Report on Corporate Governance

A. Company's Corporate Governance Philosophy

The Company's philosophy on Corporate Governance is founded upon a legacy of fair, ethical and transparent governance practices.

The Company has been guided by ethical principles and being transparent and fair in its business dealings and administration, and having adequate system of controls and checks in place to ensure that the executive decisions should result in optimum growth and development which benefits all the stakeholders. The Company aims to increase and sustain its corporate value through growth and innovation. Further, the Company has established systems and procedures to ensure that its Board of Directors is well informed and well equipped to fulfil its overall responsibilities and to provide management with the strategic direction needed to create long term shareholders' value. The Company has always worked towards building trust with the shareholders, employees, customers, suppliers and other stakeholders based on the principles of good corporate governance viz., integrity, equity, transparency, fairness, disclosure, accountability and commitment to values.

Corporate Governance is an ongoing process at L&T Finance Holdings. The Company believes that there is a need to view Corporate Governance as more than just regulatory requirements as there exists a fundamental link with the organisation of business, corporate responsibility and shareholder wealth maximisation.

B. Board of Directors

1. Composition of the Board

The Company has a broad based Board of Directors, constituted in compliance with the relevant guidelines issued by Reserve Bank of India, Companies Act, Listing Agreement and in accordance with best practices in Corporate Governance. The Board functions either as a full Board or through various Committees constituted to oversee specific areas. Policy formulation, setting up of goals and evaluation of performance and control functions vest with the Board.

Currently, the Board comprises of Mr. Y. M. Deosthalee, Chairman & Managing Director, Mr. N. Sivaraman, President & Whole-time Director and eight non-executive Directors.

Mr. R. Shankar Raman, Non-Executive Director, is the Chief Financial Officer and a member of the Board of Directors of Larsen & Toubro Ltd. Mr. A. K. Jain, Mr. S. V. Haribhakti, Mr. B. V. Bhargava, Mr. Subramaniam N., Mr. M. Venugopalan, Mr. P. V. Bhide and Ms. Kamakshi Rao are Independent Directors as defined in Clause 49 of the Listing Agreement.

With seven Independent Directors on the Board, the Company meets the spirit of Corporate Governance more than that mandated by the law.

2. Meetings of the Board

The Meetings of the Board are generally held at its Corporate office at the Metropolitan, 8th floor, Bandra Kurla Complex, Mumbai 400 051. During the year under review, 8 meetings were held on April 26, 2011, August 5, 2011, September 14, 2011, November 2, 2011, December 28, 2011, January 25, 2012, March 16, 2012 and March 29, 2012.

The Company Secretary prepares the agenda and the explanatory notes, in consultation with the Chairman & Managing Director or President & Whole-time Director and circulates the same in advance to the Directors. Every Director is free to suggest inclusion of items on the agenda. The Board meets at least once every quarter inter alia to review the quarterly results. Additional Meetings are held, when necessary. The Minutes of the proceedings of the Meetings of the Board of Directors are noted and the draft Minutes are circulated amongst the members of the Board for their perusal. Comments, if any, received from the Directors are also incorporated in the Minutes, in consultation with the Chairman. The Minutes are approved by the members of the Board at the next Meeting. Senior Management Personnel are invited to provide additional inputs for the items being discussed by the Board of Directors as and when necessary.

3. Information to the Board:

The Board of Directors has complete access to the information within the Company, which inter alia includes -

• Annual revenue budgets and capital expenditure plans of the Company, its subsidiaries and second level subsidiaries.

• Quarterly results and results of operations of subsidiaries, stepped down subsidiaries and business segments.

• Financing plans of the Company.

• Minutes of meetings of the Board of Directors, Audit Committee, Shareholders'/Investors' Grievance Committee, Nomination & Remuneration Committee, IPO Committee and Committee of Directors.

• Minutes of the Board Meetings of material subsidiaries.

• Details of any joint venture, acquisitions of companies or collaboration agreement.

• Material default, if any, in financial obligations to and by the Company or substantial non-payment for services rendered, if any.

• Any issue, which involves possible public liability claims of substantial nature, including any Judgment or Order, if any, which may have strictures on the conduct of the Company.

• Developments in respect of human resources.

