UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2010 |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report _____________________ |
For the transition period from ______ to _____ |
Commission file number 1-15252
Mahanagar Telephone Nigam Limited
(Exact name of Registrant as specified in its charter)
N/A (Translation of Registrant’s name into English) | The Republic of India (Jurisdiction of incorporation or organization) |
12th Floor, Jeevan Bharati, Tower-1
124 Connaught Circus
New Delhi 110001
India
(Address of principal executive offices)
Smt Anita Soni, Director Finance, 91-11-2332-1095, dirfinco@bol.net.in
Jeevan Bharati Building, Tower-I, 124 Connaught Circus, New Delhi 110001, India
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contract Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
American Depositary Shares, each representing two equity shares. Equity Shares (Not for trading, but only in connection with the registration of the American Depositary Shares) | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 630,000,000 Equity Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, or the Securities Act. YES o NO x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. YES o NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Accelerated filer | x | Non-accelerated filer | ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP | x | International Financial Reporting Standards as issued by the International Accounting Standards Board | ¨ | Other | ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 x
If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO x
Page
PRESENTATION | iii | ||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | iii | ||
INTRODUCTION | iii | ||
PART I | 1 | ||
Item 1. | Identity of Directors, Senior Management and Advisers | 1 | |
Item 2. | Offer Statistics and Expected Timetable | 1 | |
Item 3. | Key Information | 1 | |
A. | SELECTED FINANCIAL DATA | 1 | |
SELECTED FINANCIAL AND OPERATING DATA | 1 | ||
EXCHANGE RATES | 5 | ||
B. | CAPITALIZATION AND INDEBTEDNESS | 5 | |
C. | REASONS FOR THE OFFER AND USE OF PROCEEDS | 5 | |
D. | RISK FACTORS | 6 | |
Item 4. | Information on the Company | 14 | |
A. | HISTORY AND DEVELOPMENT OF THE COMPANY | 14 | |
B. | BUSINESS OVERVIEW | 24 | |
LEGAL PROCEEDINGS | 36 | ||
C. | ORGANIZATIONAL STRUCTURE | 39 | |
D. | PROPERTY, PLANTS AND EQUIPMENT | 39 | |
TELECOMMUNICATIONS REGULATION IN INDIA | 44 | ||
Item 4A. | Unresolved Staff Comments | 50 | |
Item 5. | Operating and Financial Review and Prospects | 51 | |
A. | OPERATING RESULTS | 51 | |
B. | LIQUIDITY AND CAPITAL RESOURCES | 63 | |
C. | RESEARCH AND DEVELOPMENT | 64 | |
D. | TREND INFORMATION | 64 | |
E. | OFF-BALANCE SHEET ARRANGEMENTS | 64 | |
F. | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS | 64 | |
G. | SAFE HARBOR | 64 | |
Item 6. | Directors, Senior Management and Employees | 65 | |
A. | DIRECTORS AND SENIOR MANAGEMENT | 65 | |
B. | COMPENSATION | 68 | |
C. | BOARD PRACTICES | 68 | |
AUDIT COMMITTEE | 68 | ||
D. | EMPLOYEES | 68 | |
TRAINING | 70 | ||
E. | SHARE OWNERSHIP | 70 | |
Item 7. | Major Shareholders and Related Party Transactions | 70 | |
A. | MAJOR SHAREHOLDERS | 70 | |
B. | RELATED PARTY TRANSACTIONS | 71 | |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS | 71 | ||
C. | INTEREST OF EXPERTS AND COUNSEL | 73 | |
Item 8. | Financial Information | 73 | |
A. | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 73 | |
B. | SIGNIFICANT CHANGES | 73 | |
Item 9. | The Offer and Listing | 74 | |
A. | OFFER AND LISTING DETAILS | 74 | |
MARKET PRICE INFORMATION | 74 | ||
B. | PLAN OF DISTRIBUTION | 74 | |
C. | MARKETS | 75 |
i
THE INDIAN SECURITIES MARKET | 75 | ||
D. | SELLING SHAREHOLDERS | 81 | |
E. | DILUTION | 81 | |
F. | EXPENSES OF THE ISSUE | 81 | |
Item 10. | Additional Information | 81 | |
A. | SHARE CAPITAL | 81 | |
B. | MEMORANDUM AND ARTICLES OF ASSOCIATION | 82 | |
C. | MATERIAL CONTRACTS | 87 | |
D. | EXCHANGE CONTROLS | 87 | |
INDIAN FOREIGN EXCHANGE CONTROLS AND SECURITIES REGULATIONS | 87 | ||
E. | TAXATION | 90 | |
