Directors' Report

The Directors take great pleasure in presenting the Seventh Annual Report of BSE Limited along with the audited financial statements for the year ended March 31, 2012.

1 The Economic Environment

1.1 Global Outlook

The global recovery, from the aftermath of the global financial crisis, in some way continues to get a firmer footing. But it also has experienced wrenching strains and uncertainty because of the crisis in the Euro area. Estimates of global output from the IMF forecast global growth in calendar 2012 at 3.5%. This is clearly a disappointing slowdown from the 5.2% growth rate achieved in 2010 and even the 3.8% growth rate recorded last year. While growth rates are less robust, there are some signs, at least in some of the developed economies, that economic growth is at least becoming sustainable.

The developed economies, as a group, are expected to grow at an anemic 1.4% in 2012 - in large part because of continued troubles in the Euro zone. The developing economies overall -growing much faster at 5.6% - are obviously now the main engine of growth. But even the traditional emerging market heavyweights - China and India - have seen their growth rates decelerate in the last few years. China, for example, has declined from 10.4% in 2010 to 9.2% in 2011 to 8% in 2012 (proj. - IMF).

1.2 India Outlook

For the full calendar year 2011, Indian economic growth also decelerated significantly from the year before - to 7.4% from a strong 9.9% in 2010, according to IMF numbers. By the last quarter of the 2011-12 fiscal year, moreover, the economic growth rate had stalled to 5.3%. The slowdown in growth was due to a number of causes. The growth of private consumption moderated to 6.5%, from 8.1% in the previous fiscal year while government spending also slowed from 7.9% to 3.9%, and the most troubling factor - because it underpins long term economic growth potential - the investment growth was down from 7.5% to 5.6%. As a consequence, most analysts expect continued moderation of Indian economic growth, at least for the next year or two. The IMF's current projection of Indian growth in 2012 is 6.1%.

India's inflation rate continued to be a major concern of policy makers in 2011. The Wholesale Price Index remained consistently above 9% throughout 2011 - touching a high of 9.7% in August 2011. To counter rising inflation, the Reserve Bank of India (RBI) raised interest rates six times during the year. The repo rate on March 31, 2012 stood at 8.5% and base rates for the largest private and government-owned banks are close to 10%.

Rising interest rates contributed to the slowdown in 2011-12, as did the declining foreign investment flows and policy gridlock on certain key issues.

While the Indian Government budget deficit also continues to be a concern, 2011-12 saw significant improvement in the situation from the previous year. The 2011-12 deficit is expected to come in around 5.7% of GDP, down from 6.9% the previous year and recent government projections put the target number for the 2012-13 fiscal year at 5.1%.

India's current account deficit has also improved in 2011, narrowing to 2.7% of GDP from 3.2% the previous calendar year.

2 The Capital Markets

2.1 Overview

2011 was a difficult year for investors in the Indian stock market. The Sensex fell by a total 5,054.17 points (24.6%) in the calendar year 2011, compared to a gain of 3,044 points (17%) in the previous year 2010 and 7,817 points (81%) in 2009. The weak performance in 2011 was partly offset by a very strong performance in the first quarter of 2012, with the Sensex gaining 12.3%.

Negative net FII flows in the equity market for the calendar year 2011 -2,812 crores or -$454 million) were clearly a large part of this story in 2011; linked to difficult global market conditions and the continued uncertainty about the domestic economic situation. FII flows into Indian equities in calendar year 2010, by way of comparison, were Rs. 1,33,266 crores ($29.3 billion).

The early months of 2012 have seen a positive shift in sentiment of the foreign investors and net flows into equity for the first quarter of 2012 have been Rs. 36,496.2 crores (or $7,353.94 million). As a result, the net FII equity flows for the 2011-12 fiscal year were Rs. 43,737.6 crores compared to Rs. 1,10,120.8 crores for 2010-11.

2.2 Primary Market

During the financial year 2011-12, 32 companies came out with IPOs as against 53 companies in 2010-11. The amount raised through IPOs in 2011-12 was Rs. 5,506.81 crores as against Rs. 33,592.36 crores in 2010-11. Further, one company raised Rs. 3,494.95 crores through Follow-on Public Offers (FPOs) in 2011-12. There were 4 FPOs in 2010-11. The total amount mobilized through privately placed debt securities in 2011-12 was Rs. 1,03,114.13 crores.

The total number of companies listed on BSE as on March 31, 2012 was 5133 as against 5067 as on March 31, 2011. The BSE remains the number one exchange in the world in terms of number of listed companies.

2.3 Secondary Market

2011 was a challenging year for equity markets. Not only did the Sensex benchmark index decline by 24.6% for the calendar year, but equity volumes were also down significantly. Equity turnover on the BSE has declined in recent years from an average daily value of Rs. 5,630 crores in FY 2009-10, to Rs. 4,318 crores in 2010-11 and Rs. 2,671 crores in 2011-12. BSE declines mirror the overall pattern of the industry as derivatives activity has grown to dwarf equity trading volumes.

The Mutual Fund industry also faced continued difficulties. The total Assets Under Management (AUM) of the Mutual Fund industry as of March 31, 2012 stood at Rs. 6,70,931 crores, down about 4.7% from Rs. 7,03,680 crores the previous year.

On a more positive note, the BSE's StAR MF platform continues to gain acceptance, with 2011-12 activity up almost 250% compared to 2010-11. Further, efforts by the MF team to get Asset Management Companies (AMCs) to list their close ended schemes/ETFs at BSE have paid off with the revenues from the same rising in FY 2012 by 600% as compared to last year.

The number of FIIs registered with SEBI rose slightly to 1759 at the end of 2011, from 1718 a year earlier. But the number of registered sub-accounts of these FIIs rose substantially to 6222 from 5503 a year earlier.