• Non-compliance of any regulatory, statutory nature or listing requirements and investor service such as non-payment of dividend, delay in share transfer, etc., if any.

4. Post-meeting internal communication system:

The important decisions taken at the Board/Committee meetings are communicated to the concerned departments/subsidiary companies promptly.

C. Board Committees

The Board has constituted the following committees:

• Audit Committee;

• Shareholders'/Investors' Grievance Committee;

• Nomination & Remuneration Committee;

• IPO Committee;

• Committee of Directors;

• Asset Liability Committee; and

• Risk Management Committee

1. Audit Committee

(i) Terms of reference

The role of the Audit Committee includes the following:

• Holding discussions with the auditors periodically about internal control systems, the scope of audit including the observations of the auditors and review of the quarterly, half yearly and annual financial statements before submission to the Board and also ensuring compliance of internal control systems.

• Overseeing of the Company's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

• Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditors and the fixation of audit fees.

• Approving of payment to statutory auditors for any other services rendered by them.

• Reviewing, with the management, the annual financial statements before submission to the Board for approval, with particular reference to matters required to be included in the Directors' Responsibility Statement to be included in the Board's Report in terms of Clause (2AA) of Section 217 of the Companies Act; changes, if any, in accounting policies and practices and reasons for the same; major accounting entries involving estimates based on the exercise of judgment by management; significant adjustments made in the financial statement arising out of audit findings; compliance with listing and other legal requirements relating to financial statements; disclosure of any related party transactions & qualifications in the draft audit report; reviewing, with the management, the quarterly financial statements before submission to the Board for approval.

• Reviewing, with the management, the statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/prospectus/ notice and the report submitted by the monitoring agency, monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take steps in this matter.

• Reviewing, with the management, performance of statutory & internal auditors and adequacy of the internal control systems.

• Reviewing the adequacy of the internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.

• Discussing with the internal auditors on any significant findings and follow up thereon.

• Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board.

• Discussing with statutory auditors before the audit commences, about the nature and scope of audit as well as post audit discussion to ascertain any area of concern.

• Looking into the reasons for substantial defaults in the payment to the debenture holders, shareholders (in case of non payment of declared dividends) and creditors, if any.

• Review of information as prescribed under Clause 49 of the Listing Agreement.

(ii) Internal Audit

The Internal Audit department of L&T Finance Limited provides internal audit services to the Company.

2. Shareholders'/Investors' Grievance Committee

(i) Terms of reference

The role of the Shareholders'/Investors' Grievance Committee includes the following:

• review of cases for refusal of transfer/transmission of shares and debentures;

• redressal of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc.;

• reference to statutory and regulatory authorities regarding investor grievances; and

• otherwise ensuring proper and timely attendance and redressal of investor queries and grievances.

(iv) Details of Shareholders' Requests/Complaints

During the year under review, the Company has resolved investor grievances expeditiously except for the cases constrained by disputes or legal impediments. During the year under review, the Company/its Registrar received the following complaints from SEBI/Stock Exchanges and queries from the shareholders, which were resolved within the time frame laid down by SEBI.

3. Nomination & Remuneration Committee (N&R Committee)

(i) Terms of reference

The role of the Nomination & Remuneration Committee includes the following:

• to review the overall compensation policy, service agreements and other employment conditions of Executive Directors and senior executives just below the Board of Directors and make appropriate recommendations to the Board of Directors;

• to review the overall compensation policy for Non­Executive Directors and Independent Directors and make appropriate recommendations to the Board of Directors;

• to make recommendations to the Board of Directors on the increments in the remuneration of the Directors;

• to assist the Board in developing and evaluating potential candidates for senior executive positions and to oversee the development of executive succession plans;

• to review and approve on an annual basis the corporate goals and objectives with respect to compensation for the senior executives and make appropriate recommendations to the Board of Directors;

• to evaluate at least once in a year the senior executive officer's performance in the light of these established goals and objectives and based on these evaluations, set the senior executive officer's annual compensation, including salary, bonus and equity and non-equity incentive compensation;

• to review and make appropriate recommendations to the Board of Directors on an annual basis, on the evaluation process and compensation structure for the Company's officers just below the level of the Board of Directors;