F. | DIVIDEND AND PAYING AGENTS | 94 | |
G. | STATEMENTS BY EXPERTS | 94 | |
H. | DOCUMENTS ON DISPLAY | 94 | |
I. | SUBSIDIARY INFORMATION | 95 | |
Item 11. | Quantitative and Qualitative Disclosures about Market Risk | 95 | |
Item 12. | Description of Securities Other than Equity Securities | 96 | |
PART II | 98 | ||
Item 13. | Defaults, Dividend Arrearage and Delinquencies | 98 | |
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 98 | |
Item 15. | Controls and Procedures | 98 | |
Item 16A. | Audit Committee Financial Expert | 102 | |
Item 16B. | Code of Ethics | 102 | |
Item 16C. | Principal Accountant Fees and Services | 102 | |
Item 16D. | Exemptions from the Listing Standards for Audit Committees | 103 | |
Item 16E. | Purchase of Equity Securities by the Issuer and Affiliated Purchasers | 103 | |
Item 16F. | Change in Registrant’s Certifying Accountant | 103 | |
Item 16G. | Corporate Governance | 103 | |
PART III | 108 | ||
Item 17. | Financial Statements | 108 | |
Item 18. | Financial Statements | 108 | |
Item 19. | Exhibits | 108 | |
SIGNATURES | 109 | ||
EXHIBIT INDEX | 110 | ||
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS | F-1 |
ii
PRESENTATION
The financial information in this report has been prepared in accordance with US GAAP with respect to our consolidated statements of operations, shareholders’ equity and cash flow for the fiscal years ended March 31, 2008, 2009 and 2010, and our balance sheets as of March 31, 2009 and 2010. Our fiscal year ends on March 31 of each year, so all references to a particular fiscal year are to the year ended March 31 of that year. The consolidated financial statements, including the notes to those financial statements, are set forth at the end of this report.
Although we have translated in this report certain rupee amounts into dollars for convenience, this does not mean that the rupee amounts referred could have been, or could be, converted into dollars at any particular rate, the rates stated below, or at all. All translations from Indian rupees to United States dollars with respect to financial data as of March 31, 2010 are based on the noon buying rate in the City of New York for cable transfers in Indian rupees on such date. The Federal Reserve Bank of New York certifies this rate for customs purposes on each date the rate is given. The noon buying rate on March 31, 2010 was Rs.44.95 per US$1.00.
Information contained in our website, www.mtnl.net.in, is not part of this annual report, and no portion of such information is incorporated herein.
Reference to “we,” “us,” “our,” “MTNL,” and the “Company” refer to Mahanagar Telephone Nigam Limited.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements”, as defined in Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, that are based on our current expectations, assumptions, estimates and projections about our company, our industry, economic conditions in the markets in which we operate, and certain other matters. The forward-looking statements are subject to various known and unknown risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “will likely result,” “believe,” “expect,” “will continue,” “anticipate,” “estimate,” ; “intend,” “plan,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “project,” “should,” and similar expressions or variations of these expressions. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. Actual events or results may differ materially. The risks and uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed elsewhere in this report. See Item 3D. “Key Information—Risk Factors” and Item 5. “Operating and Financial Review and Prospects” in this report. ; In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. Other than required by law, we do not undertake to release the results of any revisions of these forward-looking statements to reflect new information or future events or circumstances. Readers should carefully review the information in this report and in filings we may make in the future with the U.S. Securities and Exchange Commission.