2.4 Secondary Market Policy Developments

• SEBI Changes to Annual Exchange System Audit Rules

SEBI has required annual system audits for all securities exchanges and depositories in India since 2008. However, in 2011 these audit requirements were tightened, providing more transparency to SEBI and limiting an auditor to a maximum of three successive audits.

• SEBI announcement of new KYC (Know Your Customer) regulations and KYC Registration Agency (KRA) Regulations

SEBI introduced a unified system for KYC and In-Person Verification (IPV) for all registered intermediaries, reducing duplication of KYC efforts. Now, once KYC procedures have been fulfilled by one intermediary, details are uploaded to a central KRA. Subsequently, other intermediaries can rely on information at the KRA to meet further KYC requirements. CDSL Ventures Ltd. (CVL) is one of the three KRAs registered with SEBI.

• New Category of Qualified Foreign Investors (QFI) allowed to invest in Indian equity shares

The Government of India announced in early 2012 that it would further open up the Indian equity market to certain foreign entities deemed Qualified Foreign Investors (QFIs). The category of QFIs will include foreign individuals and signatories to the multilateral MoU of the International Organization of Securities Commissions (IOSCO). Previously, only Foreign Institutional Investors (FIIs) and their sub-accounts registered under the SEBI (Foreign Institutional Investors) Regulations, 1995 (FII Regulations) and Non Resident Indians (NRIs) were permitted to directly invest in shares listed/traded on Indian stock exchanges. For QFIs, the individual and aggregate investment limits have been set at 5% and 10% respectively of the paid-up capital of an Indian company.

• Composition of Arbitration Committees at Stock Exchanges

SEBI announced on January 20, 2012 that trading members would, from now on, be excluded from arbitration committees. In the past, not more than twenty percent of the members of the arbitration committee could be trading members.

• Call Auction in pre-open session for Initial Public Offering (IPO) and other scrips

SEBI announced on January 20, 2012 that a call auction mechanism, similar to that used in the pre-open at BSE, would now be used for IPOs and re-starts of trading for suspended stocks.

3 Audited Financial Results

3.2 Company Performance

3.2.1 Consolidated Results

During the financial year 2011-12, all major revenue streams of the Exchange showed steady or improved performance despite a continued challenging industry environment. During the financial year 2011-12, the Exchange recorded total income of Rs. 57,842 lakh reflecting a growth of 7.5% year-on-year. The total expenses for the year was Rs. 24,832 lakh. Profit before tax & before Exceptional items rose to Rs. 33,010 lakh as against Rs. 30,940 lakh in the previous year and profit for the year was Rs. 17,813 lakh after considering exceptional expenses of Rs. 6,049 lakh.

3.2.2 Standalone Results

On account of depressed market conditions and consequent fall in trading volumes on the Exchange during the financial year 2011-12, the total revenue reduced from Rs. 44,075 lakh to Rs. 40,256 lakh. The total expenses for the financial year 2011-12 was Rs. 18,964 lakh reflecting a decrease of 4% year-on-year. Profit before tax & before Exceptional items was Rs. 21,292 lakh and profit after tax was Rs. 11,729 lakh after considering exceptional expenses of Rs. 6,049 lakh in the financial year 2011-12 as against Rs. 18,624 lakh in the previous year.

3.2.3 Financial Situation as on March 31, 2012

The net worth of the Exchange on consolidated basis grew to Rs. 223,022 lakh, an increase of 5% over Rs. 212,481 lakh as on March 31, 2011. The level of deposits from deposit based trading members increased to Rs. 30,440 lakh. Investments were also made in bonds & debentures of corporates and units of dividend/growth oriented Debt Schemes of Mutual Funds. A substantial amount continues to be invested in fixed deposits with Scheduled Banks.

3.3 Appropriations

3.3.1 Dividend

Your Directors have recommended dividend on equity shares at the rate of Rs. 4/- per equity share and a one-time special dividend of Rs. 2/- per equity share of the face value of Rs. 1/- each fully paid up for the year ended March 31, 2012, aggregating to Rs. 6/- per equity share (previous year Rs. 4/- per equity share) subject to the approval of the shareholders at the Seventh Annual General Meeting.

Under Clause 5.3 of the BSE (Corporatisation and Demutualisation) Scheme, 2005 (the Scheme), the allotment of equity shares to 17 Trading Members of the erstwhile BSE has been kept in abeyance for various reasons on March 31, 2012. Meanwhile, all corporate benefits including dividend as may be declared by the Exchange from time to time are being provided for and would be payable on the allotment of these shares.

3.3.2 Transfer to Reserves

The Exchange proposes to transfer Rs. 1,500 lakh to the general reserve out of amount available for appropriations and an amount of Rs. 32,373 lakh is proposed to be retained in the profit and loss account.

4 Significant Developments

4.1 Management Changes

A number of changes took place at the management level. Mr. Madhu Kannan, MD & CEO, demitted office with effect from May 11, 2012 pursuant to the expiration of his contract with the Exchange. The Executive Management Committee as on date consists of Mr. Ashishkumar Chauhan, Interim CEO; Mr. V. Balasubramaniam, Chief Business Officer; Mr. Nayan Mehta, Chief Financial Officer; Mr. Nehal Vora, Chief Regulatory Officer; Mr. Kersi Tavadia, Chief Information Officer; Mr. V.K.R. Agrawal, Officer on Special Duty and Mr. Lakshman Gugulothu, Officer on Special Duty.

4.2 Change of Name

During the financial year under review, the name of the Exchange has been changed from 'Bombay Stock Exchange Limited' to 'BSE Limited' with effect from July 8, 2011.

