delays or loss of applications in transit, if any.

2. Non-Resident Equity Shareholders / Applicants Application with repatriation benefits Non-Resident Equity Shareholders / Applicants, applying on a repatriation basis, are required to submit the completed CAF / application on plain paper, as the case may be, alongwith the payment made through any of the following ways: 1. By Indian Rupee drafts purchased from abroad and payable at Mangalore or funds remitted from

abroad (submitted along with Foreign Inward Remittance Certificate); or 2. By Local cheque / bank drafts remitted through normal banking channels or out of funds held in Non-

Resident External Account (NRE) or FCNR Account maintained with banks authorized to deal in foreign currency in India, along with documentary evidence in support of remittance; or

3. FIIs registered with SEBI must remit funds from special non-resident rupee deposit account. 4. For Equity Shareholders / Applicants , applying through CAF, the CAF is to be sent at the bank

collection centre specified in the CAF along with cheques/drafts in favour of [●] and crossed ‘A/c Payee only’ for the amount payable.

5. For Equity Shareholders / Applicants, applying on a plain paper, the applications are to be directly sent

to the Registrar to the Issue by registered post along with drafts (after deducting bank and postal charges) in favour of [●] payable at Mangalore and crossed ‘A/c Payee only’ for the amount payable so as to reach them on or before the Issue Closing Date.

6. For Equity Shareholders/ Applicants applying through CAF but not residing at places where the

collection centre is located, shall send the CAF to the Registrar to the Issue by registered post along with drafts of an amount after deducting bank and postal charges in favour of [●] payable at

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Mangalore and crossed ‘A/c Payee only’ for the amount payable so as to reach them on or before the Issue Closing Date.

A separate cheque or bank draft must accompany each application form. Applicants may note that where payment is made by drafts purchased from NRE/FCNR accounts as the case may be, an Account Debit Certificate from the bank issuing the draft confirming that the draft has been issued by debiting the NRE/FCNR account should be enclosed with the CAF. In the absence of the above the application shall be considered incomplete and is liable to be rejected. In the case of NRIs who remit their application money from funds held in FCNR/NRE Accounts, refunds and other disbursements, if any shall be credited to such account details of which should be furnished in the appropriate columns in the CAF. In the case of NRIs who remit their application money through Indian Rupee Drafts from abroad, refunds and other disbursements, if any will be made in U.S Dollars at the rate of exchange prevailing at such time subject to the permission of RBI. Our Bank will not be liable for any loss on account of exchange rate fluctuation for converting the Rupee amount into U.S. Dollar or for collection charges charged by the applicant’s Bankers. Our Bank or the Registrar to the Issue will not be responsible for postal delays or loss of application in transit, if any Payments through Non Resident Ordinary Account (NRO account) will not be permitted. Application without repatriation benefits

For non-residents Equity Shareholders / Applicants applying on a non-repatriation basis, in addition to the modes specified above, payment may also be made by way of cheque drawn on Non-Resident (Ordinary) Account maintained at Mangalore or Rupee Draft purchased out of NRO Account maintained elsewhere in India but payable at Mangalore. In such cases, the allotment of Equity Shares will be on non-repatriation basis. For Non Resident Equity Shareholders/Applicants, applying through CAF, the CAF is to be sent at the bank collection centre specified in the CAF along with cheques/demand drafts drawn after deducting bank and postal charges in favor of [●] and crossed ‘A/c Payee only’ for the amount payable. For Equity Shareholders/Applicants, applying on a plain paper, the applications are to be directly sent to the Registrar to the Issue by registered post along with demand drafts after deducting bank and postal charges drawn in favor of [●] payable at Mangalore so as to reach them on or before the Issue Closing Date. For Equity Shareholders/ Applicants applying through CAF but not residing at places where the collection centre is located, shall send the CAF to the Registrar to the Issue by registered post along with drafts of an amount after deducting bank and postal charges in favour of [●] payable at Mangalore for the amount payable so as to reach them on or before the Issue Closing Date. If the payment is made by a draft purchased from an NRO account, an Account Debit Certificate from the bank issuing the draft, confirming that the draft has been issued by debiting the NRO account, should be enclosed with the CAF. In the absence of the above, the application shall be considered incomplete and is liable to be rejected. New dematerialised accounts shall be opened for Equity Shareholders who have had that change in status from resident Indian to NRI. Our Bank or the Registrar to the Issue will not be responsible for postal delays or loss of application in transit, if any, on this account and applications received through mail after closure of the Issue are liable to be rejected. Applications through mails should not be sent in any other manner except as mentioned above. The CAF along with the application money must not be sent to our Bank or the Lead Manager or the Registrar except stated otherwise. The Investors are requested to strictly adhere to these instructions. Renouncees who are NRIs/FIIs/Non-Resident should submit their respective applications either by hand delivery or by registered post with acknowledgement due to the Registrar to the Issue only along with the cheque/demand draft payable at Mangalore so that the same are received on or before the closure of the Issue.

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Note:

1. In case where repatriation benefit is available, interest, dividend, sales proceeds derived from the investment in Equity Shares can be remitted outside India, subject to tax, as applicable according to Income Tax Act, 1961.

2. In case Equity Shares are allotted on non-repatriation basis, the dividend and sale proceeds of the

Equity Shares cannot be remitted outside India.

3. The CAFs duly completed together with the amount payable on application must be deposited with the collecting bank indicated on the reverse of the CAFs before the close of business hours on or before the Issue Closing Date. Separate cheque or bank draft must accompany each CAF.

4. In case of a CAF received from non-residents, allotment, refunds and other distribution, if any, will be

made in accordance with the guidelines/ rules prescribed by RBI as applicable at the time of making such allotment, remittance and subject to necessary approvals.

Last date of Application The last date for submission of the duly filled in CAF is [●] i.e. the Issue Closing Date. The Issue will be kept open for a minimum of 15 (Fifteen) days and the Board or any committee thereof will have the right to extend the said date for such period as it may determine from time to time but not exceeding 30 (Thirty) days from the Issue Opening Date. If the CAF together with the amount payable is not received by the Banker to the Issue/ Registrar to the Issue on or before the close of banking hours on the aforesaid last date or such date as may be extended by the Board, the offer contained in this Draft Letter of Offer shall be deemed to have been declined and the Board shall be at liberty to dispose of the Equity Shares hereby offered, as provided under the paragraph titled “Basis of Allotment” beginning on page 98 of this Draft Letter of Offer. V. Basis of Allotment Subject to the provisions contained in this Draft Letter of Offer, the Articles of Association of our Bank and the approval of the Designated Stock Exchange, the Board will proceed to allot our Equity Shares in the following order of priority:

(a) Full allotment to those Equity Shareholders who have applied for their Rights Entitlement either in full or in part and also to the Renouncee(s) who has/have applied for Equity Shares renounced in their favour, in full or in part.

(b) For Equity Shares being offered on a rights basis under this Issue, the shareholders holding 1 Equity Share on the Record Date will be offered 1 entitlement. In all other cases, the shareholders fractional entitlements on the Record Date will be ignored if such entitlement is less than 0.5 and will be rounded off to the next integer if the entitlement is 0.5 or more. Eligible Equity Shareholders whose fractional entitlements are being ignored would be given preference in allotment of one additional Rights Equity Share each if they apply for additional Rights Equity Shares. Allotment under this head shall be considered if there are any unsubscribed Rights Equity Shares after allotment under (a) above. If the number of Rights Equity Shares required for allotment under this head are more than the number of Rights Equity Shares available after allotment under (a) above, the allotment would be made on a fair and equitable basis in consultation with the Designated Stock Exchange.

(c) Allotment to the Equity Shareholders who having applied for all the Equity Shares offered to them as part of the Issue and have also applied for additional Equity Shares. The allotment of such additional Equity Shares will be made as far as possible on an equitable basis having due regard to the number of Equity Shares held by them on the Record Date, provided there is an under-subscribed portion after making full allotment in (a). The allotment of such Equity Shares will be at the sole discretion of the Board / Committee of Directors in consultation with the Designated Stock Exchange, as a part of the Issue and will not be a preferential allotment.

