Your Directors are pleased to present the Eighth Annual Accounts together with the audited accounts of the Company for the year ended March 31, 2005.

1. FINANCIAL RESULTS
The financial results for the year ended March 31, 2005are as under:

* Figures for the year ended March 31, 2005 is arrived at, after considering deferred tax credit of Rs.48.38 crore.

** Created pursuant to Section 45 I-C of Reserve Bank of India Act, 1934 as amended in January 1997. This reserve forms part of Free Reserves, Net owned Funds and Tier I Capital.

Your Directors regret to report that the Company ended the year with a loss of Rs. 97.80 crore - for the first time since its commencement of business in the year 1994-95 – due to adverse trading conditions in the fixed income market as discussed later in this report.


2. The Economy
Indian economy remained strong despite slowing down from its peak performance in the previous year. The Central Statistical Organisation (CSO) has estimated real GDP growth at 6.9 per cent in 2004-05, down from 8.5 per cent (revised estimates) in 2003-04. This somewhat lower level of growth may be seen in the background of an uneven and deficient South-West monsoon which restricted the growth in agriculture and allied activities to 1.1 per cent in 2004-05 as against a robust 9.6% growth in these activities achieved in the earlier year. An improved industrial performance led by manufacturing and ‘electricity, gas and water supply’ segments, has been able to compensate for the slow down in agriculture to certain extent. Moreover, the robust growth in services sector recorded in 2003-04 remained well sustained in this year as well.
Thus, despite the sharp slow down in agriculture, the overall growth of GDP in 2004-05 remained higher than the average growth attained over the preceding 12-year period beginning 1992-93. Such a performance, despite existing adversities has generated optimism that India would remain among the fastest growing economies of the world in the medium-term.

3. Developments in Money and Securities Markets
The fixed income securities market witnessed bouts of uncertainty and nervousness created by the upturn in the international interest rate cycle, switches in capital flows and a soaring international fuel prices. Further, bunching of several factors emanating both from domestic and global developments began to affect the Government Securities Market from the middle of the first quarter of 2004-05. These were:

As a result, yields began to firm up from May 2004 onwards. The 10-year benchmark yield moved from 5.16 per cent at end March 2004 to 6.67 per cent on August 11, 2004 before retreating to 6.09 per cent by the month end, with the reintroduction by Reserve Bank of India (RBI) of one-day reverse repos in place of 7-day and 14-day reverse repos, lower than anticipated hike in the Market Stabilisation Scheme (MSS) ceiling (Rs.80,000 crore) and moderation in global fuel prices.

Gilt yields began to harden once again in the third quarter of the year. Although domestic inflation rate softened from the peak of 8.74 per cent at the end of August 2004, higher inflationary expectations fuelled by the spurt in international fuel prices drove the 10-year yield to a peak of 7.31 per cent on November 8, 2004. The secondary market outright turnover in Government securities contracted to about Rs.59,907 crore in November 2004 as compared to the outright turnover of Rs.1,57,002 crore in April 2004.
Yields softened during December 2004 and January 2005 with the easing of liquidity conditions resulting from the cancellation of scheduled auctions, a revival of capital inflows and a moderation of inflationary expectations. The secondary market turnover in the gilts also improved between December 2004 and January 2005. The upgradation of India’s sovereign rating by Standard and Poor’s (S&P) further helped softening of yields. The yields, however, hardened once again in the beginning of March 2005 on concerns about the higher than expected Government borrowing as announced in the Union Budget for 2005-06 and concerns arising from persistent rise in the international crude oil prices. The 10-year yield stood at 6.65 per cent on March 31, 2005, up from 6.47 per cent on February 28, 2005.

4. Company’s Performance
(i) Financial Performance
Spurts in the secondary market yields much beyond general market expectations in different phases over the year adversely affected the overall performance of the players operating in Government Securities market, particularly the Primary Dealers (PDs) maintaining sizable trading stocks of gilts.

This was despite a large reduction in the government borrowing programme over the year. Persistence of uncertain market conditions not only limited the scope of profitable trading opportunities, it also restricted the flexibility of gainfully managing the book size commensurate with your Company’s position as a leading Primary Dealer.
Under such circumstances, despite all efforts, your Company ended the year with a loss for the first time in eleven years of its operations. The loss arose largely because of quick slashing down of the book-size, even by incurring losses, once clear signs of continuing interest rate uncertainties emerged. This was done to de-risk the Company’s Balance Sheet during a period of on-going upheavals in the government securities market and thus averting further losses.
Your Company recorded a net loss of Rs. 97.80 crore (after considering deferred tax credit of Rs.48.38 crore) as against a net profit of Rs. 193.90 crore during the previous year.