INTRODUCTION
Mahanagar Telephone Nigam Limited was established by the government of India in 1986 to provide fixed-line and other basic telecommunications services in Delhi and Mumbai. Delhi and Mumbai are two of the largest, most densely populated and wealthiest metropolitan areas in India. At March 31, 2010, our fixed-line telecommunications networks in Delhi and Mumbai had an aggregate of approximately 3.62 million fixed lines in service. In February 2001, we launched our cellular services using global system for mobile communications or GSM technology in Delhi and Mumbai and, as of March 31, 2010, had approximately 4.78 million subscribers. GSM is the European and Asian standard for digital mobile telephone networks. We launched CDMA-based services in 1997 based on limited mobility, and at March 31, 2010 had approximately 0.18 million limited mobile subscribers in Mumbai and Delhi. CDMA is a digital wireless technology that increases network capacity by allowing more than one user to simultaneously occupy a single radio frequency band with reduced interference. We began providing Internet service in both Delhi and Mumbai in February 1999 and had approximately 1.49 million Internet access subscribers at March 31, 2010. In December 2008, we were the first operator to inaugurate the 3G services in India, with commercial launch in February 2009 in Delhi and in May 2009 in Mumbai. See Item 4. “Information on the Company” in this report.
iii
The government of India owns approximately 56.25% of our equity shares and the Life Insuarnace Company of India owns approximately 18.18% of equity shares, with the balance publicly traded on the major stock exchanges in India and as American Depositary Shares on the New York Stock Exchange. See Item 7A. “Major Shareholders and Related Party Transactions-Major Shareholders” in this report.
iv
PART I
Item 1. | Identity of Directors, Senior Management and Advisers |
Not applicable.
Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
Item 3. | Key Information |
3A. | Selected Financial Data |
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in conjunction with our consolidated financial statements and the related notes, and Item 5 “Operating and Financial Review and Prospects” and the other financial information included elsewhere in this report and our other reports filed with the SEC. We have adjusted shareholders' equity, retained earnings and net income for the fiscal year ended March 31, 2009 to reflect the impact of the adjustment in our accounting by reason of payments for 3G and BWA spectrum as licence fees. The nature and impact of the adjustment is described in Note 3 to our consolidated financial statements and in Item 3. “Key Information” and Item 5. “Operating and Financial Re view and Prospects” in this report.
Our selected financial and operating data included in this report are presented in Indian rupees and are derived from our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) for the fiscal years ended March 31, 2006, 2007, 2008, 2009 and 2010.
The selected statement of operations data and cash flow data for the three years ended March 31, 2010, and the selected balance sheet data as of March 31, 2009 and 2010 under US GAAP have been extracted or derived from our consolidated audited US GAAP financial statements which are included elsewhere in this report. The selected statement of operations data and cash flow data for the years ended March 31, 2006 and 2007, and the selected balance sheet data as of March 31, 2006, 2007 and 2008 under US GAAP are derived from our consolidated audited US GAAP financial statements not included in this report. Our historical results do not necessarily indicate our results expected for any future period.
Consolidated financial statements for the year ended March 31, 2010 have been translated for convenience into US dollars (although we have translated certain rupee amounts in this report into US dollars for convenience, this does not mean that the rupee amounts referred to could have been, or could be, converted into US dollars at any particular rate, the rates stated below, or at all). All translations from Indian rupees to dollars with respect to financial data as of March 31, 2010 are based on the noon buying rate in New York City for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York on such date. The noon buying rate on March 31, 2010 was Rs.44.95 per US$1.00.