(d) Allotment to Renouncees who having applied for all the Equity Shares renounced in their favour, have

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applied for additional Equity Shares provided there is surplus available after making full allotment under (a) and (b) above. The allotment of such Equity Shares will be at the sole discretion of the Board/Committee of Directors in consultation with the Designated Stock Exchange, as a part of the Issue and not preferential allotment.

(e) Allotment to any other person as the Board may in its absolute discretion deem fit provided there is surplus available after making full allotment under (a), (b) (c) and (d) above.

After taking into account allotment to be made under (a) and (b) above, if there is any unsubscribed portion, the same shall be deemed to be ‘unsubscribed’ for the purpose of regulation 3(1)(b) of the Takeover Code which would be available for allocation under (b), (c) (d) and (e) above. After such allotments as above, including the application for rights/renunciation and additional Equity Shares, any additional Equity Shares shall be disposed off by the Board of our Bank, in such manner as they think most beneficial to our Bank and the decision of the Board of our Bank in this regard shall be final and binding. In the event of oversubscription, allotment will be made within the overall size of the Issue Our Bank expects to complete the allotment of Equity Shares within a period of 15 days from the date of closure of the Issue in accordance with the listing agreement with NSE and BSE. In case of delay in allotment our Bank shall, as stipulated under Section 73(2A) of the Act, be required to pay interest on the same at a rate of 15 per cent p.a. Our Bank shall retain no oversubscription. Underwriting Our Bank has not currently entered into any underwriting arrangement. VI. Allotment and Refund Our Bank will issue and dispatch allotment advice/letters of allotment/Share Certificates/demat credit and/or letters of regret along with refund orders or credit the allotted securities to the respective beneficiary accounts, if any, within a period of 15 days from the Issue Closing Date. If the amount to be refunded is not paid within eight days from the day our Bank becomes liable to pay it, our Bank and every Director of our Bank who is an officer in default shall be jointly and severally liable to repay the money with interest for the delayed period at 15% per annum as stipulated under sub-sections (2) and (2A) of Section 73 of the Companies Act. Investors residing at centers where clearing houses are managed by the Reserve Bank of India ("RBI") will get refunds through National Electronic Clearing Service ("NECS") except where Investors are otherwise disclosed as applicable/eligible to get refunds through direct credit and real time gross settlement ("RTGS"). In case of those Equity Shareholders or applicants who have opted to receive the Equity Shares in dematerialized form using electronic credit under the depository system, advice regarding their credit of the Equity Shares shall be given separately. Applicants to whom refunds are made through electronic transfer of funds will be sent a letter through ordinary post intimating them about the mode of credit of refund within 15 working days of closure of Issue. In case of those Equity Shareholders or applicants who have opted to receive the Equity Shares in physical form and in respect of which our Bank issues letters of allotment, the corresponding Share Certificates will be delivered within three months from the date of allotment thereof or such extended time as may be approved by the Bank Law Board under Section 113 of the Companies Act or other applicable provisions, if any. Allottees are requested to preserve such letters of allotment, which will subsequently be exchanged for the Share Certificates. The allotment advice/letters of allotment and refund orders exceeding Rs.1,500 will be sent by registered post/speed post to the sole/first applicant’s registered address in India. Refund orders up to the value of Rs.1, 500/- will be sent under certificate of posting. Such refund orders will be payable at par at all places where the applications were originally accepted. The same will be marked “account payee only” and will be drawn in

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favor of the sole/first applicant. Adequate funds will be made available to the Registrar to the Issue for this purpose. Our Bank shall ensure at par facility is provided for encashment of refund orders or pay orders at the places where applications are accepted. As regards allotment/refund to Non-Residents, the following further conditions shall apply In the case of Non Resident Equity Shareholders or applicants who remit their application money from funds held in NRE/FCNR Accounts, refunds and/or payment of interest or dividend and other disbursements, if any, shall be credited to such accounts, the details of which should be furnished in the CAF. Subject to the approval of the RBI, in case of Non Resident Equity Shareholders or applicants who remit their application money through Indian Rupee demand drafts purchased from abroad, refund and/or payment of dividend or interest and any other disbursement, shall be credited to such accounts and will be made after deducting bank charges or commission in US Dollars, at the rate of exchange prevailing at such time. The Bank will not be responsible for any loss on account of exchange rate fluctuations for conversion of the Indian Rupee amount into US Dollars. The Share Certificate(s) will be sent by registered post to the address in India of the Non Resident Equity Shareholders or applicants. Mode of making Refund Applicants should note that on the basis of name of the applicants, Depository Participant’s name, Depository Participant-Identification number and Beneficiary Account Number provided by them in the Composite Application Form, the Registrar to the Issue will obtain from the Depositories, the applicant’s bank account details including nine digit MICR code. Hence, applicants are advised to immediately update their bank account details as appearing on the records of the depository participant. Please note that failure to do so could result in delays in credit of refunds to applicants at the applicant’s sole risk and neither the Lead Manager nor our Bank shall have any responsibility and undertake any liability for the same. The payment of refund, if any, would be done through various modes in the following order of preference: I. NECS

Payment of refund would be done through NECS for applicants having an account at one of the centres specified by the RBI, where such facility has been made available.

This would be subject to availability of complete Bank Account Details including MICR code wherever applicable from the depository. The payment of refund through ECS is mandatory for applicants having a bank account at any of the centres where ECS facility has been made available by the RBI (subject to availability of all information for crediting the refund through ECS), except where applicant is otherwise disclosed as eligible to get refunds through NEFT or Direct Credit or RTGS.

II. NEFT

Payment of refund shall be undertaken through NEFT wherever the applicants’ bank has been assigned the Indian Financial System Code (IFSC), which can be linked to a Magnetic Ink Character Recognition (MICR) , if any, available to that particular bank branch. IFSC Code will be obtained from the website of RBI as on a date immediately prior to the date of payment of refund, duly mapped with MICR numbers. Wherever the applicants have registered their nine digit MICR number and their bank account number while opening and operating the demat account, the same will be duly mapped with the IFSC Code of that particular bank branch and the payment of refund will be made to the applicants through this method.

III. Direct Credit

Applicants that have bank accounts with the Bankers to the Issue shall be eligible to receive refunds through direct credit. Charges, if any, levied by the Bankers to the Issue for the same will be borne by our Bank.

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IV. RTGS

Applicants having a bank account at any of the centres specified by RBI where such facility has been made available and whose refund amount exceeds Rs. 1 Lakh, have the option to receive refund through RTGS. Such eligible applicants who indicate their preference to receive refund through RTGS are required to provide the IFSC code in the CAF. In the event the same is not provided, refund shall be made through ECS. Charges, if any, levied by the Refund Bank(s) for the same would be borne by our Bank opting for RTGS as a mode of refund. Charges, if any, levied by the applicant’s bank receiving the credit would be borne by the applicant.