• to evaluate the performance of the Company's senior executives just below the level of the Board of Directors and to recommend to the Board of Directors the annual compensation, including salary, bonus and equity and non-equity incentive compensation, for such senior executives, based on initial recommendations from the Managing Director;

• to provide oversight of management's decisions concerning the performance and compensation of other officers of the Company;

• to review incentive compensation arrangements to confirm that incentive pay does not encourage unnecessary risk taking and to review and discuss, at least annually, the relationship between risk management policies and practices, corporate strategy and senior executive compensation;

• to maintain regular contact with the leadership of the Company, including interaction with the Company's human resources department, review of data from the employee survey and regular review of the results of the annual leadership evaluation process; and

• to formulate the Employee Stock Option Scheme (ESOS), decide the terms and conditions, make appropriate recommendations to the Board of Directors and administer and superintend ESOS.

(ii)Board Membership Criteria

While screening, selecting and recommending to the Board new members, the Committee ensures that the Board is objective, there is absence of conflict of interest, ensures availability of diverse perspectives, business experience, legal, financial & other expertise, integrity, managerial qualities, practical wisdom, ability to read and understand financial statements, commitment to ethical standards and values of the Company and ensure healthy debates and sound decisions.

While evaluating the suitability of a Director for re-appointment, besides the above criteria, the Committee considers the past performance, attendance & participation in and contribution to the activities of the Board by the Director.

The Independent Directors comply with the definition as given under Clause 49 of the Listing Agreement. While appointing / re-appointing any NEDs on the Board, the Committee considers the criteria as laid down in the Listing Agreement.

(iii) Remuneration Policy:

The remuneration of the Board members is based on the Company's size, its economic and financial position, industrial trends, compensation paid by the peer companies, etc. Compensation reflects each Board member's responsibility and performance. The level of compensation to Executive Directors is designed to be competitive in the market for highly qualified executives. The Director on the Board who is in the service of Larsen & Toubro Limited draws remuneration from Larsen & Toubro Limited and is not paid any sitting fees separately for attending the meetings of the Board and/any Committee of the Company.

The Company pays remuneration to Executive Directors by way of salary, perquisites, retirement benefits (fixed components) and variable remuneration, based on recommendation of the Nomination & Remuneration Committee, approval of the Board and the shareholders.

The NEDs are paid remuneration by way of commission & sitting fees. The Company pays sitting fees of Rs. 20,000 per meeting to the NEDs for attending the meetings of the Board and Committees. The commission is paid as per limits approved by the shareholders, subject to a limit not exceeding 1% p.a. of the profits of the Company (computed in accordance with Section 309(5) of the Companies Act, 1956).

As required by the provisions of Clause 49 of the Listing Agreement, the criteria for payment to NEDs is made available on the investor page of the corporate website www.ltfinanceholdings.com

4. IPO Committee

(i) Terms of reference

The IPO Committee of the Company was constituted to handle matters related to the IPO of the Company such as the appointment of various intermediaries including merchant bankers, registrars, printers, advertisement and publicity agents, legal counsels and bankers to the Issue, submission of applications and documents to statutory and other authorities from time to time, determination of the price band and the issue price and other aspects related thereto, as may be delegated by the Board in this regard.

(ii)Meetings:

The Committee met ten times during the year on June 28, 2011, July 4, 2011, July 7, 2011, July 15, 2011, July 21, 2011, July 26, 2011, July 30, 201 1, August 3, 2011, August 6, 2011 & August 8, 2011.

5. Committee of Directors

(i) Terms of reference:

The Committee of Directors of the Company was constituted to facilitate the operational decisions within the broad framework laid down by the Board such as day to day operational decisions of the Company in terms of borrowing power, additional investment in subsidiaries, authentication of information in connection with the IPO of the Company, etc.

6. Asset Liability Committee (ALCO) & Risk Management Committee

The aforesaid special purpose Committees have been constituted during the year for effective risk management in various portfolios and in compliance with RBI Circular on Corporate Governance. Since these Committees were constituted by the Board on March 29, 2012, no meeting was held during the year.

D. Nomination on Boards of Material Subsidiaries

The Company has ensured that atleast 1 independent director of the Company is nominated on the Board of each Material Subsidiary of the Company. As at March 31, 2012, Mr. P. V. Bhide and Mr. Subramaniam N. were nominees on the Board of Directors of L&T Finance Limited; Mr. A. K. Jain and Mr. B. V. Bhargava were nominees on the Board of Directors of L&T Infrastructure Finance Company Limited.

