Investment in Centurion Bank Ltd. in India

This document aims to clarify the following points in order to enable the shareholders of BankMuscat SAOG to consider and decide on the proposed scheme arrangements of investment in Centurion Bank Ltd. in India that will be considered in the Ordinary General Meeting of the Shareholders on 19 August 2003.

1. The reasons why BankMuscat is investing in Centurion Bank
2. The reasons why the bank is paying a INR 3 as a premium per share.
3. What would be the impact of the investment on BankMuscat?

BankMuscat presently has only one branch in India that is based in Bangalore. The bank invested US$ 10 million as the capital for the branch. If the bank has to expand and open another branch it would involve additional capital of US$ 10 million. Therefore to have two branches the bank’s investment would be US$ 20 million. The bank can open a third branch and this would require US$ 5 million as the investment.

We have from the operations of the last five years realized that in India, which is a vast country, two to three branches would not give any strength in terms of reach, customer base as well as the capability to attract and retain top talent. We have also observed that the non-resident Indian business that could be generated out of Oman would be limited because of the limited branch network.

Therefore the bank was exploring opportunities of how to increase its presence in India through a wider network and at the same time have its risk limited as well as have an exit opportunity available for the investment. The opportunity came in the form of Centurion Bank which is a public listed company and which has a wide network of 60 branches, 139 ATM’s and a presence in 44 cities. The bank had to pay a premium of INR 3/- primarily for this business and network that Centurion Bank already had. In case the bank started a new venture and wanted to build up the necessary infrastructure it would have taken a similar cost.

BankMuscat decided to take a 26% stake in the entity and the total value of the investment is US$ 15 million. The Bangalore Branch of BankMuscat would be merged with Centurion Bank and therefore our net additional investment into India is only about US$ 5 million. The advantages to BankMuscat from this investment are as follows:

a) From a one-branch presence we would have a presence in 44 cities and 60 branches.

b) In the case of a branch there is no exit route available for the bank’s investment. Whereas in this case the bank could exit through the stock market if necessary.

c) In the case of a branch the bank is exposed to 100% of the losses incurred by the branch whereas in this case the bank’s risk is capped to its investment value i.e. US$ 15 million.

Since this investment would be qualified as an Associate Company in the books of BankMuscat SAOG we would account for the results of Centurion Bank using the principles laid down in the Accounting Standards for Associate Companies.