Only or all the other applicants except for whom payment of refund is possible through I, II, III and IV, the refund orders would be dispatched “Under Certificate of Posting” for refund orders less than Rs.1,500/- and through Speed Post/Registered Post for refund orders exceeding Rs.1,500/-. Such refunds will be made by cheques, pay orders or demand drafts drawn in favour of the sole/first applicant and payable at par. For shareholders opting for allotment in physical mode, bank account details as mentioned in the CAF shall be considered for electronic credit or printing of refund orders, as the case may be. Refund orders will be made by cheques, pay orders or demand drafts drawn on the Refund Bank(s) and payable at par at places where the applications were received and will be marked account payee and will be drawn in the name of Sole/First Applicant. The bank charges, if any, for encashing such cheques, pay orders or demand drafts at other centres will be payable by the Applicants. Refund payment to Non-Resident Where applications are accompanied by Indian rupee drafts purchased abroad and payable at Mangalore (as otherwise specified in this section titled “Terms and Procedure of the Issue”), refunds will be made in convertible U.S. dollars equivalent to Indian rupees to be refunded. Indian rupees will be converted into U.S. dollars at the rate of exchange, which is prevailing on the date of refund. The exchange rate risk on such refunds shall be borne by the concerned applicant and our Bank shall not bear any part of the risk. Where the applications made are accompanied by NRE/FCNR/NRO cheques, refunds will be credited to NRE/FCNR/NRO accounts respectively, on which such cheques were drawn and details of which were provided in the CAF. Export of letters of allotment (if any)/ share certificates/ demat credit to non-resident allottees will be subject to the approval of RBI. Interest in Case of Delay in Dispatch of Allotment Letters/ Refund Orders Our Bank will issue and dispatch letters of allotment/ share certificates and/ or letters of regret along with refund order or credit the allotted securities to the respective beneficiary accounts, if any within a period of fifteen days from the date of closure of the Issue. The dispatch of share certificates/ refund orders and demat credit will be completed and the allotment and listing documents will be submitted to the stock exchanges within 15 days from the closure of the Issue. If such money is not repaid within 8 days from the day our Bank becomes liable to pay it, our Bank shall pay that money with interest at the rate of 15% per annum as stipulated under sub-sections (2) and (2A) of Section 73 of the Companies Act. . Option to receive Equity Shares in Dematerialized Form Applicants to the Equity Shares of our Bank issued through this Issue shall be allotted the securities in dematerialised (electronic) form at the option of the applicant. Our Bank has signed agreements dated October 16, 2000 and October 14, 2000 with NSDL and CDSL respectively, which enables the Investors to hold and trade in securities in a dematerialised form, instead of holding the securities in the form of physical certificates. In this Issue, the allottees who have opted for Equity Shares in dematerialised form will receive their Equity Shares in the form of an electronic credit to their beneficiary account with a depository participant. The CAF shall contain space for indicating number of shares applied for in demat and physical form or both. Investor will have to give the relevant particulars for this purpose in the appropriate place in the CAF. Applications, which do not accurately contain this information, will be given the securities in physical form. No separate applications for securities in physical and/or dematerialized form should be made. If separate applications are made, the

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application for physical securities will be treated as multiple applications and is liable to be rejected. In case of partial allotment, allotment will be done in demat option for the shares sought in demat and balance, if any, will be allotted in physical shares.

INVESTORS MAY PLEASE NOTE THAT THE EQUITY SHARES OF OUR BANK CAN BE TRADED ON THE STOCK EXCHANGES ONLY IN DEMATERIALIZED FORM. Procedure for availing the facility for allotment of Equity Shares in this Issue in the electronic form is as under: 1. Open a beneficiary account with any depository participant (care should be taken that the beneficiary

account should carry the name of the holder in the same manner as is exhibited in the records of our Bank. In the case of joint holding, the beneficiary account should be opened carrying the names of the holders in the same order as with our Bank). In case of Investors having various folios in our Bank with different joint holders, the Investors will have to open separate accounts for such holdings. Those Equity Shareholders who have already opened such Beneficiary Account (s) need not adhere to this step.

2. For Equity Shareholders already holding Equity Shares of our Bank in dematerialized form as on the

Record Date, the beneficial account number shall be printed on the CAF. It may be noted that the allotment of Equity Shares arising out of this Issue may be made in dematerialized form even if the original Equity Shares of our Bank are not dematerialized. Nonetheless, it should be ensured that the Depository Account is in the name(s) of the Equity Shareholders and the names are in the same order as in the records of our Bank.

3. Responsibility for correctness of information (including applicant’s age and other details) filled in the CAF

vis-à-vis such information with the applicant’s depository participant, would rest with the applicant. Applicants should ensure that the names of the applicants and the order in which they appear in CAF should be the same as registered with the applicant’s depository participant.

4. If incomplete / incorrect beneficiary account details are given in the CAF or where the investor does not

opt to receive the Rights Equity shares in dematerialized form, the applicant will get Equity Shares in physical form.

5. Applicants must necessarily fill in the details (including the beneficiary account number or client ID

number) appearing in the CAF under the heading ‘Request for shares in Electronic Form’. 6. Applicants should ensure that the names of the Applicants and the order in which they appear in the CAF

should be the same as registered with the Applicant’s depository participant. 7. The Rights Equity Shares pursuant to this Issue allotted to investors opting for dematerialized form, would

be directly credited to the beneficiary account as given in the CAF after verification. Allotment advice, refund order (if any) would be sent directly to the applicant by the Registrar to the Issue but the applicant’s depository participant will provide to him the confirmation of the credit of such Equity Shares to the applicant’s depository account.

8. Renouncees will also have to provide the necessary details about their beneficiary account for allotment of

securities in this Issue. In case these details are incomplete or incorrect, the application is liable to be rejected.

9. Renouncees can also exercise the option to receive Equity Shares in the demat form by indicating in the

relevant column in the CAF and providing the necessary details about their beneficiary account. It may be noted that Equity Share arising out of this Issue can be received in demat form even if the existing Equity Shares are held in physical form. Nonetheless, it should be ensured that the depository participant account is in the name of the Applicant(s) in the same order as per specimen signatures appearing in the records of the depository participant/Bank. It may be noted that shares in electronic form can be traded only on the Stock Exchange having electronic connectivity with NSDL or CDSL.

10. Dividend or other benefits with respect to the Equity Shares held in dematerialised form would be paid to

those Equity Shareholders whose names appear in the list of beneficial owners given by the depository participant to our Bank as on the Record Date.

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VII. General instructions for applicants (a) Please read the instructions printed on the enclosed CAF carefully. (b) Application should be made on the printed CAF, provided by our Bank except as mentioned under the

head “Application on Plain Paper” and should be completed in all respects. The CAF found incomplete with regard to any of the particulars required to be given therein, and/ or which are not completed in conformity with the terms of this Draft Letter of Offer are liable to be rejected and the money paid, if any, in respect thereof will be refunded without interest and after deduction of bank commission and other charges, if any. The CAF must be filled in English and the names of all the applicants, details of occupation, address, father’s / husband’s name must be filled in block letters.

(c) The applicant may accept the issue and apply for the Equity Shares offered, either in full or in part by

filling Block III of Part A of the enclosed CAF and submit the same along with the application money payable to the Bankers to the Issue or any of the branches as mentioned on the reverse of the CAF before the close of the banking hours on or before the Issue Closing Date or such extended time as be specified by the Board of Directors thereof in this regard.

(d) Payments should be made in cheque/demand draft drawn on any bank which is situated at and is a

member of sub-member of the banker’s clearing house located at the centre where application is accepted. Outstation cheques/ demand drafts will not be accepted and application(s) accompanied by such cheques/demand drafts will be rejected. The Registrar will not accept cash along with CAF.

(e) The CAF together with cheque / demand draft should be sent to the Bankers to the Issue / Collecting

Bank or to the Registrar to the Issue and not to our Bank or Lead Manager to the Issue. Applicants residing at places other than cities where the branches of the Bankers to the Issue have been authorised by our Bank for collecting applications, will have to make payment by Demand Draft payable at Mangalore of amount after deducting bank and postal charges, and send their application forms to the Registrar to the Issue by REGISTERED POST. If any portion of the CAF is / are detached or separated or if the application is sent to anyone other than the Bankers to the Issue / Collecting Bank or to the Registrar to the Issue such application is liable to be rejected.

(f) PAN Number: Whenever the application(s) is/are made, the applicant or in the case of an application in

joint names, each of the applicants, should mention his/her Permanent Account Number (PAN) allotted under the IT Act. The copy of the PAN card or PAN allotment letter is not required to be submitted with the CAF. Applications without this information and documents will be considered incomplete and are liable to be rejected. It is to be specifically noted that Applicant should not submit the GIR number instead of the PAN as the application will get rejected on this ground. In terms of SEBI Circular bearing no. MRD/DoP/Cir-20/2008 dated June 30, 2008, certain categories of investors (namely the Central Government, State Government, residents of Sikkim and the officials appointed by the courts e.g. Official liquidator, Court receiver etc. (under the category of Government)) shall be exempted from submitting their PAN, only if such organisations submit sufficient documentary evidence to support the veracity of their claim for such exemption.

(g) Bank Account Details: It is mandatory for applicants to provide information as to their savings/current account number and the name of the bank with whom such account is held in the CAF to enable the Registrar to the Issue to print the said details in the refund orders, if any, after the names of the payees. Application not containing such details is liable to be rejected. SHAREHOLDERS MAY PLEASE NOTE THAT FOR SHARES HELD IN DEMAT MODE, THE BANK ACCOUNT DETAILS SHALL BE OBTAINED FROM THE DEPOSITORIES. SHAREHOLDERS MAY ENSURE THAT THE BANK ACCOUNT DETAILS ARE UPDATED WITH THE DEPOSITORIES.