E. Other Information Training of Directors:

All Directors of the Company are aware and are also updated as and when required, of their roles, responsibilities & liabilities.

Information to Directors:

The Board of Directors has complete access to the information within the Company, which inter alia, includes items as mentioned in point no. B3 of the Corporate Governance Report. Presentations are made regularly to the Board and its Committees, where Directors get an opportunity to interact with management.

Independent Directors have the freedom to interact with the Company's management. Interactions happen during Board/ Committee meetings, when senior company personnel are asked to make presentations about the performance of the Company to the Board.

Risk Management Framework:

The Company has in place mechanisms to inform Board members about the risk assessment and minimization procedures and periodical review to ensure that executive management controls risk by means of a properly defined framework. A detailed note on risk management is given in the Management Discussion and Analysis report forming part of the Annual Report.

Statutory Auditors:

The Board has recommended to the shareholders, the re-appointment of Sharp & Tannan (S&T) as Statutory Auditors. S&T has furnished a declaration confirming their independence as well as their arm's length relationship with the Company, also declaring that they have not taken up any prohibited non-audit assignments for the Company. The Company believes that S&T, over a period of time, has gained extensive knowledge of the Company and its business, which is essential to ensure audit quality & audit objectivity. Robust internal control systems and risk management framework, review of Auditors' performance by the Audit Committee and peer review of the Audit firm, are some of the more important factors that prevent audit failures. Mr. Milind P. Phadke has signed the audit report for FY 2011-12 on behalf of S&T.

Code of Conduct:

The Company has laid down a Code of Conduct for all Board members and Senior Management Personnel. The Code of Conduct is available on the website of the Company www.ltfinanceholdings.com

Disclosures:

• During the year, there were no transactions of material nature with the Directors, Management, their relatives or the subsidiaries, that had potential conflict with the interests of the Company.

• Details of all related party transactions form a part of the accounts as required under AS 18 and the same forms part of the Annual Report.

• The Company has followed all relevant Accounting Standards notified by the Companies (Accounting Standards) Rules, 2011 while preparing the Financial Statements.

• There were no instances of non-compliance on any matter related to the capital markets, during the last three years.

Change in Accounting Policy:

• The Company has changed its accounting policy for goodwill arising on acquisition effective April 1, 2011 from amortisation to testing for impairment, annually.

Management believes that this change in accounting policy aligns with the generally accepted practices and reflects enduring benefits to be derived from goodwill arising on acquisition. Consequently, profit before tax is higher by Rs. 489.78 lakhs for the year ended March 31, 2012.

Means of Communication:

• Quarterly Results are communicated through a Press Release and newspaper advertisements in prominent national and regional dailies like the Economic Times, Business Standard, Financial Express, Mint, Free Press Journal and Navshakti.

• The financial results, official news releases and presentations are also displayed on the website of the Company (www.ltfinanceholdings.com)

• Annual Report is circulated to all the shareholders and all others like auditors, equity analysts, etc.

• Management Discussion & Analysis forms a part of the Annual Report which is mailed to the shareholders of the Company.

General Shareholders' Information:

Annual General Meeting

Thursday, August 9, 2012 at 3.00 p.m.

Birla Matushri Sabhagar, 19, Marine Lines, Mumbai 400 020

Financial Year: April 1, 2011 to March 31, 2012

Date of Book Closure

Tuesday, August 7, 2012 to Thursday, August 9, 2012 (both days inclusive)

Dividend Payment Date: Not Applicable

Listing on Stock Exchanges

1. BSE Limited

2. National Stock Exchange of India Limited

The Company has paid the listing fees to the Stock Exchanges.

Stock Code

BSE: 533519

NSE: L&TFH

Financial Calendar

First quarter: During 3rd week of July 2012*

Second quarter: During 4th Week of October 2012*

Third quarter: During 4th week of January 2013*

Registrar and Transfer Agents

Sharepro Services (India) Private Limited

13 AB, Samhita Warehousing Complex

2nd floor, Sakinaka Telephone Exchange Lane

Andheri - Kurla Road, Sakinaka, Andheri (E), Mumbai - 400 072

Tel: +91 22 6191 5400/412 • Fax: +91 22 6191 5444

E-mail: sharepro@shareproservices.com  

Share Transfer System

The Board has delegated the authority for approving transfer, transmission etc. of the Company's securities to the Share Transfer Committee.