4.3 Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012

SEBI vide notification dated June 20, 2012 and in exercise of powers conferred by Section 4, 8A and 31 of the Securities Contracts (Regulations) 1956 read with Sections 11 and 30 of the SEBI Act, 1992 has notified new Regulations - The Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012 - to regulate recognition, ownership and governance in stock exchanges and clearing corporations and matters connected therewith or incidental thereto.

With the notification of these Regulations, The Securities Contracts (Regulations) (Manner of Increasing and Maintaining Public shareholding in recognized Stock Exchanges) Regulations (MIMPS), 2006, which dealt only with the stock exchanges stand repealed.

4.4 Transfer of Clearing and Settlement Division of BSE to Indian Clearing Corporation Limited (ICCL)

During the financial year under review, the Board approved the transfer of clearing and settlement division of BSE Limited to Indian Clearing Corporation Limited (ICCL), a wholly owned subsidiary of BSE Limited, which was subsequently approved by shareholders in the court convened meeting. The proposed scheme, for transfer of clearing and settlement division, was filed with the Hon'ble High Court, Bombay, for its approval. The Hon'ble High Court, Bombay, vide its order dated January 20, 2012 approved the proposed scheme of arrangement for transfer of clearing and settlement division to ICCL.

Pursuant to the approval of the scheme of arrangement, the clearing and settlement division of BSE Limited was transferred to Indian Clearing Corporation Limited from the date of filing of the Order of the Hon'ble High Court, Bombay, with the Ministry of Corporate Affairs on February 24, 2012.

4.5 Introduction of Market Making in Derivatives Segment _ LEIPS

Pursuant to SEBI Circular CIR/DNPD/5/2011 dated June 2, 2011 (BSE Notice No. 20110602-18, dated June 2, 2011), permitting stock exchanges to introduce Liquidity Enhancement Schemes (LES) for illiquid securities in their equity derivatives segment, the BSE has launched a series of Liquidity Enhancement Incentive Programmes (LEIPS) with the goal of creating lasting, self-sustaining liquidity in BSE's futures & options Segment.

The first programme in the series, LEIPS-I (BETA), was launched on September 28, 2011 with a focus on getting the members ready for the full implementation. The second programme in the series, LEIPS-II, was launched on October 26, 2011, with a focus on SENSEX futures products. The LEIPS-III programme, launched on February 1, 2012 focused on the options on the SENSEX.

Various adjustments to the programmes have been made periodically in response to market reaction. The impact on trading volume and open interest in BSE derivatives products has been quite positive. For the quarter ending March 31, 2012, average daily volume in BSE futures and options was 76,870 contracts 1,992.74 crores) and 3,93,451 contracts 9,818.43 crores) respectively.

4.6 Launch of SME (Small-Medium Enterprise) platform

On September 27, 2011 Securities and Exchange Board of India (SEBI) granted approval to BSE to launch an SME platform. On March 13, 2012, marked by a well-attended bell-ringing ceremony, BSE Ltd. began operations of its SME platform with the first listing ceremony of BCB Finance Ltd., in the presence of Shri R. K. Mathur, Secretary, MSME, GoI., Shri Rajeev Agarwal, Whole Time Member, SEBI, and Shri C. S. Mohapatra, Adviser (FSDC), DEA, MoF.

The BSE SME platform was developed after studying the salient features, best practices and the business model of similar exchanges globally. The listing norms have been simplified and made more convenient for SMEs compared to listing norms on the main board.

4.7 BRICS Exchange Alliance

On October 12, 2011 executives of stock exchanges from the BRICS countries convened at the WFE (World Federation of Exchanges) meeting in Johannesburg to sign an MOU to form the BRICS Exchange Alliance. In the following months, the five founding members of the Alliance - BM&FBOVESPA from Brazil, Open Joint Stock Company MICEX-RTS from Russia, BSE Limited from India, Hong Kong Exchanges and Clearing Limited (HKEx) as the initial China representative, and JSE Limited from South Africa - finalized an agreement to expand their product offerings beyond their home markets and give investors of each exchange exposure to the dynamic, emerging, and increasingly important BRICS economies.

The initial phase of the alliance began on March 30, 2012 with the cross-listing of the following derivatives products offered in the local currency and local trading hours of each of the exchanges:

• Brazil's iBOVESPA futures

• Russia's MICEX Index futures

• India's Sensex Index futures

• Hong Kong's Hang Seng Index futures

• South Africa's FTSE/JSE Top40 futures

5 Business and Operations Review 5.1 Trading Business

5.1.1 Equities Segment

Equities turnover continued to decline in 2011-12, with an average daily turnover of Rs. 2,671 crores compared to Rs. 4,318 crores in the previous year. This is in part a result of the weak performance of the market in 2011 and in part the erosion of BSE's market share in cash equity trading. As a result, BSE net revenue from its cash equities business declined in 2011-12 compared to a year earlier, from Rs. 6,030 lakh to Rs. 3,600 lakh.

5.1.2 Derivatives Segment

I n the current financial year, the following steps have been taken to stimulate trading in the Equity Derivatives Segment of the BSE, which will be critical in turning around market share losses in the cash equity segment as well:

• Applied for and obtained the regulatory approval to allow delivery-based single stock futures and single stock options contracts. Delivery-based derivatives are the norm in most markets around the world and have proven superior as investment vehicles since they are much less susceptible to manipulation than cash-settled derivative products.

• Expanded order handling capacity to facilitate auto-quoting and algo trading. This has resulted in a significant increase in the order/trade ratio at the BSE and added substantially to on screen visible liquidity.

• Signed agreements to allow SENSEX futures and options to trade on EUREX and the BRICS Alliance Exchanges.

Obtained regulatory approval to introduce derivatives based on foreign stock indices of BRICS countries and other major markets.