(h) Payment by cash: The Registrar will not accept any payments against any applications, if made in cash.

In case payment is effected in contravention of this, the application may be deemed invalid and the application money will be refunded and no interest will be paid thereon.

(i) Signatures should be either in English or Hindi or in any other language specified in the Eight Schedule

to the Constitution of India. Signatures other than in English or Hindi and thumb impression must be attested by a Notary Public or a Special Executive Magistrate under his/ her official seal. The Equity Shareholders must sign the CAF as per the specimen signature recorded with our Bank or depositories.

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(j) In case of an application under power of attorney or by a body corporate or by a society, a certified true

copy of the relevant power of attorney or relevant resolution or authority to the signatory to make the relevant investment under this Issue and to sign the application and a copy of the Memorandum and Articles of Association and / or bye laws of such body corporate or society must be lodged with the Registrar to the Issue giving reference of the serial number of the CAF. In case the above referred documents are already registered with our Bank, the same need not be a furnished again. In case these papers are sent to any other entity besides the Registrar to the Issue or are sent after the Issue Closing Date, then the application is liable to be rejected. In no case should these papers be attached to the application submitted to the Bankers to the Issue.

(k) In case of joint holders, all joint holders must sign the relevant part of the CAF in the same order and as

per the specimen signature(s) recorded with our Bank. Further, in case of joint applicants who are renouncees, the number of applicants should not exceed three. In case of joint applicants, reference, if any, will be made in the first applicant’s name and all communication will be addressed to the first applicant.

(l) Application(s) received from Non-Resident / NRIs, or persons of Indian origin residing abroad for

allotment of Equity Shares shall, inter alia, be subject to conditions, as may be imposed from time to time by the RBI under FEMA in the matter of refund of application money, allotment of Equity Shares, subsequent issue and allotment of Equity Shares, interest, export of share certificates, etc. In case a Non-Resident or PIO/NRI Equity Shareholder has specific approval from the RBI, in connection with his shareholding, he should enclose a copy of such approval with the CAF. The Abridged Letter of Offer and CAF shall be dispatched to non-resident Eligible Equity Shareholders at their Indian address only.

(m) All communication in connection with application for the Equity Shares, including any change in

address of the Equity Shareholders should be addressed to the Registrar to the Issue prior to the date of allotment in this Issue quoting the name of the first / sole applicant Equity Shareholder, folio numbers and CAF number. Please note that any intimation for change of address of Equity Shareholders, after the date of allotment, should be sent to Registrar to our Bank; Integrated Enterprises India Limited, No 30 Ramana Residency 4th Cross, Sampige Road, Malleswaram, Bangalore 560 003 in the case of Equity Shares held in physical form and to the respective depository participant, in case of Equity Shares held in dematerialized form.

(n) Split Application Forms cannot be re-split. (o) Only the person or persons to whom Equity Shares have been offered and not renouncee(s) shall be

entitled to obtain split forms. (p) Applicants must write their CAF number at the back of the cheque / demand draft. (q) Only one mode of payment per application should be used. The payment must be by cheque / demand

draft drawn on any of the banks, including a co-operative bank, which is situated at and is a member or a sub member of the Bankers Clearing House located at the centre indicated on the reverse of the CAF where the application is to be submitted.

(r) A separate cheque / draft must accompany each CAF. (s) No receipt will be issued for application money received. The Bankers to the Issue / Collecting Bank/

Registrar will acknowledge receipt of the same by stamping and returning the acknowledgment slip at the bottom of the CAF.

(t) An applicant which is a mutual fund can make a separate application in respect of each scheme of the

mutual fund registered with SEBI and such applications in respect of more than one scheme of the mutual fund shall not be treated as multiple applications provided that the application clearly indicate the scheme concerned for which the application has been made. The application made by the asset management company or custodian of a mutual fund shall clearly indicate the name of the concerned scheme for which the application is made.

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Procedure for Applications by Mutual Funds

A separate application can be made in respect of each scheme of an Indian mutual fund registered with the SEBI and such applications shall not be treated as multiple applications. The applications made by asset management companies or custodians of a mutual fund should clearly indicate the name of the concerned scheme for which the application is being made.

Grounds for Technical Rejections Applicants are advised to note that applications are liable to be rejected on technical grounds, including the following: 1. Applications which are not completed or are not accompanied with the application money payable, are

liable to be rejected; 2. Amount paid does not tally with the amount payable for; 3. In case of physical shareholders, bank account details (for refund) are not given; 4. Age of first applicant not given; 5. PAN allotted under the IT Act has not been mentioned by the applicant, except for CAFs on behalf of

central or state government officials appointed by the Courts or residents of Sikkim; 6. In case of Application under power of attorney or by limited companies, corporate, trust, etc., relevant

documents are not submitted; 7. If the signature of the existing shareholder does not match with the one given on the Application Form

and for renouncees if the signature does not match with the records available with their depositories; 8. If the Applicant desires to receive Equity Shares in electronic form, but the CAF does not have the

Applicant’s depository account details; 9. CAF are not submitted by the Applicants within the time prescribed as per the CAF and the Letter of

Offer and the Abridged Letter of Offer;

10. Applications not duly signed by the sole/joint Applicants; 11. Applications by OCBs unless approved by RBI; 12. Applications accompanied by Stockinvest; 13. In case no corresponding record is available with the Depositories that matches three parameters,

namely, names of the Applicants (including the order of names of joint holders), the Depositary Participant’s identity (DP ID) and the beneficiary’s identity;

14. Applications by ineligible Non-residents on account of restriction or prohibition under applicable local

laws. 15. Applications that do not include the certification set out in the CAF to the effect that the subscriber is

not a U.S. Person and is purchasing the Equity Shares in an “offshore transaction” (as defined in Regulation S), and is authorised to acquire the Equity Shares in compliance with all applicable laws and regulations; and where a registered address in India has not been provided

16. Applications which have evidence of being executed in/dispatched from the US 17. Applications where our Bank believes that the CAF is incomplete or acceptance of such CAF may

infringe applicable legal or regulatory requirements; or

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18. Multiple applications, including where an applicant submits a CAF and a plain paper application. 19. Duplicate Applications, including cases where an investor submits CAFs along with plain paper

applications. 20. Applications by Renouncees who are persons not competent to contract under the Indian Contract Act,

1872, including minors; 21. Please read the Abridged Letter of Offer and the instructions contained therein and in the CAF

carefully before filling in the CAF. The instructions contained in the CAF are an integral part of the Letter of Offer and Abridged Letter of Offer and must be carefully followed. An application is liable to be rejected for any non-compliance of the provisions contained in this Draft Letter of Offer or the CAF.

As a matter of abundant caution, attention of the Investors is specifically drawn to the provisions of sub-section (1) of section 68A of the Companies Act which is reproduced below:

"Any person who makes in a fictitious name an application to a Company for acquiring, or subscribing for, any shares therein, or otherwise induces a Company to allot, or register any transfer of shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years". Procedure for Application through the Applications Supported by Blocked Amount (“ASBA”) Process SEBI, by its circular dated August 20, 2009, introduced in rights issue -application supported by blocked amount wherein the application money remains in the ASBA Account until allotment. Mode of payment through ASBA in Rights Issue became effective on August 20, 2009. Since this is a new mode of payment in Rights Issues, set forth below is the procedure for applying under the ASBA procedure, for the benefit of the shareholders. This section is only to facilitate better understanding of aspects of the procedure which is specific to ASBA investors. ASBA investors should nonetheless read this document in entirety. The Bank and the Lead Manager are not liable for any amendments or modifications or changes in applicable laws or regulations, which may occur after the date of this Draft Letter of Offer. Equity shareholders who are eligible to apply under the ASBA process are advised to make their independent investigations and ensure that the number of Equity Shares applied for by such equity shareholders do not exceed the applicable limits under laws or regulations. ASBA Process An ASBA Investor can submit his application through CAF/plain paper, either in physical or electronic mode, to the SCSB with whom the bank account of the ASBA Investor or bank account utilised by the ASBA Investor is maintained. The SCSB shall block an amount equal to the application amount in the ASBA Account specified in the CAF, physical or electronic, on the basis of an authorisation to this effect given by the account holder at the time of submitting the CAF. The application data shall thereafter be uploaded by the SCSB in the web enabled interface of the Stock Exchanges as prescribed under circular issued by SEBI -SEBI/CFD/DIL/DIP/38/2009/08/20 dated August 20, 2009 or in such manner as may be decided in consultation with the Stock Exchanges. The amount payable on application shall remain blocked in the ASBA Account until finalisation of the Basis of Allotment and consequent transfer of the amount against the allocated Equity Shares to the separate account opened by the Bank for Rights Issue or until failure of the Issue or until rejection of the ASBA application, as the case may be. Once the basis of Allotment is finalized, the Registrar to the Issue shall send an appropriate request to the Controlling Branch for unblocking the relevant ASBA Accounts and for transferring the amount allocable to the successful ASBA Investors to the separate account opened by the Bank for Rights Issue. In case of withdrawal/failure of the Issue, the blocked amount shall be unblocked on receipt of such information from the Registrar to the Issue The Lead Manager, our Bank, its directors, and officers and the Registrar to the Issue shall not take any responsibility for acts, mistakes, errors, omissions and commissions etc. in relation to applications accepted by SCSBs, Applications uploaded by SCSBs, applications accepted but not uploaded by SCSBs or applications accepted and uploaded without blocking funds in the ASBA Accounts. It shall be

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presumed that for applications uploaded by SCSBs, the amount payable on application has been blocked in the relevant ASBA Account. Equity Shareholders who are eligible to apply under the ASBA Process The option of applying for Equity Shares in the Issue through the ASBA Process is only available to a shareholder of our Bank on the Record Date and who:

• Is holding Equity Shares in dematerialised form and has applied for entitlements or additional Equity Shares in the Issue in dematerialised form;

• Has not renounced his entitlements in full or in part; • Has not split the CAF; • Is not a Renouncee to the Issue; • Who applies through a bank account with one of the SCSBs.

CAF The Registrar will dispatch the CAF to all Equity Shareholders as per their entitlement on the Record Date for the Issue. Those Equity Shareholders who wish to apply through the ASBA payment mechanism will have to select for this mechanism in Part A of the CAF and provide necessary details. Equity Shareholders desiring to use the ASBA Process are required to submit their applications by selecting the ASBA Option in Part A of the CAF only. Application in electronic mode will only be available with such SCSB who provides such facility. The Equity Shareholder shall submit the CAF to the SCSB for authorizing such SCSB to block an amount equivalent to the amount payable on the application in the said bank account maintained with the same SCSB. Please note, no more than 5 applications (including CAF and plain paper) can be submitted per bank account in the Issue. Application on Plain Paper An Equity Shareholder who has neither received the original CAF nor is in a position to obtain a duplicate CAF and wanting to apply under ASBA process may make an application to subscribe for the Issue on plain paper. The application on plain paper, duly signed by the applicants including joint holders, in the same order as per specimen recorded with our Bank, must be submitted at a designated branch of a SCSB on or before the Issue Closing Date and should contain the following particulars;

• Name of the issuer, being The Karnataka Bank Limited;

• Name and address of the Equity Shareholder, including any joint holders;

• DP ID number and client ID number;

• Number of Equity Shares held as on the Record Date;

• Rights Entitlement;

• Number of Equity Shares applied for;

• Number of additional Equity Shares applied for, if any;

• Total number of Equity Shares applied for;

• Savings/Current Account Number along with name and address of the SCSB and Branch from which the money will be blocked ;

• The permanent account number (PAN) of the Equity Shareholder and where relevant, for each joint holder, except in respect of Central and State Government officials, residents of Sikkim and officials appointed by the court (e.g., official liquidators and court receivers) who, in terms of a SEBI circular dated June 30, 2008, may be exempt from specifying their PAN for transacting in the securities market,

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subject to submitting sufficient documentary evidence in support of their claim for exemption, provided that such transactions are undertaken on behalf of the Central and State Government and not in their personal capacity;

• A representation that the Equity Shareholder is not a “U.S. Person” (as defined in Regulation S under the Securities Act);

• Signature of the Equity Shareholders to appear in the same sequence and order as they appear in the records of our Bank;

• In case of Non Resident Shareholders, NRE/FCNR/NRO A/c no., Name and address of the SCSB and Branch

• In the application, the ASBA Investor shall, inter alia, give the following confirmations/declarations: a. That he/she is an ASBA Investor as per the SEBI ICDR and b. That he/she has authorized the SCSBs to do all acts as are necessary to make an application in the

Issue, upload his/her application data, block or unblock the funds in the ASBA Account and transfer the funds from the ASBA Account to the separate account maintained by our Bank for Rights Issue after finalization of the basis of Allotment entitling the ASBA Investor to receive Equity Shares in the Issue etc

The Equity Shareholder shall submit the plain paper application to the SCSB for authorising such SCSB to block an amount equivalent to the amount payable on the application in the said bank account maintained with the same SCSB If an applicant makes an application in more than one mode i.e. both in the Composite Application Form and on plain paper, then both the applications may be liable for rejection. The list of banks that have been notified by SEBI to act as SCSB for the ASBA Process are provided on http://www.sebi.gov.in/pmd/scsb.html. For details on designated branches of SCSB collecting the CAF, please refer the above mentioned SEBI link. If the Investor violates any of these requirements, he/she shall face the risk of rejection of both the applications. Our Bank shall refund such application amount to the Investor without any interest thereon. Acceptance of the Issue You may accept the Issue and apply for the Equity Shares offered, either in full or in part, by filling Part A of the CAF sent by the Registrar, selecting the ASBA process option in Part A of the CAF and submit the same to the SCSB before the close of the banking hours on or before the Issue Closing Date or such extended time as may be specified by the Board of Directors of our Bank in this regard. Mode of payment The shareholder applying under the ASBA Process agrees to block the entire amount payable on application (including for additional Equity Shares, if any) with the submission of the CAF, by authorizing the SCSB to block an amount, equivalent to the amount payable on application, in a bank account maintained with the SCSB. After verifying that sufficient funds are available in the bank account provided in the CAF, the SCSB shall block an amount equivalent to the amount payable on application mentioned in the CAF until it receives instructions from the Registrar. Upon receipt of intimation from the Registrar, the SCSBs shall transfer such amount as per Registrar’s instruction allocable to the Shareholders applying under the ASBA Process from bank account with the SCSB mentioned by the Shareholder in the CAF. This amount will be transferred in terms of the SEBI Regulations, into the separate bank account opened by our Bank for the Rights Issue. The balance amount remaining after the finalisation of the basis of allotment shall be unblocked by the SCSBs on the basis of the instructions issued in this regard by the Registrar to the Issue and the Lead Manager to the respective SCSB.

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The shareholders applying under the ASBA Process would be required to block the entire amount payable on their application at the time of the submission of the CAF. The SCSB may reject the application at the time of acceptance of CAF if the bank account with the SCSB details of which have been provided by the Shareholder in the CAF does not have sufficient funds equivalent to the amount payable on application mentioned in the CAF. Subsequent to the acceptance of the application by the SCSB, our Bank would have a right to reject the application only on technical grounds. Options available to the shareholder applying under the ASBA Process The summary of options available to the Shareholders is presented below. You may exercise any of the following options with regard to the Equity Shares offered, using the CAF received from Registrar: Option Available Action Required 1 Accept whole or part of your entitlement without renouncing the balance.