The Company obtains from a Company Secretary in practice, half-yearly certificate of compliance with the share transfer formalities as required under Clause 47(c) of the Listing Agreement with Stock Exchanges and files a copy of the certificate with the Stock Exchanges.

Dematerialisation of Shares:

The Company's shares are required to be compulsorily traded in the Stock Exchanges in dematerialized form.

Dematerialisation of shares and liquidity

As on March 31, 2012 almost the entire equity capital was held in the dematerialised form with NSDL and CDSL. Only 3,315 shares were held in physical form.

Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity

The Company does not have any Outstanding GDRs/ADRs/Warrants or any other Convertible instrument as on date.

Plant Locations

As the Company is engaged in the business of Non Banking Financial Services, this section is not applicable.

Address for correspondence

Sharepro Services (India) Private Limited

13 AB, Samhita Warehousing Complex

2nd floor, Sakinaka Telephone Exchange Lane,

Andheri-Kurla Road,

Sakinaka, Andheri (E), Mumbai - 400 072

Tel: +91 22 6191 5400/412

Fax: +91 22 6191 5444

E-mail: sharepro@shareproservices.com

Address of the Compliance Officer

Mr. N. Suryanarayanan, Company Secretary

L&T Finance Holdings Limited

City - 2, 177, C.S.T. Road, Kalina,

Santacruz (East), Mumbai - 400 098.

Phone No.: 022 - 6621 7300

Fax No.: 022 - 6621 7515

E-mail: igrc@ltfinanceholdings.com

Non-mandatory requirements on Corporate Governance recommended under Clause 49 of the Listing Agreement.

The Company has adhered to most of the non-mandatory requirements of Corporate Governance norms as prescribed under Clause 49 of the Listing Agreement, which are described as follows:

• Remuneration Committee - Nomination & Remuneration Committee has been formed. The Committee comprises of three independent Directors and the Chairman & Managing Director of the Company.

• Audit Qualifications - All Audit Reports on the financial statements of the Company are unqualified.

• Training of Directors - All our Directors are updated as and when required, of their role, responsibilities & liabilities.

Securities Dealing Code:

Pursuant to the SEBI (Prohibition of Insider Trading) Regulations 1992, a Securities Dealing Code for prevention of insider trading is in place. The objective of the Code is to prevent purchase and / or sale of shares of the Company by an Insider on the basis of unpublished price sensitive information. Under this Code, Designated Persons are prevented from dealing in the Company's shares during the closure of Trading Window. To deal in securities beyond specified limit, permission of the Compliance Officer is also required. All the Designated Employees are also required to disclose related information periodically as defined in the Code. Directors and designated employees who buy and / or sell shares of the Company are prohibited from entering into an opposite transaction i.e sell or buy any shares of the Company during the next six months following the prior transactions. Directors and designated employees are also prohibited from taking positions in the derivatives segment of the Company's shares.

Mr. Shekhar Prabhudesai, Head - Secretarial & Compliance has been designated as the Compliance Officer.

Secretarial Audit

The Secretarial Audit, at regular intervals, is conducted by the Corporate Secretarial department of Larsen & Toubro Limited, which has competent professionals to carry out the said audit. Further, as a good corporate governance practice, the Company has voluntarily undergone a Secretarial Audit by M/s. S. N. Ananthasubramanian & Co., Practising Company Secretaries, of the secretarial records and documents for the period under review in respect of compliance with the Companies Act, 1956, Listing Agreement and the applicable regulations and guidelines issued by Securities and Exchange Board of India.

As stipulated by SEBI, a Qualified Practising Company Secretary carries out Reconciliation of Share Capital Audit to reconcile the total admitted capital with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) and the total issued and listed capital. This audit is carried out every quarter and the report thereon is submitted to the Stock Exchanges. The Audit confirms that the total listed and paid up capital is in agreement with the aggregate of the total number of shares in dematerialized form and in physical form.