5.1.3 Debt Segment

The Fixed Income Market provides an array of products and services to market participants. This segment at the Exchange currently includes:

• Reporting of secondary market trades in government securities, treasury bills, corporate bonds, Certificate of Deposit (CD) and Commercial Paper (CP) on the Wholesale Debt Market segment platform called Indian Corporate Debt Markets (ICDM).

• Trading in non convertible debentures and bonds on 'F' group on BOLT.

• Trading in government securities on the Retail Debt Market (RDM) 'G' group on BOLT.

• In accordance with RBI and SEBI guidelines, the Exchange developed a platform called 'e-settle' to facilitate clearing and settlement of secondary market trades in corporate bonds on Delivery Verses Payment (DVP I) basis through Indian Clearing Corporation Limited (ICCL).

During the year, reporting of debt securities on ICDM and in F-Group grew 39% and 18% respectively. Several Public Sector Undertakings listed their bonds on the Exchange for the first time during this fiscal. The value of trades in corporate bonds settled through 'e-settle' has reduced by approximately 38% over the previous fiscal; efforts to increase the participation in this platform are being made.

ebidXchange _ Auction of FII limits for debt

A custom designed platform called 'ebidXchange' for allocation of FII limits for investment in government securities and corporate bonds was launched by the Exchange in May 2009. The ebidXchange platform pioneered the auction of multiple products - infrastructure bonds, corporate bonds and government securities. During 2011-12, the Exchange conducted three auction sessions, all of which were conducted seamlessly and received positive response from market participants.

5.2 Membership

During 2011-12, 57 new Deposit Based Membership (DBM) applications were received at BSE. Since the launch of the new deposit based membership scheme, BSE has received 590 new DBM applications out of which 374 applicants have received SEBI registration and 292 members have commenced business on BSE. These new DBMs contributed 6.34% of total turnover at BSE in FY 2011-12.

Several automation projects were introduced during the year specifically focused on serving the regulatory and business needs of the BSE members. Automation is a key element of the membership compliance process and one of the primary ways that BSE is improving membership services.

The following modules were developed in BSE's Electronic Filing System (BEFS) portal used by BSE members:

• On-line submission of applications, tracking of the approval process and updating of details such as change in Authorized Person/s Name, Trade Name, Address, Partners, Directors, additional Branch office/s and Terminal IDs details pertaining to an Authorized Person/s.

• Online registration of market makers for SME Platform through BEFS.

• Online confirmation of IBT (Internet Based trading)/ STWT/SOR (Smart Order Routing) turnover for both cash and derivative segments through BEFS.

5.3 Corporate Services

The corporate services segment of the BSE registered healthy revenue growth in 2011-12. Overall annual listing fees (Equity, Debt and Mutual Funds) increased 42.11% to Rs. 2,899 lakh compared to Rs. 2,040 lakh in 2010-11.

Overall listing processing fees, reflecting activity in new listings and new issuance were Rs. 1,775 lakh compared to Rs. 2,652 lakh in 2010-11 down 33.08% from the high levels of the previous year.

The Exchange also provides other services to corporates such as book building software, buy-back facilities, reverse book building software, etc. Fees earned from such services were Rs. 2,940 lakh, up 59.78% from the last year's level of Rs. 1,840 lakh.

5.4 Data Information Products

Revenue from the sale of market data and information products was Rs. 2,076 lakh in 2011-12, up 6.9% from the Rs. 1,942 lakh registered in the previous year.

New developments this year included the release of the daily bulletin in text format as a new product and the development of Phase III of the distribution of Corporate Action data to custodial customers through the SWIFT network. In addition, the real-time data-feed system is being revamped to improve the customer experience and enhance the delivery capacity of the system.

5.5 Index

The BSE's overall index licensing business grew slightly from Rs. 147 lakh in 2010-11 to Rs. 155 lakh in 2011-12. But this year was a year of important developments which should lay foundation for future revenue growth.

A joint licensing agreement with the BRICS exchanges from Brazil, Russia, Hong Kong (China) and South Africa will bring license revenue as trading volume in the SENSEX futures and options gradually grows in these markets in the next few years.

A new Carbon Index called BSE-GREENEX was developed in collaboration with g-Trade and launched on February 22, 2012. The Hon'ble Minister for Corporate Affairs - Dr. M. Veerappa Moily officiated at the launching ceremony at BSE.

5.6 BSE StAR MF Platform _ Online Mutual Fund Platform

The exchange's online mutual fund transaction platform -BSE StAR MF - completed its second year of operations in December 2011 and has retained its dominant status in the exchange traded MF space with a 55% market share in FY 2011-12.

This year, in the Mutual Fund segment, BSE:

• Introduced a facility for custodians to enter transactions on behalf of their clients, routed through a trading member.

• Launched a dedicated mutual fund website for investors in partnership with Morningstar India Ltd. The website offers the investors information related to performance of mutual funds across the industry and also gives investors access to a number of state-of-the-art analytical tools which are widely used internationally, such as style box, star ratings and analyst ratings.

• Launched a unique mutual fund year-book encapsulating the performance of the MF industry and analyzing the various trends that prevailed through the year. This was also a collaborative effort with Morningstar India Ltd.

• Launched a unique product called Any Day SIP (ADS). By using this facility, the investor can select any day of the month to schedule the regular installments (orders) of a SIP (Systematic Investment Plan). This gives complete flexibility to the investor, instead of having to select from certain pre-specified dates of the AMC as was the case in the past.

• Launched tax savings schemes (ELSS) of mutual funds.

• Rationalized the listing fees schedule at BSE and began aggressive marketing of the listing of closed-end funds to all AMCs. These marketing efforts to list the AMCs closed-end schemes/ETFs at BSE have paid off with revenues rising 600% compared to last year.