Fill in and sign Part A of the CAF (All joint holders must sign)

2 Accept your entitlement in full and apply for additional Equity Shares

Fill in and sign Part A of the CAF including Block III relating to the acceptance of entitlement and Block IV relating to additional Equity Shares (All joint holders must sign)

The shareholder applying under the ASBA Process will need to select the ASBA option process in the CAF and provide required necessary details. However, in cases where this option is not selected, but the CAF is tendered to the SCSB with the relevant details required under the ASBA process option and SCSB blocks the requisite amount, then that CAF would be treated as if the shareholder has selected to apply through the ASBA process option. Additional Equity Shares You are eligible to apply for additional Equity Shares over and above the number of Equity Shares (as the case may be) that you are entitled too, provided that you have applied for all the Shares (as the case may be) offered without renouncing them in whole or in part in favour of any other person(s). Applications for additional shares shall be considered and allotment shall be made at the sole discretion of the Board, in consultation with the Designated Stock Exchange and in the manner prescribed under paragraph titled “Basis of Allotment” on page 98 of this Draft Letter of Offer. If you desire to apply for additional shares, please indicate your requirement in the place provided for additional Securities in Part A of the CAF. Renunciation under the ASBA Process Renouncees cannot participate in the ASBA Process. Last date of Application The last date for submission of the duly filled in CAF is [●]. The Issue will be kept open for a minimum of 15 (fifteen) days and the Board or any committee thereof will have the right to extend the said date for such period as it may determine from time to time but not exceeding 30 (thirty) days from the Issue Opening Date. If the CAF together with the amount payable is not received by the Bankers to the Issue/Registrar to the Issue or if the CAF is not received by the SCSB on or before the close of banking hours on the aforesaid last date or such date as may be extended by the Board/Committee of Directors, the offer contained in this Draft Letter of Offer shall be deemed to have been declined and the Board/Committee of Directors shall be at liberty to dispose of the Equity Shares hereby offered, as provided under paragraph titled “Basis of Allotment” on page 98 of this Draft Letter of Offer. Option to receive Equity Shares in Dematerialized Form SHAREHOLDERS UNDER THE ASBA PROCESS MAY PLEASE NOTE THAT THE EQUITY SHARES OF OUR BANK UNDER THE ASBA PROCESS CAN ONLY BE ALLOTTED IN

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DEMATERIALIZED FORM AND TO THE SAME DEPOSITORY ACCOUNT IN WHICH THE EQUITY SHARES ARE BEING HELD ON RECORD DATE. Issuance of Intimation Letters Upon approval of the basis of Allotment by the Designated Stock Exchange, the Registrar to the Issue shall send the Controlling Branches, a list of the ASBA Investors who have been allocated Equity Shares in the Issue, along with:

• The number of Equity Shares to be allotted against each successful ASBA; • The amount to be transferred from the ASBA Account to the separate account opened by our Bank for

Rights Issue, for each successful ASBA; and • The details of rejected ASBAs, if any, along with reasons for rejection to enable SCSBs to unblock the

respective ASBA Accounts. General instructions for shareholders applying under the ASBA Process (a) Please read the instructions printed on the CAF carefully.

(b) Application should be made on the printed CAF/ plain paper only and should be completed in all

respects. The CAF/ plain paper application found incomplete with regard to any of the particulars required to be given therein, and/or which are not completed in conformity with the terms of this Draft Letter of Offer are liable to be rejected. The CAF/ plain paper application must be filled in English.

(c) The CAF/ plain paper application in the ASBA Process should be submitted at a Designated Branch of the SCSB and whose bank account details are provided in the CAF and not to the Bankers to the Issue/Collecting Banks (assuming that such Collecting Bank is not a SCSB), to our Bank or Registrar or Lead Manager to the Issue.

(d) All applicants, and in the case of application in joint names, each of the joint applicants, should mention his/her PAN number allotted under the Income-Tax Act, 1961, irrespective of the amount of the application. CAFs without PAN will be considered incomplete and are liable to be rejected.

(e) All payments will be made by blocking the amount in the bank account maintained with the SCSB. Cash payment is not acceptable. In case payment is affected in contravention of this, the application may be deemed invalid and the application money will be refunded and no interest will be paid thereon.

(f) Signatures should be either in English or Hindi or in any other language specified in the Eighth Schedule to the Constitution of India. Thumb impression and Signatures other than in English or Hindi must be attested by a Notary Public or a Special Executive Magistrate under his/her official seal. The shareholders must sign the CAF as per the specimen signature recorded with our Bank/or Depositories.

(g) In case of joint holders, all joint holders must sign the relevant part of the CAF in the same order and as per the specimen signature(s) recorded with our Bank. In case of joint applicants, reference, if any, will be made in the first applicant’s name and all communication will be addressed to the first applicant.

(h) All communication in connection with application for the Securities, including any change in address of the shareholders should be addressed to the Registrar to the Issue prior to the date of allotment in this Issue quoting the name of the first/sole applicant Shareholder, folio numbers and CAF number.

(i) Only the person or persons to whom Securities have been offered and not renouncee(s) shall be eligible to participate under the ASBA process.

Do’s:

a. Ensure that the ASBA Process option is selected in part A of the CAF and necessary details are filled in. In case of non- receipt of the CAF, the application can be made on plain paper indicating the application through ASBA payment mechanism with all necessary details as indicated in this chapter titled “Terms and Procedure of the Issue” on page 85 of this Draft Letter of Offer.

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b. Ensure that you submit your application in physical mode only. Electronic mode is only available with certain SCSBs and not all SCSBs and you should ensure that your SCSB offers such facility to you.

c. Ensure that the details about your Depository Participant and beneficiary account are correct and the

beneficiary account is activated as Equity Shares will be allotted in the dematerialized form only. d. Ensure that the CAFs are submitted at the SCSBs whose details of bank account have been provided in

the CAF.

e. Ensure that you have mentioned the correct bank account number in the CAF.

f. Ensure that there are sufficient funds (equal to {number of Equity Shares applied for} X {Issue Price per Equity Share as the case may be}] available in the bank account maintained with the SCSB mentioned in the CAF before submitting the CAF to the respective Designated Branch of the SCSB.

g. Ensure that you have authorised the SCSB for blocking funds equivalent to the total amount payable

on application mentioned in the CAF, in the bank account maintained with the respective SCSB, of which details are provided in the CAF and have signed the same.

h. Ensure that you receive an acknowledgement from the SCSB for your submission of the CAF in

physical form.

i. Each applicant should mention their Permanent Account Number (“PAN”) allotted under the I. T. Act.

j. Ensure that the name(s) given in the CAF is exactly the same as the name(s) in which the beneficiary account is held with the Depository Participant. In case the CAF is submitted in joint names, ensure that the beneficiary account is also held in same joint names and such names are in the same sequence in which they appear in the CAF.

k. Ensure that the Demographic Details are updated, true and correct, in all respects.

Don’ts:

1. Do not apply on duplicate CAF after you have submitted a CAF to a Designated Branch of the SCSB.

2. Do not pay the amount payable on application in cash, by money order or by postal order.

3. Do not send your physical CAFs to the Lead Manager to Issue / Registrar / Collecting Banks (assuming that such Collecting Bank is not a SCSB) / to a branch of the SCSB which is not a Designated Branch of the SCSB / Bank; instead submit the same to a Designated Branch of the SCSB only.

4. Do not submit the GIR number instead of the PAN as the application will get rejected on this ground.

5. Do not instruct their respective banks to release the funds blocked under the ASBA Process.

6. Do not submit more than 5 applications (including CAF and plain paper applications) per bank account

maintained with an SCSB for the Issue. Grounds for Technical Rejection for ASBA Process: In addition to the grounds listed under paragraph titled “Grounds for Technical Rejection” mentioned on page 105 of this Draft Letter of Offer, applications under ASBA Process can be rejected on following additional grounds:

a. Application on split form.

b. Application for entitlements or additional shares in physical form.

c. DP ID and Client ID mentioned in CAF not matching with the DP ID and Client ID records available with the Registrar.

