1. Introduction

Your company is engaged in the business of providing depository services in respect of various types of securities. It provides depository services to investors through depository participants and has put in place necessary infrastructure for recording allotment and transfer of securities in dematerialized form and to protect the interest of the investors. Since the commencement of its operations twelve years ago, the company has emerged as a convenient, dependable and secure depository and has accomplished high level of operational efficiency over the years.

2. Industry Structure and Developments

Your company as a depository extends its services to the investors through agents, i.e. the depository participants, who provide an interface between the depository and beneficial owners. The depository provides infrastructure for maintenance of records of the beneficial owners and facilitates transfer of securities. The clearing houses / clearing corporations of stock exchanges and commodity exchanges are electronically connected for processing settlement of transactions. The activities like dematerialization and rematerialisation of securities/ warehouse receipts, corporate actions such as issue of rights and bonus shares, consolidation, subdivision and redemption of securities and revalidation of warehouse receipts are carried out by the issuers of securities or their Registrars and Transfer Agents who have established electronic connectivity with your company. With the admission of close ended mutual funds with the depository, beneficial owners can destatementise / restatementise their existing units and hold the same in their demat accounts. The introduction of KYC Registration Agency (KRA) in January 2012, will make it convenient for investors to do a onetime KYC across all intermediaries in the capital markets.

3. Opportunities and Threats

The depository system has helped to enhance liquidity, facilitate faster transfer of securities, reduce transaction costs, and brvent various risks associated with the erstwhile system of holding securities in physical form. Currently various types of securities such as equity shares, debentures, bonds, certificate of deposits, commercial paper are admitted with CDSL for dematerialization. Your company has also commenced admission of open ended Mutual Fund units, which can now be purchased on the mutual fund platform of BSE and NSE.

Though the current capital market environment remains favorable for enhancing the opportunities and demand for depository services, maintaining the integrity, safety and efficiency of the system remains a challenging task due to increasing volumes and shorter settlement cycles.

4. Segment wise / product wise Performance

The depository services of CDSL cannot be classified into different business segments or products. Its performance may, therefore, be viewed in an integrated manner from the data furnished hereunder:

Financial Performance

The company registered a gross income of Rs. 1022.42 million in 2011-12 as against Rs. 1020.91 million in the brvious financial year reflecting an increase of 0.14 %. The profit after tax amounted to Rs. 474.57 million as against the net profit of Rs. 480.39 million in the brvious year, reflecting a decline of 1.21 % over the brvious year. The financial performance of the company is mainly dependent on the capital market conditions.

5. Future Outlook

The transactions processed by your company are mainly related to settlement of trades on the stock exchanges. The volume of transactions, and consequently, CDSL's business prospects, is in a large measure determined by stock market sentiment and activity level. During the year 2011-12, the stock market indices have dipped by 10.58% due to adverse market conditions, which has impacted the number of debit transactions on CDSL by 31%. This has posed a challenge to the company in maintaining the earlier pace of growth of its depository operations. All efforts, will, however be made to achieve satisfactory financial results for the year 2012-13.

6. Risk Management

Risk is managed under a combrhensive risk framework, with policies related to each of the relevant risks and a governance structure that makes clear the responsibilities for monitoring and control. All critical functional areas of the company are under concurrent audit, which is carried out by an independent firm of Chartered Accountants. An extensive internal audit covering all areas is also carried out by the independent firm of Chartered Accountants. Post audit reviews are carried out to ensure follow up on the observations made. The scope of the internal and concurrent audit is determined by the Audit Committee and the audit reports are reviewed by this Committee on regular basis.

CDSL has constituted a Risk Management Committee to assess and mitigate the risks involved in depository and depository participant business. The Committee meets periodically to review issues related to identification, assessment and containment of risks.

CDSL also sends SMS alerts directly to BOs for any debit or credit transaction, modifications in important client details like address, nominee etc., pledge transactions, credits received through dematerialization, IPOs and /or corporate actions.

CDSL has continued with its policy to lay more stress on compliance so as to ensure that the integrity of the depository system is not compromised, since this is a key driver for sustainable growth. CDSL has also obtained a Combrhensive Package Policy to cover risks associated with Securities Depository Operations with indemnity limit of Rs. 50 Crores (Any one Accident ) and Rs. 100 Crores (Any one Year) covering the company and its depository participants. A similar policy covering risks associated with operations in warehouse receipts held in electronic form has been obtained with indemnity limit of Rs. 10 Crores (Any one Accident) and Rs. 20 Crores (Any one Year). CDSL performs periodic Information Systems Audit with a view to secure its IT environment and to improve various IT related processes. The combrhensive System Audits which covers entire IT infrastructure is carried out by external system auditors. CDSL has benchmarked its IT practices with ISO27001 standard and is certified for the same by DNV. The Vulnerability Assessment /Penetration Testing Audits are also carried out by external auditors at regular intervals. The compliance of audit is done promptly, the progress of which is monitored by Technology Development Advisory Committee.

7. Monitoring of DP Operations

It has been the endeavor of CDSL to evaluate adequacy of internal controls and procedures and to ensure adherence to compliance requirements by the depository participants, who provide an interface to investors in extending depository services.

In addition to the internal audit of depository participant operations, CDSL has also instructed depository participants to appoint independent Chartered Accountant firms to conduct concurrent audit of risk prone areas on 100% basis. CDSL also conducts regular inspection of depository participants and Registrar and Transfer Agents in order to improve the efficiency of operations of depository participants and ensure compliance with regulatory provisions. During last financial year, CDSL conducted inspections of all its active depository participants and their live connected branches through its own staff.

CDSL has decided to continue to focus on '100% compliance by depository participants'. Accordingly, to enhance the overall compliance level, CDSL has taken initiatives to educate depository participants across the country. CDSL conducts compliance training programmes for depository participants and suggest improvements to achieve the objective of 100% compliance. To ensure that internal auditors of depository participants are equipped with knowledge about depository participant operations, CDSL conducts training for internal auditors of depository participants with special focus on auditing tools and procedures.

Cautionary Statement:

Statements in the Management Discussion and Analysis describing CDSL's objectives, expectations, and projections are based on experience relating to behavioural pattern of capital market. Actual results may vary in tandem with the capital market conditions and regulatory environment.

For and on behalf of the Board

N. Rangachary

Chairman

Place: Mumbai

Date: 16th April, 2012