The total Assets Under Management (AUM) of the Mutual Fund Industry as of March 31, 2012 stood at Rs. 6,70,931 crores, down about 4.7% from Rs. 7,03,680 crores the previous year. The StAR MF AMC family has now grown to 29 AMCs that collectively account for over 92% of the industry AUM in India. During 2011-12 we received 1,74,951 orders, generating a transaction value aggregating to over Rs. 1,703 crores. Today StAR MF offers over 2200 investment scheme options.

5.7 SME Platform

SEBI issued a circular on May 18, 2010 with a framework for setting up the SME platform. BSE SME platform received the final approval of SEBI on September 27, 2011.

A key distinguishing factor for the BSE SME platform is that it is integrated with the main exchange of the BSE. It leverages the existing infrastructure of BSE's trading systems and network. There is also a provision for migration from the SME platform to the main board and vice versa. Listed SMEs will be part of the existing BSE BOLT system and would be traded in 'M' and 'MT' groups. As per SEBI (Issue of Capital and Disclosure Requirements) Regulations (ICDR), a company listing on a regular exchange is required to offer a minimum of 25% of the post-issue paid-up capital to investors at the time of the IPO. There is no such restriction on the size of the IPO on the BSE SME platform.

The listing process on SME has been simplified to facilitate the raising of equity capital by SMEs. The recurrent cost of compliance is also substantially reduced for listed SMEs:

• Financial results are submitted on a half yearly basis instead of on quarterly basis;

• An abridged version of the annual report is allowed, with details of P&L account and balance sheet distributed to shareholders, instead of the full annual report; and

• A soft copy of the annual report and website publishing can be utilized.

NBFC and brokerage firm - BCB Finance - was the first SME to get listed on the BSE SME platform on March 13, 2012.

5.8 Technology

5.8.1 Enterprise System Management

Numerous milestones were reached in 2011-12 in the area of Enterprise System Management. New dashboard tools are now in operation within BSE that allow enterprise level monitoring of capacity, change management, incident management, asset management, service request management and network performance monitoring. Monitoring of all BSE websites is now integrated into these tools as well.

5.8.2 Audits and Process Improvements

The SEBI technology advisory team successfully conducted an inspection of BSE's DR (Disaster Recovery) and BCP (Business Continuity Plan) at our backup site on January 12, 2012.

An Information Security Surveillance audit for ISO2700I:2005 certification was also completed successfully on November 18, 2011.

Earlier, risk management was an integrated function within the BOLT Trading system. The risk management function has now been segregated from the trading system and moved into a separate system called RTRMS (Real Time Risk Management System). RTRMS manages post-trade risk management functions instantaneously and also performs cross-margining functions across equity and derivatives segment.

The trading function of derivatives was moved to the BOLT trading system in the previous year. This year, however, the balance of all derivatives risk management functions were moved to RTRMS and all settlement functions to CLASS (Clearing & Settlement System). As a result of these two developments, the former Derivatives Trading and Settlement System (DTSS) has been totally phased out.

In order to boost derivatives segment participation, a liquidity enhancement program was launched. This program requires extensive monitoring of various quoting and trading activities of market makers and general participants. LEIPS was the system developed to manage the liquidity enhancement program. This system provides real-time monitoring of participants activity and helps participants track their status and progress toward fulfilling their obligations.

FASTRADE ON WEB (FOW) is a web-initiative, providing an internet or "cloud" trading facility to all investors. In order to provide a single platform for trading, the ability to trade on National Stock Exchange (NSE) was integrated and extended to the FOW user community. FOW users can now trade on-line seamlessly on BSE as well as on NSE.

5.9 Marketing and Communications

A new BSE tag line or slogan ("Experience the New") was introduced that reflects a new approach and attitude to business. A new logo was also introduced for the BSE SME Platform this year. During the year, several high-profile visits by leading dignitaries and delegations from the government, industry and other sectors from India and abroad were conducted.

6 Regulation

The BSE Regulatory Group comprises of Membership Compliance, Listing Compliance and Surveillance.

In 2011-I2 there were 32063 surveillance alerts generated. These alerts led to 965 snap investigations and I37 full investigations.

2875 complaints against members were resolved this year as well as 5830 complaints against listed companies.

Several key regulatory projects undertaken during the year were:

• Automating significant elements of the listing operations and compliance process.

• I mproving the membership, inspection and investigation interface using BEFS (BSE Electronic Filing System).

• Providing trade information to clients automatically through SMS and email.

6.1 Investor Services

BSE redresses investor complaints against trading members through mediation and counseling through its Investor Grievances Redressal Committees. BSE provides these services as well as arbitration at its regional arbitration centers at Mumbai, Chennai, Delhi and Kolkata. To further serve investor needs, BSE has set up Investor Grievance Redressal Mechanism at its Investor Service Centres located in Ahmedabad and Hyderabad from March 30, 2012 in addition to the pre-existing Investor Services Centers at Kochi and Rajkot.

BSE is the only Exchange in the country, where I5 Registrar and Transfer Agents (RTAs) regularly visit its registered office, for redressal of investor complaints against companies listed on BSE.

6.1.1 New Initiatives in 2011-12

BSE Investor Services took the following new initiatives in 2011-I2

• BSE has successfully implemented SEBI's SCORES (SEBI Complaints Redressal System) at all its regional Investor Service Centres in June 2011 which facilitated online registration of investor complaints against trading members of the Exchange as well as continuous monitoring/follow up of the same until resolution. Investors can lodge complaints through this system and also view the status of their complaints.

• To protect investors from unauthorized trading, BSE has begun to issue SMS alerts and email alerts directly to investors for trades executed on the BSE platform. SMS alerts and email alerts began from November 28, 2011 and December 2, 2011 respectively.