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d. Sending CAF to a Lead Manager / Registrar / Collecting Bank (assuming that such Collecting Bank is

not a SCSB) / to a branch of a SCSB which is not a Designated Branch of the SCSB / Bank.

e. Renouncee applying under the ASBA Process.

f. Insufficient funds are available with the SCSB for blocking the amount.

g. Funds in the bank account with the SCSB whose details are mentioned in the CAF having been frozen pursuant to regulatory orders.

h. Application for RTS entitlements or additional shares in physical form.

i. Account holder not signing the CAF or declaration mentioned therein.

j. Application by shareholder holding Equity Shares in physical form

COMMUNICATIONS All future communication in connection with ASBA applications made in this Issue should be addressed to the Registrar to the Issue quoting the full name of the sole or first ASBA Investor, CAF number, details of Depository Participant, number of Equity Shares applied for, date of CAF, name and address of the Designated Branch where the application was submitted and bank account number of the ASBA Account, with a copy to the relevant SCSB. The Registrar to the Issue shall obtain the required information from the SCSBs for addressing any clarifications or grievances. The SCSB shall be responsible for any damage or liability resulting from any errors, fraud or willful negligence on the part of any employee of the concerned SCSB, including its Designated Branches and the branches where the ASBA Accounts are held. ASBA Investors can contact the Compliance Officer, the Designated Branch where the application was submitted, or the Registrar to the Issue in case of any pre or post-Issue related problems such as nonreceipt of credit of Allotted Equity Shares in the respective beneficiary accounts, blocking of excess Amount, etc. Depository account and bank details for shareholders applying under the ASBA Process IT IS MANDATORY FOR ALL THE SHAREHOLDERS APPLYING UNDER THE ASBA PROCESS TO RECEIVE THEIR EQUITY SHARES IN DEMATERIALISED FORM. ALL SHAREHOLDERS APPLYING UNDER THE ASBA PROCESS SHOULD MENTION THEIR DEPOSITORY PARTICIPANT’S NAME, DEPOSITORY PARTICIPANT IDENTIFICATION NUMBER AND BENEFICIARY ACCOUNT NUMBER IN THE CAF. SHAREHOLDERS APPLYING UNDER THE ASBA PROCESS MUST ENSURE THAT THE NAME GIVEN IN THE CAF IS EXACTLY THE SAME AS THE NAME IN WHICH THE DEPOSITORY ACCOUNT IS HELD. IN CASE THE CAF IS SUBMITTED IN JOINT NAMES, IT SHOULD BE ENSURED THAT THE DEPOSITORY ACCOUNT IS ALSO HELD IN THE SAME JOINT NAMES AND ARE IN THE SAME SEQUENCE IN WHICH THEY APPEAR IN THE CAF. Shareholders applying under the ASBA Process should note that on the basis of name as provided by them, Depository Participant’s name and identification number and beneficiary account number provided by them in the CAF, the Registrar to the Issue will obtain from the Depository their demographic details such as address, bank account details for printing on refund orders / advice and occupation (“Demographic Details”). Hence, shareholders applying under the ASBA Process should carefully fill in their Depository Account details in the CAF. These Demographic Details would be used for all correspondence with such shareholders including mailing of the letters intimating unblock of bank account of the respective Shareholder. The Demographic Details given by shareholders in the CAF would not be used for any other purposes by the Registrar. Hence, shareholders are advised to update their Demographic Details as provided to their Depository Participants. By signing the CAFs, the shareholders applying under the ASBA Process would be deemed to have authorised the Depositories to provide, upon request, to the Registrar to the Issue, the required Demographic Details as available on its records.

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Letters intimating allotment and unblocking or refund (if any) would be mailed at the address of the shareholder applying under the ASBA Process as per the Demographic Details received from the Depositories. Refunds, if any, will be made directly to the bank account in the SCSB and which details are provided in the CAF and not the bank account linked to the DP ID. Shareholders applying under the ASBA Process may note that delivery of letters intimating unblocking of bank account may get delayed if the same once sent to the address obtained from the Depositories are returned undelivered. In such an event, the address and other details given by the shareholder in the CAF would be used only to ensure dispatch of letters intimating unblocking of bank account. Note that any such delay shall be at the sole risk of the shareholders applying under the ASBA Process and none of the Bank, the SCSBs or the Lead Manager shall be liable to compensate the Shareholder applying under the ASBA Process for any losses caused to such Shareholder due to any such delay or liable to pay any interest for such delay. In case no corresponding record is available with the Depositories that matches three parameters, namely, names of the shareholders (including the order of names of joint holders), the DP ID and the beneficiary account number, then such applications are liable to be rejected. Disposal of application and application money No acknowledgment will be issued for the application moneys received by our Bank. However, the Bankers to the Issue / Registrar to the Issue receiving the CAF will acknowledge its receipt by stamping and returning the acknowledgment slip at the bottom of each CAF. In case an application is rejected in full, the whole of the application money received will be refunded. Wherever an application is rejected in part, the balance of application money, if any, after adjusting any money due on Equity Shares allotted, will be refunded to the applicant within fifteen days from the close of the Issue. The dispatch of share certificates/ refund orders and demat credit will be completed and the allotment and listing documents will be submitted to the stock exchanges within fifteen days from the close of Issue. For further instruction, please read the paragraph titled “Options available to the Equity Shareholders” beginning on page 90 of this Draft Letter of Offer carefully. Restriction on Share Capital and Voting Rights Banks can issue only ordinary shares. The Banking Regulation Act specifies that no shareholder in a banking company can exercise voting rights on poll in excess of 10% of total voting rights of all the shareholders of the banking company. Any acquisition of shares that will take the shareholding of any entity/ group of entities to 5% or more of the paid up capital of the bank would require acknowledgement of RBI in terms of the criteria laid down in the RBI guidelines contained in the Circular DBOD. NO.PSBS. BC. 64/ 16.13.100/ 2003-04 dated February 3, 2004. Further, in terms of the guidelines on ownership and governance issued on February 28, 2005 any acquisition that will take the shareholding of any entity/ group, directly or indirectly, to 10% or more of the paid-up capital of the bank will require the prior approval of RBI Restriction on foreign ownership of Banks The Government of India regulates foreign ownership in private sector banks. Under guidelines issued by the Government, total foreign ownership in a private sector Bank from all sources (FDI, FII, NRI) cannot exceed 74 percent of the paid-up capital. The limit of 74 per cent will be reckoned by taking the direct and indirect holding. In other words, at all times, at least 26 per cent of the paid up capital of the private sector bank will have to be held by residents. Presently, the FII shareholding limit of our Bank is 49% of our paid up capital as approved by the shareholders at its meeting held on July 7, 2006. RELEVANT RBI PROVISIONS Rights issues by private sector banks – Acknowledgement of transfer / allotment of shares

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1) In terms of RBI Circular DBOD.No.PSBS.BC.79/16.13.100 /2001-2002 dated March 20, 2002, listed as

well as unlisted private sector banks are not required to obtain approval of RBI for Rights Issue. 2) While reviewing the following issues have emerged with reference to percentage of holding at the time of

rights issue:- a) When some shareholders (individuals/ entities / groups) pick up unsubscribed shares which would

result in his / its holding going up as a percentage of total paid up capital of the bank. b) When Some shareholders not picking up their entitlements, holdings of the other shareholders would

go up in percentage even if they pick up their own entitlements. The above matter has been examined from the point of view of applicability of RBI Circular DBOD. NO.PSBS. BC. 64/ 16.13.100/ 2003-04 dated February 3, 2004 on acknowledgement of transfer/ allotment of shares in private sector banks and DBOD. NO. BP.BC.71/ 21.01.01/ 2004-05 dated February 28, 2005 on ownership and governance and also the regulatory limits such as the cap for the aggregate FDI/FII/NRI holdings and the 5% limit for a bank’s investment in equity of another bank. The RBI has advised banks going for rights issue to make complete disclosure of the regulatory requirements in the offer documents, including the following that:

i. Subscription to rights other than own entitlement will not be permitted if such subscription would result in breach of any statutory / regulatory ceilings

ii. Any acquisition of shares that will take the shareholding of any entity/ group of entities to 5% or

more of the paid up capital of the bank would require acknowledgement of RBI in terms of the criteria laid down in the RBI guidelines contained in the Circular DBOD. NO.PSBS. BC. 64/ 16.13.100/ 2003-04 dated February 3, 2004. Further, in terms of the guidelines on ownership and governance issued on February 28, 2005 any acquisition that will take the shareholding of any entity/ group, directly or indirectly, to 10% or more of the paid-up capital of the bank will require the prior approval of RBI

iii. If the holding of any shareholder breaches any statutory / regulatory ceilings as a result of non-

subscription of rights by other shareholders, the shareholder concerned will not be able to acquire any further shares till his/ its shareholding is brought within the stipulated ceilings.