1
Under US GAAP
Statement of Income Data: | Fiscal Years Ended March 31, | |||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 (Restated) | 2010 | 2010 | |||||||||||||||||||
(Rs. in millions except per share data) | Convenience translation into millions of US$ (Unaudited) | |||||||||||||||||||||||
Revenues | Rs.46,668 | Rs.45,475 | Rs.44,705 | Rs.41,837 | Rs.35,513 | $ | 790 | |||||||||||||||||
Total costs and expense | (47,480 | ) | (48,927 | ) | (47,027 | ) | (51,981 | ) | (79,983 | ) | (1779 | ) | ||||||||||||
Liability for post retirement medical benefits written back | 0 | 5,794 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Operating income | (812 | ) | 2,342 | (2,323 | ) | (10,144 | ) | (44,471 | ) | (989 | ) | |||||||||||||
Other income / (expense), net | 2,388 | 7,894 | 4,661 | 9,962 | 7,105 | 158 | ||||||||||||||||||
Income before income taxes | 1,576 | 10,236 | 2,338 | (181 | ) | (37,365 | ) | (831 | ) | |||||||||||||||
Income taxes | (437 | ) | 1,073 | 121 | (1,241 | ) | 11,806 | 263 | ||||||||||||||||
Equity in (losses) of affiliate | (73 | ) | (7 | ) | (1 | ) | (8 | ) | 5 | 0 | ||||||||||||||
Net Income (Loss) | Rs.1,066 | Rs.11,302 | Rs.2,458 | Rs.(1,430 | ) | Rs.(25,553 | ) | (568 | ) | |||||||||||||||
Weighted average equity shares outstanding | 630 | 630 | 630 | 630 | 630 | - | ||||||||||||||||||
EPS – Basic & diluted | Rs.1.69 | Rs.17.94 | Rs.3.90 | Rs.(2.27 | ) | Rs.(40.56 | ) | $ | (0.90 | ) | ||||||||||||||
Basic and diluted earnings per GDR/ADS | Rs.3.38 | Rs.35.88 | Rs.7.80 | Rs.(4.54 | ) | Rs.(81.12 | ) | $ | (1.80 | ) | ||||||||||||||
Dividends paid per equity share | Rs.6.21 | Rs.4.56 | Rs.4.68 | Rs.1.17 | 0 | 0 | ||||||||||||||||||
Dividends paid per equity share | $ | 0.14 | $ | 0.11 | $ | 0.12 | $ | 0.02 | 0 | 0 | ||||||||||||||
Dividends paid per GDR/ADS | Rs.12.42 | Rs.9.12 | Rs.9.37 | Rs.2.34 | 0 | 0 | ||||||||||||||||||
Dividends paid per GDR/ADS | $ | 0.28 | $ | 0.21 | $ | 0.23 | $ | 0.05 | 0 | 0 |
Balance Sheet Data: | As at March 31, | |||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||
(Rs. in millions except per share data) | Convenience translation into millions of US$ (Unaudited) | |||||||||||||||||||||||
Cash and Cash equivalents | Rs.1,641 | Rs.1,660 | Rs.1,346 | Rs.1,419 | Rs.1,056 | $ | 24 | |||||||||||||||||
Investment in bank deposits | 19,020 | 17,102 | 32,444 | 46,725 | 47,835 | 1,064 | ||||||||||||||||||
Dues from Related Parties | 23,818 | 23,659 | 25,713 | 35,435 | 39,053 | 869 | ||||||||||||||||||
Total Assets | 170,151 | 178,937 | 193,547 | 343,732 | 313,707 | 6,979 | ||||||||||||||||||
Dues to Related Parties | 6,091 | 5,729 | 8,118 | 122,301 | 124,861 | 2,778 | ||||||||||||||||||
Total Liabilities | 89,703 | 90,060 | 105,160 | 257,512 | 253,040 | 5,629 | ||||||||||||||||||
Total Shareholders equity | 80,448 | 88,877 | 88,387 | 86,220 | 60,667 | 1,350 | ||||||||||||||||||
Capital Stock1 | 12,949 | 12,949 | 12,949 | 12,949 | 12,949 | 288 |
Cash Flow Data: | Fiscal Years Ended March 31, | |||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||
(Rs. in millions except per share data) | Convenience translation into millions of US$ (Unaudited) | |||||||||||||||||||||||
Net cash from operating activities | Rs.6,006 | Rs.9,672 | Rs.27,640 | Rs.130,849 | Rs.13,158 | $ | 293 | |||||||||||||||||
Net cash used in investing activities | (7,976 | ) | (6,780 | ) | (25,006 | ) | (130,037 | ) | (13,521 | ) | (301 | ) | ||||||||||||
Net cash from financing activities | (3,951 | ) | (2,873 | ) | (2,948 | ) | (737 | ) | - | - |