• For the convenient access of investors, BSE has shifted its Investor Service Centre to the adjacent Cama Building premises. All the queries relating to complaints against members, companies and arbitrations are attended to under one roof.

6.2 Investor Protection Fund

BSE through its Investor Protection Fund (IPF) regularly conducts Investor Awareness Programmes (IAPs) throughout the country. It has conducted II29 programmes during 2011-I2. During the year, IPF conducted I7 IAPs exclusively with SEBI across different parts of the country. The IPF also sponsors workshops arranged for investors by The Institute of Company Secretaries of India (ICSI), the Investors' Associations recognized by the Securities and Exchange Board of India (SEBI), the local chamber of commerce, etc. In addition, it periodically brings out advertisements on Do's and Don'ts for investors in print media in order to enable them to safeguard their interests.

In 2011-I2, various activities were undertaken to promote awareness and to educate investors. Investor-oriented advertising in business dailies and magazines was rolled out during the year. A new BSE IPF TV campaign was also aired on all business channels for several months and a year-long BSE IPF radio property on a leading national radio channel (Radio Mirchi) was rolled out. Several programmes on TV to educate investors about personal finance and derivative products were also sponsored by BSE IPF. It also sponsored various educational and award events during the year with institutions, media houses, institutes and other corporations to enhance investor awareness and educate people about corporate best-practice. BSE IPF also participated in global conferences and seminars to enhance understanding of Indian markets both in India and abroad.

7 Human Resources

Organizations that invest in human capital invest in the future. Today at BSE we realize this truth and are increasing our focus on having the right investments in human capital to take BSE and all its employees to the next level of competence. BSE has always believed that motivated employees represent a core source of competitive advantage. For this reason we continue to invest in training and development programmes along with various HR initiatives.

BSE has aligned the compensation packages of management and successfully revamped many outdated HR policies to make benefits and compensation more transparent and employee-friendly.

Also, the organizational structure of BSE has undergone significant restructuring to enhance accountability and efficiency with a view to aligning performance management and reward strategies.

In compliance with the requirements of Section 217(2A) of the Companies Act, I956 read with the Companies (Particulars of Employees) Rules, I975, a statement containing details of employees is annexed.

As of March 31, 2012 the BSE had 302 officers and I73 staff employees.

8. Management Discussion & Analysis

The Management & Discussion Analysis Report forming part of Directors' Report for the year under review is part of the Annual Report. The report provides strategic direction and a more detailed analysis on the performance of individual businesses and their outlook.

9. Report on Subsidiary Companies

The Company has following 8 subsidiary companies (direct and indirect) as on March 31, 2012:

• Central Depository Services (India) Limited (CDSL)

• Indian Clearing Corporation Limited (ICCL)

• BSE Institute Limited (BIL)

• Marketplace Technologies Private Limited (MTPL)

• BFSI Sector Skill Council of India (BFSI)

• Marketplace Tech Infra Services Private Limited

• CDSL Ventures Limited (CVL)

• Central Insurance Repository Limited (CIRL)

There has been no material change in the nature of the business of the subsidiaries.

Pursuant to the provision of Section 2I2(8) of the Act, the Ministry of Corporate Affairs vide its circular dated February 8,

2011 has granted general exemption from attaching the balance sheet, statement of profit and loss and other documents of the subsidiary companies with the balance sheet of the Company. A statement containing brief financial details of the Company's subsidiaries for the financial year ended March 31,

2012 is included in the Annual Report.

The Company shall make available, the annual accounts and related information of its subsidiaries, to those shareholders who wish to have the copies of the same. Further, these documents shall be available for inspection by a shareholder at the registered office of the Company as well as of its subsidiaries.

9.1 CDSL and its subsidiaries

BSE owns 54.20% of CDSL, which provides depository and record-keeping services to the securities industry in India, facilitating dematerialization of holding of securities and book-entry settlement.

CDSL witnessed steady growth in 2011-I2 despite challenging industry conditions. Operating income was up 3.37% from the previous year. Other metrics, such as number of demat accounts and value of securities held also grew over the period.

CDSL Ventures Limited (CVL) saw continued progress in its mutual fund KYC registration product as well as the new KYC Registration Agency (KRA) which was inaugurated on January 4, 2012. Already, as of March 31, 2012, the number of intermediaries registered with the Agency is II75 and the number of KYCs submitted is 5.50 lakh.

The establishment of the Central Insurance Repository Ltd. (CIRL),which will hold (life and non-life) policies for beneficiaries in electronic form, is in final testing and auditing phases.

I n addition, several new projects are underway. The National Academic Depository (NAD) will hold records of academic awards and credentials in electronic form. CDSL's e-Voting initiative for corporate resolutions at AGMs and EGMs has completed 8 e-Voting implementations and 2I companies have signed up for the service so far. CVL's Green Initiative which would allow companies to send Annual Reports, quarterly results, ballot resolutions and other corporate communications to shareholders by email is now underway, with 7 companies signed up so far.

9.2 Indian Clearing Corporation Ltd. (ICCL)

ICCL is a wholly owned subsidiary of BSE Ltd. and carries out the functions of clearing, settlement, collateral management and risk management for various segments of different stock exchanges.

ICCL provides the clearing and settlement functions for trades reported on the debt and mutual fund segments of BSE and for trades executed on all the other segments of BSE and the currency derivatives segment of United Stock Exchange (USE).

While over 20 banks are empanelled with ICCL as clearing banks for BSE activities, ten banks have been empanelled as clearing banks for providing clearing and settlement services for trades executed on USE platform.

9.3 BSE Institute Limited (BIL)

BIL is incorporated as a wholly-owned subsidiary of BSE for development of financial education, training and certification in India.