(ii) Performance of the Company as a Primary Dealer in Government Securities
The performance of the Company as a Primary Dealer during the year under review is set out in Statement-1 annexed to the Report. As against the stipulated minimum success ratio of 40%, the Company achieved success ratios in respect of bids tendered for primary issues of both the Government dated securities and Treasury Bills at 40.37% and 49.08%, respectively. The Company’s total turnovers (in both primary and secondary markets) in Government dated securities and Treasury Bills were 47 times and 129 times respectively, of the average of month-end stocks, as against the stipulated minimum turnover of 5 times and 10 times respectively under the RBI’s guidelines for primary dealers’ in government securities. On outright basis, the turnover was 27 times in respect of Government dated securities and 100 times in respect of Treasury Bills as against the prescribed minimum of 3 times and 6 times respectively.
A comparative position of the Company’s secondary market turnover in Gilt securities and that in the money market for the year under review and for the previous year is given hereunder:

(iii) Non-Gilt Segment
Consistent with the trend in the Government Securities market, there was a fall in the trading volumes in the Commercial Papers, Bonds/Debentures and Pass Through Certificates (PTCs) issued by corporates both in public and private sectors The turnover in the secondary market in these securities during the year aggregated
Rs. 3,278 crore as against Rs. 4,730 crore during the previous year. With the rising interest rates, the operations in this segment were also adversely affected and the Company has sustained a loss of Rs. 4.77 crore in this segment as against a profit of Rs 43.62 crore during the previous year.

(iv) Internal Control & Risk Management
The Company has constituted the following committees of senior executives to meet the growing business needs. All these Committees met atleast once in a fortnight and more often when felt necessary.
The Management Committee comprises Senior Executives and is headed by the Managing Director. It deliberates on matters which have a bearing on Company’s operations and functions as a forum to elicit inputs from departmental heads and also keeps them aware of these issues.

The ALCO and Risk Management Committee also comprises Senior Executives and is headed by the Managing Director. It is responsible for (i) ensuring adherence to the prudential limits and guidelines set by the Board and the Risk Review Committee of the Board, (ii) formulating Risk Management Policies, and (iii) attending to all the issues related to Asset-Liability Management.

The Primary Market Committee headed by the Managing Director decides on (i) Annual Bidding Commitments as a Primary Dealer, and (ii) the underwriting and subscription bids at the time of each auction.
As a part of the risk management system, the Company uses Value-at-Risk methodology for measuring and monitoring the market risk associated with its gilt portfolio and uses stress-testing tools to monitor and measure the impact of interest rate movements on its portfolio at frequent intervals. These risk management tools are gradually being extended to the non-gilt portfolio also.
As on March 31, 2005, the Company had a Capital Adequacy Ratio of 70.67% as against the Regulatory requirement of 15%.
M/s B K Khare & Co., Chartered Accountants, were appointed as the Company’s Internal Auditors during the year under report and were additionally entrusted with the work of Concurrent Audit of all the money and securities market transactions.

(v) Regulatory Compliance
The Company has complied with all the applicable guidelines prescribed by RBI for the Primary Dealers and NBFCs, regarding accounting standards, income recognition, valuation of securities, capital adequacy, etc.
The Company has also complied with the Directions and Guidelines issued by the Securities & Exchange Board of India (SEBI) under the SEBI (Portfolio Managers) Regulations, 1993.

(vi) Credit Rating
The Company continues to enjoy the highest ratings of P1+ and A1+ from rating agencies CRISIL and ICRA respectively for its short-term borrowing programme of Rs.1,000 crore. The MAAA rating assigned by ICRA for the medium term borrowing programme of Rs 100 crore was withdrawn at the Company’s request as there has been no issue of medium term paper by the Company, nor is any such issue now contemplated.