1 Includes capital stock and additional paid-in capital.
2
Restatement of Previously Reported Amounts
We had provided for Rs.213.20 million during the 2009 fiscal year on account of 3G and BWA spectrum as license fees on the base reserve price subject to finalization of auction process by the Department of Telecommunications (DOT) and therefore the accounting policy in this regard was not made on that date. On finalization of the auction process by the DOT, during 2011 fiscal year, in accordance with DOT guidelines, dated August 1, 2008, on 3G spectrum and BWA spectrum and on finalization of the price on spectrum vide DOT letter No. P-11014/13/2008-PP, dated May 21, 2010, for 3G and DOT letter No P-11014/13/2008-PP dated June 12, 2010, on BWA spectrum, the liability for Rs.110,979.7 million has been accounted for by creating intangible assets as one time charges payable to DOT for 3G and BWA spectrum. This is to be amortized for the period of 20 years and 15 years for 3G and BWA spectrum, respectively, on straight line basis. Accordingly, the amortized amount for the period from August 8, 2008, the date of allotment of spectrum, to March 31, 2009 is Rs.4,082.30 million.
The change in the method of calculation of ISP license fee implemented for the 2010 fiscal year, MTNL CO letter No. MTNL/RA/AGR/2009/Pt dated March 29, 2010, was also extended for the previous fiscal year. This was approved in the ECM held on June 12, 2010, and accordingly the license fees were reduced by Rs.70.42 million in the 2009 fiscal year.
The following table presents the impact of the restatement adjustments on net income for the year ended March 31, 2009, as well as the impact on various line items within the statement of operations under US GAAP :
(Rs. in millions except per share data) | For the year ended March 31, 2009 | |||
Statement of Income | ||||
Net Income as previously reported | 1,141.00 | |||
Adjustments: | ||||
Income Tax on License fee | (96.40 | ) | ||
Income Taxes on Property and Equipment, Intangible Assets | (36,301.66 | ) | ||
Income Taxes on due to related parties | 37,625.61 | |||
Amortization of 3G & BWA | (4,082.30 | ) | ||
License fee | 283.62 | |||
Net Income as restated | (1,430.13 | ) | ||
Cost of Revenue as previously reported | (31,456.00 | ) | ||
Adjustments: | ||||
License fee | 283.62 | |||
Cost of Revenue as restated | (31,172.38 | ) | ||
Depreciation and amortisation as previously reported | (8,209.00 | ) | ||
Adjustments: | ||||
Amortization of 3G & BWA | (4,082.30 | ) | ||
Depreciation and amortisation as restated | (12,291.30 | ) | ||
Income Tax Expense as previously reported | (2,468.47 | ) | ||
Adjustments: | ||||
Income Tax on License fee | (96.40 | ) | ||
Income Taxes on Property and Equipment, Intangible Assets | (36,301.66 | ) | ||
Income Taxes on due to related parties | 37,625.61 | |||
Income Tax Expense as restated | (1,240.92 | ) | ||
Basic and diluted Earning per share as previously reported | 1.81 | |||
Adjustments: | (4.08 | ) | ||
Basic and diluted Earning per share as restated | (2.27 | ) |
3
The following table presents in greater detail the impact of the restatement adjustment on our previously reported shareholders' equity as at March 31,2009 under US GAAP :
(Rs. in millions except per share data) | For the year ended March 31, 2009 | |||
Shareholder's equity as previously reported | 75,534.00 | |||
Adjustments: | ||||
Income Tax on License fee | (96.40 | ) | ||
Income Taxes on Property and Equipment, Intangible Assets | (36,301.66 | ) | ||
Income Taxes on due to related parties | 37,625.61 | |||
Amortization of 3G & BWA | (4,082.30 | ) | ||
License fee | 283.62 | |||
Shareholder's equity as restated | 72,963.00 |