Training Initiatives in 2011-12

During the year in review, BIL witnessed significant growth. Revenues were up I73.7% in 2011-I2 compared to the previous year. During the year, BIL offered over 9I short-term courses, 6 international programs, and over 22,000 certification examinations on financial and securities markets.

BIL's many new initiatives in the current year include:

• MBA-Financial Markets in collaboration with IGNOU. This program has received an excellent response from students all over the country with over 500 applications in March 2011 and equal number of applications in March 2012. The first batch commenced from June 2011 comprising two sections with a total of I38 students.

• Post Graduate Diploma in Stock Markets (PGDSM) program was launched in August 2011 with the commencement of first batch in January 2012. It is a distance mode program in collaboration with IGNOU and provides convenience to professionals interested in financial markets, who can pursue the course while continuing with their jobs.

• A program for undergraduate skill development called the 'Global Financial Markets Professional Program' (GFMP) was launched in May 2011. This is a part time program that students can pursue along with their studies. The unique aspect of this program is a six month industry practice which is provided at the end of the program.

• BIL initiated the setting up of the BFSI Sector Skill Council of India under the aegis of the National Skill Development Corporation (NSDC). This is a major national level skill development initiative aimed at addressing over 4.5 million skill requirements by the year 2022. The Skill Council has already signed up major banks, insurance companies, broking houses and other players from the BFSI sector as co-members of the council. The Council has received an in principle approval for grant of Rs. 2 crores from NSDC.

• BIL launched many other new programs targeting experienced professionals across numerous sectors and subjects.

9.4 Marketplace Technologies (MTPL)

MTPL is a wholly-owned subsidiary that is a leading provider of cutting edge IT solutions with focus on equity, stock, commodities, banking and financial services markets in India.

Key projects that MTPL has rolled out this year are:

• A multi-asset Online Collateral Management System.

• A Clearing & Settlement System for delivery-based derivatives.

• RTRMS (Real Time Risk Management System) with integrated collateral management system software to implement LEIPS, the Liquidity Enhancement Program for BSE derivatives trading.

• NSE on FOW (Fastrade on Web) which is being used by over I400 members.

• Settlement Software for BOISL to handle settlement pertaining to various segments of BSE Ltd.

• An end-to-end system for Offer for Sale that has already handled 2 offers from ONGC and Wipro. The system integrates everything from Collateral, to RTRMS, to I BBS, to Clearing & Settlement.

10 Fixed Deposits

The Exchange has not accepted any fixed deposits and as such, no amount of principal or interest was outstanding as on the Balance Sheet date.

11 Issue of Equity Shares during the Financial Year

Pursuant to the Demutualisation Scheme, the Exchange is required to allot 10,000 equity shares against each of the membership rights held by Trading Members of erstwhile BSE; however, allotment of such equity shares may be kept in abeyance, on account of suspension on the said membership rights. Accordingly, at the beginning of the financial year, the allotment of 10,000 equity shares of Rs. 1/- each against 18 membership rights held by I8 Trading Members of erstwhile BSE (out of 73,50,000 equity shares against 735 membership right of erstwhile BSE) was kept in abeyance for specific reasons, viz., Trading Member being a notified person, attachment of membership right by the Income Tax Department, legal dispute for the ownership of the membership rights etc.

During the financial year, 10,000 equity shares of Rs. 1/- each against one membership right held by one Trading Member of erstwhile BSE was allotted pursuant to the Scheme, upon revocation of suspension on such membership rights. The said Trading Member was also given the Corporate Benefits i.e. prior year dividends and 1,20,000 bonus shares emanating from the allotment of 10,000 equity shares.

The allotment of equity shares pursuant to the Scheme against I7 membership rights held by 17 Trading Members of erstwhile BSE continue to remain in abeyance as at the end of the financial year.

12 Listing of the Exchange's Shares

Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 which is effective from June 20, 2012, subject to certain regulatory conditions, allows an Exchange to list its equity on other exchanges. The Exchange plans on taking steps to become a publicly traded company through the listing of its shares.

13 Conservation of Energy, Technology Absorption and Foreign Exchange Earning and Outgo

Since the Exchange does not own any manufacturing facility, Directors have nothing to report with regard to Conservation of Energy and Technology Absorption in terms of Section 217(I)(e) of the Act read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988.

14 Corporate Social Responsibility

Corporate Social Responsibility (CSR) in BSE is aligned with its tradition of creating wealth in the community with a three pronged focus on Education, Health and the Environment. Besides funding charitable causes for the elderly and the physically challenged, the major notable activity in 2011-I2 was expenditure from the Gujarat Earthquake Relief Fund. The Fund was utilized towards the restoration and rehabilitation of a girls' school in Porbandar, Gujarat that was damaged badly during the earthquake of 200I. A hostel wing and washroom facilities were renovated and a water tank was built providing functional basic amenities to the students of the school run by a well-known local trust.

15 Corporate Governance

Pursuant to the new Regulations namely Securities Contacts (Regulations) (Stock Exchanges & Clearing Corporations) Regulations, 2012 ("SECC Regulations 2012") notified by Securities and Exchange Board of India vide notification dated June 20, 2012, corporate governance norms as specified for listed companies mutatis mutandis applies to a recognised stock exchange.

I n accordance with good corporate governance practices and in order to comply with the SECC Regulations 2012, a report on Corporate Governance as at March 31, 2012 forms part of the Annual Report. A Certificate from M/s. Mehta & Mehta, Company Secretaries, Mumbai regarding status of compliances of the conditions under Clause 49 of the Listing Agreement is annexed to this Report.

A Certificate on Secretarial Compliance for the year ended March 31, 2012 issued by M/s. Mehta & Mehta, Company Secretaries, Mumbai in terms of the provisions of Section 383A of the Act is attached with this Report.