In case the permission to deal in and for an official quotation of the Equity Shares is not granted by the Stock Exchanges, our Bank shall forthwith repay without interest, all monies received from the applicants in pursuance of this Draft Letter of Offer and if such money is not repaid within eight days after the day from which our Bank is liable to repay it, i.e. fifteen days after closure of the Issue, we shall pay interest at the rate of 15% p.a. as prescribed under Section 73 (2) / 73 (2A) of the Companies Act, 1956. The above is subject to the terms mentioned under the section titled “Basis of Allotment” on page 98 of this Draft Letter of Offer.

General Instructions Issue Period Issue Opens on [●]

Last date for receiving request for Split Application Forms

[●]

Issue Closes on [●]

8. The Board may however decide to extend the Issue period as it may determine from time to time but not exceeding 30 days including the Issue Opening Date.

9. Allotment Schedule

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1. Our Bank agrees that as far as possible allotment of securities offered to the shareholders shall be made within 15 days from the date of the closure of the Issue.

2. Our Bank further agrees that it shall pay interest @ 15% per annum for the delayed period if the

allotment has not been made and/or allotment letters / the refund orders have not been dispatched to the applicants/ refund instruction beyond 8 days from the date specified above.

10. General Applications should be made only on the prescribed CAFs provided by our Bank and should be complete in all respects. Applications which are not complete or which are not accompanied with remittance of the proper amount calculated as aforesaid are liable to be rejected and the money paid in respect thereof will be refunded without interest. The CAF must be filled in English in BLOCK LETTERS. In case of joint holders, all joint holders must sign the CAF at the appropriate places in the same order as per specimen signatures recorded in the Register of Members of our Bank / Depository. In case of renouncee(s), the name of the applicant(s), details of occupation, address and father’s/husband’s name must be filled in Block Letters. The CAF must be submitted to the Collection Centres as mentioned in the CAF/ Registrar to the Issue, as the case may be, in its entirety. If any of the parts A, B, C, D and the acknowledgement of the CAF is/are detached or separated; such applications will be rejected forthwith. Any dispute or suit or action or proceeding arising out of or in relation to this Draft Letter of Offer or this Issue or in respect of any matter or thing contained therein and any claim by either party against the other shall be instituted or adjudicated upon or decided solely by the appropriate Court in Mangalore . All communications in connection with your application for the Equity Shares should be addressed to the Registrars to the Issue. Shareholder’s Depository Account and Bank details Shareholder’s applying for shares in demat mode should note that on the basis of the name of the shareholder(s), Depository Participant’s Name, Depository Participant’s Identification Number and Beneficiary Account Number provided by them in the CAF, the Registrars to the Issue will obtain from the Depository the demographic details including the address, Shareholders bank account details, MICR code and occupation (hereinafter referred to as ‘Demographic Details’). These bank account details would be used for giving refunds to the shareholder(s). Hence, the shareholder(s) are requested to immediately update their bank account details as appearing in the records of the Depository Participant. Please note that failure to do so could result in delays in dispatch / credit of refunds to the shareholder(s) at the shareholder(s) sole risk and neither the Lead Manager’s or the Registrars or the Refund Banker nor our Bank shall have any responsibility and undertake any liability for the same. Hence, applicants should carefully fill their Depository Account details in the Composite Application Form. These demographic details would be used for all correspondences with the shareholder(s) including mailing of Allotment advice and printing of bank particulars on the refund order or for refunds through electronic transfer of funds, as applicable. By signing the Composite Application Form the shareholder(s) would be deemed to have authorized the depositories to provide, upon request, to the Registrar to the Issue, the required Demographic Details as available in its records. In case of shareholder(s) receiving refunds through electronic transfer of funds, delivery of refund orders/allocation advice gets delayed if the same once sent to the address obtained from the depositories are returned undelivered. INVESTORS MAY PLEASE NOTE THAT THE EQUITY SHARES OF OUR BANK CAN BE TRADED ON THE STOCK EXCHANGE ONLY IN DEMATERIALIZED FORM.

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Important 1. Please read this Draft Letter of Offer carefully before taking any action. The instructions contained in

the Composite Application Form (CAF) are an integral part of the conditions of the Draft Letter of Offer, Abridged Letter of Offer and Letter of Offer must be carefully followed; otherwise the application is liable to be rejected.

All enquiries in connection with the Draft Letter of Offer or accompanying CAF and requests for Split Application Forms must be addressed (quoting the Registered Folio Number/ DP and Client ID number, the CAF number and the name of the first Equity Shareholder as mentioned on the CAF and superscribed THE KARNATAKA BANK LIMITED -Rights Issue on the envelope) to the Registrar to the Issue at the following address:

Integrated Enterprises India Limited No 30 Ramana Residency 4th Cross, Sampige Road, Malleswaram, Bangalore 560 003 Telephone: + 91 80 23460815-818 Facsimile: + 91 80 23460189 E-mail: alfint@vsnl.com Investor Grievance E-mail: ktkbankrights@vsnl.net Website:www.iepindia.com Contact Person: Mr. S. Vijayagopal

SEBI Registration No: INR 000000544 2. It is to be specifically noted that this Issue of Equity Shares is subject to the chapter entitled “Risk

Factors” beginning on page 8 of this Draft Letter of Offer

3. Our Bank will not be liable for any postal delays and applications received through mail after the closure of the Issue, are liable to be rejected and returned to the applicants.

The Issue will not be kept open for more than 15 days unless extended, in which case it will be kept open for a maximum of 30 days.

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MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION

The contracts referred to below (not being contracts entered into in the ordinary course of business carried on by our Bank or entered into more than two years prior to the date of this Draft Letter of Offer) which are or may be deemed material have been entered into by our Bank or are to be entered into by our Bank. Copies of these contracts, together with the copies of the documents referred to below, may be inspected at the Registered and Head Office of our Bank between 10.00 A.M. and 3.00 P.M. on any working day of our Bank from the date of the Draft Letter of Offer until the date of closing of the subscription list. A) Material contracts

1. Engagement Letter dated September 20, 2010 between our Bank and Edelweiss Capital Limited appointing

them as the Lead Manager to the Issue. 2. Issue Agreement between our Bank and Edelweiss Capital Limited dated October 15, 2010. 3. Agreement between our Bank and Integrated Enterprises India Limited dated October 15, 2010 to act as

Registrar to the Issue.

B) Documents 1. Our Memorandum and Articles of Association as amended from time to time. 2. Board resolution in relation to the Issue passed on July 30, 2010. 3. Shareholders Resolution in relation to the Issue passed on September 9, 2010. 4. Letter of Offer of the Rights Issue (being the last rights issue) dated January 07, 2005. 5. RBI letter no. 20953/08.40.001/2008-09 dated June 8, 2009 granting approval for appointment of Mr P

Jayarama Bhat as Managing Director of our Bank. 6. RBI letter No. DBOD.No. 20957/08.40.001/2008-09 dated June 8, 2009 granting approval for the

appointment of Mr. Ananthakrishna as Part-time Non-Executive Chairman of our Bank. 7. Consents of Lead Manager, Registrar to the Issue, Legal Advisor to the Issue, Auditors, Directors of our

Bank, Compliance Officer, as referred to, in their respective capacities. 8. Annual reports of our Bank for last five years. 9. Report of the Auditors dated October 15, 2010 in relation to the Financial Statements of our Bank for the

year ended March 31, 2010. 10. Report of the Auditors dated October 15, 2010 in relation to the Limited Review of Financial Statements

of our Bank for the half year ended September 30, 2010. 11. Statement of Tax Benefits dated October 15, 2010. 12. Initial listing applications for this Rights Issue dated [●] and [●] filed with the BSE and the NSE

respectively. 13. In-principle listing approval dated [●] and [●] received from the BSE and the NSE respectively. 14. Tripartite Agreement between NSDL, our Bank and the Registrar and the Alpha Systems Private Limited*

for the Bank dated October 16, 2000. 15. Tripartite Agreement between CDSL, our Bank and the Alpha Systems Private Limited* for the Bank

dated October 14, 2000. 16. Due diligence certificate dated October 15, 2010 to SEBI from the Lead Manager. *Pursuant to the scheme of merger Alpha Systems Private Limited has merged with Integrated Enterprises India Limited. Any of the contracts or documents mentioned in this Draft Letter of Offer may be amended or modified at any time if so required in the interest of our Bank or if required by the other parties, without reference to the shareholders subject to compliance of the applicable laws.