The following table presents the impact of the restatement adjustments on balance sheet line items as of March 31, 2009 under US GAAP :
(Rs. in millions except per share data)
Balance Sheet data | As of March 31, 2009 | ||||
As previously reported | As restated | ||||
Deferred Income Tax Assets - current | Rs. | 7,649 | Rs. | 45,275 | |
Other receivables | 13,583 | 13,487 | |||
Intangible Assets | 309 | 107,206 | |||
Deferred Income Tax liabililty - non current | 11,973 | 48,275 | |||
Dues to related party | Rs. | 11,605 | Rs. | 122,301 |
4
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee price of our equity shares on the Indian Stock Exchanges and, as a result, will likely affect the market price of the American Depository Shares, or ADSs, in the United States, and vice versa. Such fluctuations will also affect the U.S. dollar conversion by the depositary of any cash dividends paid in Indian rupees on our equity shares represented by the ADSs.
The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one US dollar would be exchanged based on the noon buying rate in the City of New York for cable transfers of Indian rupees, as certified for customs purposes by the Federal Reserve Bank of New York.
Fiscal Year Ended March 31, | At end of period | Average rate (1) | High | Low |
2006 | 44.48 | 44.21 | 46.26 | 43.05 |
2007 | 43.10 | 45.06 | 46.83 | 42.78 |
2008 | 40.02 | 40.13 | 43.05 | 38.48 |
2009 | 50.87 | 46.32 | 51.96 | 39.73 |
2010 | 44.95 | 47.18 | 50.48 | 44.94 |
2011 (through September 24, 2010) | 45.10 | 46.00 | 47.49 | 44.10 |
(1) The average rate is the average of the exchange rates on the last business day of each month during the period.
The following table sets forth the high and low exchange rates for the previous six months and is based on the noon buying rate in the City of New York during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:
Month | High | Low | |
April 2010 | 44.79 | 44.10 | |
May 2010 | 47.49 | 44.46 | |
June 2010 | 47.08 | 45.64 | |
July 2010 | 47.23 | 46.25 | |
August 2010 | 47.02 | 45.70 | |
September 2010 (through September 24, 2010) | 46.82 | 45.10 |
On September 24, 2010, the noon buying rate was Rs.45.10= US$1.00.
3B. | Capitalization and Indebtedness |
Not applicable.
3C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
5
3D. | Risk Factors |
You should carefully consider all the information contained in this report and the following risk factors that affect us and our industry in evaluating us and our business. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also affect our business. This report also contains forward-looking statements that involve risks and uncertainties. Should any of these risks or uncertainties occur, our business, financial condition and results of operations could suffer and the market price of our equity shares or ADSs could decline
Risks Relating to Our Business
We expect to continue to encounter increased competition in each of our markets.
The Indian government is rapidly liberalizing the telecommunications industry in India. The Department of Telecommunications (DOT) may license, at its discretion, multiple additional service providers in any service area, with respect to both basic telecommunications services and cellular services. In November 2003, the DOT issued guidelines for Unified Access Licenses, which cover both basic and cellular services within a service area. In the Indian context, “basic telecommunications services” or “basic services” include basic fixed-line access service and a number of other telecommunications services, other than long distance services, cellular service and Internet access. Basic services also include CDMA-based fixed wireless and mobile services (without roaming).