16 Directors' Responsibility Statement

Pursuant to the requirement under Section 217(2AA) of the Act, with respect to Directors' Responsibility Statement, it is hereby confirmed:

(i) that in the preparation of the accounts for the financial year ended March 31, 2012, the applicable accounting standards have been followed and there was no material departure from such standards;

(ii) that the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Exchange as at the end of the financial year on March 31, 2012 and of the profit of the Exchange for the said financial year;

(iii) that the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act, for safeguarding the assets of the Exchange and for preventing and detecting fraud and other irregularities;

(iv) that the Directors have prepared the accounts for the financial year ended March 31, 2012 on a 'going concern basis'.

17. BSE Board Structure and Governance

Securities and Exchange Board of India (SEBI) while prescribing governance structure of the Exchange vide its letter no. MRD/485II/05 dated August 31, 2005, has provided for various categories of Directors viz. Public Interest Directors, Shareholder Directors and Trading Member Directors with the extent of their representation on the Board.

Further, pursuant to SECC Regulations 2012 notified by SEBI on June 20, 2012, the Governing Board of every recognised stock exchange shall include:

(a) Shareholder Directors;

(b) Public interest Directors; and,

(c) Managing director.

The number of public interest directors shall not be lesser than the number of shareholder directors in a recognised stock exchange. No Trading members or their associates and agents shall be on the Governing Board of any recognized stock exchange.

The appointment and re-appointment of all shareholder directors on the governing board of every recognised stock exchange(s) shall be with the prior approval of the Board.

The public interest directors on the governing board of the recognised stock exchange(s) shall be nominated by the Board.

Additionally, pursuant to the said Regulations, every recognised stock exchange shall ensure compliance with the provisions of the aforesaid within three months from the date of commencement of these Regulations. The Exchange shall take commensurate steps within the stipulated time, to comply with the new Regulations.

However, the SECC Regulations 2012 prescribes that an Advisory Committee comprising of trading members shall be constituted by the Governing Board of every recognized stock exchange to advise the Governing Board on non-regulatory and operational matters including product design, technology, charges and levies. The Chairperson of Governing Board shall be head of Advisory Committee and Managing Director shall be permanent invitee to every meeting of Advisory Committee. The recommendations of the Advisory Committee will be required to be placed in the next meeting of the Governing Board of stock exchange for consideration and appropriate decision of the Governing Board. The recommendation of the Advisory Committee with the decision of the Governing Board shall be disclosed on the websites of the Stock Exchange.

17.1 Managing Director

Mr. Madhu Kannan has ceased to be MD & CEO of the Exchange with effect from May 11, 2012. In the absence of Managing Director, Mr. Ashishkumar Chauhan, Deputy CEO has been appointed as Interim CEO of the Exchange with effect from May 11, 2012.

17.2 Public Interest Directors

Mr. Sudhakar Rao was appointed by the Board as a Public Interest Director of the Exchange with effect from June 29, 2011 in place of Mr. S.N. Menon, who retired from the office at the same meeting due to completion of his second term in terms of Article I3.I6B.2 of AOA of the Exchange.

17.3 Shareholder Directors

Mr. Dipak Chatterjee was appointed as a shareholder director of the Exchange, at the Sixth Annual General Meeting held on June 29, 2011 in place of Mr. Sudipto Sarkar who retired from the office at the same meeting due to completion of his second term in terms of Article I3.I8A of AOA of the Exchange.

However, Mr. Chatterjee resigned from the office of Shareholder Director with effect from January 25, 2012.

Mr. Thomas Lars Bendixen acts as an alternate director to Mr. Andreas Preuss, Deputy CEO Deutsche Borse AG, Shareholder Director of the Exchange.

17.4 Trading Member Directors

Mr. Anil Maneklal Shah, Designated Director of SPAN Caplease Pvt. Ltd, (Trading Member of the Exchange) was appointed as a trading member director of the Exchange, at the Sixth Annual General Meeting held on June 29, 2011 in place of Mr. Balkishan Mohta, who retired from the office at the same meeting due to completion of his second term in terms of Article I3.I8A of AOA of the Exchange.

Mr. Anil Shah is currently serving on the Board of BSE as a trading member director.

18 Auditors

The Auditors, M/s Deloitte Haskins & Sells, Chartered Accountants, Mumbai, hold office until the conclusion of the forthcoming Annual General Meeting and are recommended by the Board for re-appointment to hold the office from the conclusion of the forthcoming Annual General Meeting until the conclusion of the next Annual General Meeting. The Auditors have confirmed that, their re-appointment, if made, would be within the limits prescribed under Section 224(IB) of the Act and that they are not disqualified in terms of Section 226 of the Act.

19 Auditors' Report

The Auditors' Report dated April 27, 2012 on the financial statements of the Exchange for the financial year ended March 31, 2012 does not have reservation, qualification or adverse remarks.

20 Acknowledgements

The Board thanks the Government of India, Securities and Exchange Board of India, Reserve Bank of India, the Government of Maharashtra and other State Governments and various government agencies for their continued support, cooperation and advice.

The Board is grateful to the members of various standing, SEBI-mandated and other advisory committees constituted during the year. The Board also acknowledges the splendid support extended by the trading members, issuers, investors in the capital market, market intermediaries and their various associates. The Board expresses sincere thanks to all the business associates, consultants, bankers, auditors, solicitors and lawyers for their continued patronage, partnership and confidence in the Exchange.

The Board wishes to thank all the employees for the exemplary dedication and excellence displayed in discharge of their duties for the Exchange.

Finally, the Board expresses its gratitude to you as shareholders for the confidence reposed in the management of the Exchange.

For and on behalf of the Board

S. Ramadorai

Chairman

Place: Mumbai

Date: July 27, 2012