(vii) Outlook
Major concerns exist in the fixed income market on the outlook for 2005-06 arising from the ongoing developments both on global as well as domestic front. These emanate from the rising global rates of interest with the gradual phasing out of an accommodative monetary policy in the USA, risks of adjustments to large scale global macroeconomic imbalances, inflationary concerns over stretched productivity levels in mature economies, strong and consistent domestic credit off-take, increased borrowing programme
of the Central Government and expectations about the possibility of a large permanent component in the rise in global fuel prices that might bring in a second round effect on domestic inflation.
On the domestic front, the cushion of receipts from debt swapping does not exist this year. To that extent there would also be a reduction in the States’ borrowing from the market. However, it also needs to be remembered that under the Twelfth Finance Commission (TFC) recommendations, the States and Union Territories’ are enabled to raise market loans to the extent of Rs. 29,003 crore this year for financing their annual plan which earlier used to be financed by borrowing from the Centre.
Added to these, the structural constraint of Indian Government Securities Market being heavily dependent upon the investments made by the commercial banks, continues to persist. The absence of an alternative investor class of comparable size poses an added problem as commercial banks, already remain far in excess of their SLR requirements and incremental credit deposit ratio remains stretched at over 100%. A quick substitution of commercial banks’ investments in government securities by that of another class of investors appears to remain a distant possibility in the near term. This raises additional concerns in the face of increased borrowing programme of the Government.
With these developments in the background, the expectations of market participants in the Indian debt market remains towards further hardening of the secondary market yields over the year. This would mean limited trading opportunities affecting the Company’s main income stream of trading profits
Amidst these concerns there are some positives as well. The Finance Minister’s budget proposal to take measures to provide for clear legal validity to OTC derivative contracts is definitely a welcome move for the market. The Monetary and Credit Policy
document for 2005-06 also makes references regarding the introduction of ‘when issued market’, ‘limited short selling’ in government securities, ‘optionalities in OTC rupee derivatives’ etc. These would definitely be viewed favourably by the market. However, the key issue that remains is operationalisation of these provisions on an urgent basis.
The new initiative of extending market repo facility in government securities to Corporates having gilt accounts with scheduled commercial banks, could also create some new demand for Government securities and is expected to have a positive bearing on the market.
The April 2005 Monetary Policy document has also talked about the enhanced responsibilities of the Primary Dealers, post April 1, 2006, pertinent to the stipulation of the Fiscal Responsibility and Budget Management (FRBM) Act, when RBI will cease to participate in the primary issuance of government securities. With respect to the requirement of emerging needs, a reference has also been made to a possible expansion of the permitted structure of PD business to include banks through a consultative process, subject to the necessary safeguards. This presents a unique challenge to the business positioning of your Company as one of the few standalone PDs, depending almost entirely on interest rate products for income and therefore subject particularly to the vagaries of interest rate cycles, in the absence of adequate hedging instruments and diversified income streams.
Under such market environment, the business prospects of your Company would remain very challenging in the current year.

5. Dividend
Having regard to the Company’s losses during the year in review, your Board does not recommend any dividend for the year 2004-05.

6. Other Matters
(i) Composition of Board and Directors
The Company’s Board comprises professionals from Banking and Financial sectors and Academics. As on March 31, 2005, the Board comprised nine Directors, out of whom two are nominated by Bank of India. The Board met four times during the year under review.
In accordance with the provisions of the Companies Act, 1956, and the Articles of Association of the Company, Shri T.C. Venkat Subramanian and Shri Nasser Munjee hold office upto the ensuing Annual General Meeting. The Company has received a Notice under Section 257 of the Companies Act, 1956 from a Member of the Company proposing the names of Shri T.C. Venkat Subramanian and Shri Nasser Munjee for the office of the Director of the Company.
Their resumes are furnished in the Explanatory Statement to the Notice of the ensuing Annual General Meeting.

(ii) Committees of the Board
The following Committees of the Board functioned during the year:

(a) Audit Committee
The Audit Committee of the Board comprises Shri D. Basu, Dr. N. Balasubramanian, Professor S. K. Barua and Shri G. Narayanan. Three members of the Committee are independent and all are Non-Executive Directors of the Company having knowledge of finance and accounts. The Committee met four times during the year under review. The scope and functions of the Audit Committee are as per the provisions of the Companies Act, 1956 and in particular include the following:

a) To determine the scope and functions of the Internal and the Concurrent Auditors.
b) To review the Statutory, Internal and Concurrent Auditors’ reports.
c) To hold discussions as necessary with the Internal, Concurrent and Statutory Auditors.
d) To review the Audit / Inspection reports of the Comptroller & Auditor General of India, RBI, etc.
e) To discuss the annual financial statements with the Management and the Statutory Auditors.

(b) HRD Committee
The HRD Committee of the Board reviews the Human Resources policy and procedure to be followed by the Company. The Members of the HRD Committee are Professor S. K. Barua, Shri R. V. Joshi, Shri G. Narayanan and Shri T.C. Venkat Subramanian. The Committee met twice during the year under review.