The market for our basic services is limited to Mumbai and Delhi. Tata Teleservices Limited, Reliance Infocomm Limited and Bharti Tele-Ventures Limited are currently competing with us in those markets for basic services , and in the near future Vodafone Essar will be launching its basic services in India. All of these companies already have significant telecommunications infrastructure in Delhi and Mumbai, including, with respect to Tata Teleservices and Reliance Infocomm, low-cost CDMA mobile and fixed wireless technology. The Telecom Regulatory Authority of India (TRAI) issued “Telecommunication Mobile Number Portability Regulations (MNP), 2009” which are likely to be implemented by October 31, 2010 (notwithstanding any further delay from the TRAI) in our license areas and make migra tion between service provides easier, thus increasing competition between the service providers and adding pressure on service providers to retain customers. With approximately 47% of our call units having come from approximately 8% of our access lines in service during the 2010 fiscal year, we are particularly vulnerable to losing market share if these or other operators aggressively target our largest subscribers. Some of our largest customers have already migrated to other basic service operators.
We experience significant and growing competition in the market for GSM cellular and Internet services. Many of these service providers enjoy significant penetration in these markets, have established brand names and have more experience operating a cellular network than we have. Cellular operators also face competition from rapidly growing CDMA-based mobile services, which are priced considerably lower than GSM cellular services.
Increased competition has kept and will likely continue to keep downward pressure on prices and has required and will likely continue to require us to increase our capital investment to improve and expand our services. These developments, in turn, have had and may continue to have a negative impact on our profitability. See Item 4B. “Business Overview -Competition.”
Our business is subject to substantial regulation by the Government.
The Indian government regulates our business through licensing of services and service areas, and through price tariffs on our services. The license for fixed-line services is valid until March 31, 2013 and for cellular services is valid until October 2017. The DOT retains the right to revoke our licenses after giving one month’s notice to us. The DOT also retains the right, after giving notice to us, to modify the terms and conditions of our licenses at any time including the related tariffs and fees, and to permit additional licenses or bidding, if it believes it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunications sector. A revocation of any license or a change in significant terms of any license, such as its duration, the amount of license fee payable, the range of services permitted and the scope of exclusivity could limit our ability to operate particular lines of our business or result in increased costs in the form of increased license fees or costs associated with applying for new licenses, or contesting limitations on our licenses.
6
Reductions in telecommunications tariffs in India are expected to continue to have an adverse effect on our results of operations and financial condition.
Telecommunications tariffs in India have declined significantly in recent years. The decline in tariffs and the reduction of Access Deficit Charges (ADCs), while resulting in a traffic volume growth spurt, has materially and adversely affected our revenues and net income. Phasing out of ADC completely is likely to further impact revenues and net income. Accordingly, our historical revenue is not indicative of future revenue based on comparable traffic volumes. As the prices for our communications services decrease, then unless we are able to increase volume or offer additional services from which we can derive additional revenue or otherwise reduce our operating expenses, our operating results will decline and our business and financial results will suffer.
We have sustained recent financial losses and expect to continue to sustain losses in the near future.
We sustained losses from operations of Rs.25,553 million for the year ended March 31, 2010, Rs.1,430 million for the year ending March 31, 2009 and Rs.4,514 million for the first quarter of the year ending March 31, 2011. These losses are attributable to decreases in revenues, and increases in the cost of revenues and selling, general and administrative expenses during those fiscal periods as well as employee benefits. See Item 5A. “Operating Results” in this report. Further, the audited financial statements for the year ended March 31, 2009 were restated. See Note 3 to our consolidated financial statements in this report.
We do not plan to pay any dividend for fiscal year 2010
By reason of financial losses sustained for the 2010 fiscal year and continuing losses for the first quarter of the 2011 fiscal year, our Board has recommended that we do not pay any dividend for the 2010 fiscal year. Previously, we had paid dividends at the rate of Rs.1 per equity share for the 2009 fiscal year and of Rs.4 per equity share for the three fiscal years prior thereto. There is no assurance that we will resume payment of dividends on our equity shares in the near future.