(c) Risk Review Committee
The Risk Review Committee consists of Shri D. Basu, Shri Nasser Munjee, Shri R.V. Joshi and Shri S.A. Bhat. The Committee met three times during the year under review. The scope and functions of the Committee are as follows:

a) Approval and review of risk policies, procedures and reporting mechanism;
b) Approval and review of various limits and parameters of trading viz. setting up of trading limits for Company’s officials, counterparty exposure limits, instrument-wise exposure limits, etc;
c) Approval and review of ALM and Other Reports that may be submitted from time to time under RBI’s NBFC Directions;
d) Approval and review of cut-loss policies;
e) Review of risk management reports;
f) Monitoring of compliance with the approved statutory risk policies, procedures, parameters, etc. and
g) Any other risk/ALCO related matter that the Committee may consider relevant and appropriate.

(d) Committee for Recruitment of Specialist Officers
A Committee of the Board for considering the lateral recruitment of experienced and specialised professionals, was constituted in March 2001. The Committee consists of Shri D. Basu, Dr. Arjun K. Sengupta, Professor S. K. Barua and Dr. N. Balasubramanian. There was no occasion for the Committee to meet during the year under review.

(iii) Directors’ Responsibility Statement
Pursuant to Section 217(2AA) of the Companies Act, the Directors confirm that:
a) In preparation of the Annual Accounts, the applicable accounting standards have been followed and that there are no material departures.

b) Appropriate accounting policies have been selected and applied consistently, judgements and estimates made are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at the end of the financial year and the profit/loss for that period.

c) Proper and sufficient care has been taken to the best of their knowledge and ability for maintenance of adequate accounting records in accordance with the provisions of the Companies Act,1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities.

d) The annual accounts have been prepared on a going concern basis.

(iv) Auditors
M/s P. Parikh & Associates, Chartered Accountants, Mumbai were appointed as the Auditors of the Company by the Comptroller & Auditor General of India (CAG) for the year ended March 31, 2005. Auditors for the financial year ending March 31, 2006 will be appointed by CAG, under the provisions of Section 619(2) of the

Companies Act, 1956. The observations in the Auditors’ Report are self-explanatory and require no further clarification.

(v) Recruitment and Training of Staff
With a view to strengthening its human resources, the Company has been recruiting professionals with appropriate skills and experience at the middle and senior management levels. The Company continues to recruit management graduates by participation in campus recruitment programs of leading business schools in the country. Recognising the importance of exposing officers to the developments in the financial sector, the Company deputes its officers for appropriate training programmes and seminars including, where appropriate, to overseas centers.

(vi) Disclosure of Particulars
No statement containing particulars of employees as required under section 217(2A) of the Companies Act, 1956 read with the Rules framed thereunder is being annexed to the Report as no employee drew remuneration in excess of the prescribed amount. The details of the foreign exchange outgo appear at Item No.6 of Schedule 18 in the Notes forming part of accounts. The provisions pertaining to the conservation of energy and technology absorption are not applicable to the Company.

(vii) Public Deposits
During the year ended March 31, 2005, your Company has not accepted any deposits from the public within the meaning of the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1998.

(viii) Operations of our Representative Offices in Delhi & Bangalore
Our representative offices in Delhi and Bangalore have been making continuous efforts for business development by maintaining regular contacts with clients in their vicinity ranging from PSUs, Commercial Banks, Cooperative Banks, Corporates, MNCs, Provident Funds, Pension and Gratuity Funds, Insurance Companies and Mutual Funds and reaching out to new ones. The developments in this regard are encouraging and being continuously assessed and monitored.

(ix) Economic Research
The Economic Research Department of the Company works closely with the operational managers in evolving integrated views. Research initiatives in projecting economic and market variables are undertaken at regular intervals and shared with the Company’s valued clients and other select market participants at large in the form of STCI Daily Newsletter, STCI Fortnightly Report and Occasional Reports.

(x) Portfolio Management Services (PMS)
Efforts continued during the year to secure mandate for fixed income portfolio management. But, despite interest shown by several potential clients, no mandates was actually issued by any of them. This, we believe, was mainly due to the depressed conditions in the fixed income market. However, these efforts did result in several provident funds beginning to source their requirements of government securities and corporate bonds from the Company.

(xi) Acknowledgement
Your Directors thank the Government of India, State Governments, Reserve Bank of India, Bank of India, State Bank of India, other commercial and cooperative banks, provident funds, financial institutions, mutual funds, corporates and other customers for their business and support. The Directors would also like to place on record their appreciation of the dedicated performance by the officers and staff of the Company in these difficult times.

ADDENDUM TO THE DIRECTORS’ REPORT

The comments of the Comptroller and Auditor General of India (CAG) under Section 619 (4) of the Companies Act, 1956 on the Accounts of the Company for the year under review together with the Company’s response thereto are annexed as part of the Annual Accounts.