We need to continue to increase the volume of traffic on our network to generate profits.
We must continue to increase the volume of Internet, data, voice and video transmissions on our network in order to realize the anticipated cash flow, operating efficiencies and cost benefits of our network. If we do not maintain our relationships with current customers and develop new large-volume customers, we may not be able to substantially increase traffic on our network, which may adversely affect our ability to become profitable. With increased competition from new licensees, we also need to leverage our existing infrastructure to realize better utilization of network, operating efficiencies and cost benefits. Further, certain costs, including costs related to repairs and maintenance, can be of a fixed nature and, in the absence of revenues shall continue to adversely impact our profitability. 160; No assurance can be given that we will achieve the revenue increases and expense reductions to reach profitability in the future.
Regulations applicable to public sector enterprises in India may affect our ability to compete effectively.
As long as the Indian government’s shareholding in us equals or exceeds 51%, we are deemed to be an Indian government company subject to laws and regulations applicable to public sector enterprises in India. These laws and regulations govern, among other things, personnel matters, procurement, budgeting and capital expenditures and the generation of funds through the issuance of securities.
Under our articles of association, the President of India, on behalf of the Indian government, may also issue directives with respect to the conduct of our business and affairs, and certain matters with respect to our business, including the appointment and remuneration of our Chairman-and-Managing Director and the declaration of dividends. None of our shareholders, management or board of directors may take action in respect of any matter reserved for the President of India without his approval. If the President of India does not allow us to make capital expenditures pursuant to our business plan, we may be unable to compete effectively or maintain profitability. Government formalities, including requirements that many of our purchases be made through a competitive bidding process, often cause delays i n our equipment and product procurement; these delays can place us at a disadvantage relative to private sector competitors.
7
The Indian government, our controlling shareholder, also controls and considers the interests of the largest government-owned telecommunications company, Bharat Sanchar Nigam Limited (BSNL), resulting in significant related party transactions. The Indian government has been evaluating the possibility of a restructuring involving BSNL and us.
The Indian government, through the DOT, controls both BSNL and us, holding 56.25% of our outstanding equity shares and 100% of BSNL’s equity shares. The DOT appoints all of our directors. The DOT has the power to determine the outcome of most actions requiring approval of our board of directors or shareholders, including proposed expansion of our basic and cellular services into new areas in which we may compete with BSNL, transactions with BSNL or the assertion of claims against BSNL. When considering many of these matters, the DOT may also take into account the interests of BSNL, the largest government-owned telecommunications company. Failure by the DOT to resolve conflicts involving BSNL and us in an equitable manner could have a material adverse effect on our business prospects.
We have significant amounts due from related parties and our inability to collect them or change the terms of our arrangements with our related parties could adversely affect our revenues and profitability. See Notes 4, 5, 20, 23(c), 23(d) and 26 to our consolidated financial statements and Item 7B. “Related Party Transactions” and Item 4B. “Business Overview - Legal Proceedings” in this report.
India’s Ministry of Communications has appointed private sector banks to act as consultants to advise on restructuring BSNL and us. We understand that these consultants have submitted their reports. There have been media reports about consideration of a merger of our companies or the transfer by the DOT of their shares in us to BSNL or to a holding company that will control both BSNL and us or the listing of BSNL shares on a national securities exchange. We cannot assess the likelihood of such a transaction, or the impact of such a transaction on our business or the value of our shares or ADSs.
We do not have title to property, and we cannot sell our properties without payment of stamp duties and registering properties in our name.
In 1987, the assets and properties of the DOT located in Delhi and Mumbai were transferred to us by an order of the government of India (the “Government”) and a deed of sale was executed by the Government in our favor representing an irrevocable transfer. Indian law generally requires that to perfect the transfer or lease of real property, the transfer should be evidenced by a formal, duly stamped deed of transfer and registered with the Central Land Registrar within a specified period after the execution of the deed of transfer or lease. A formal transfer deed for real property of the DOT, transferred by the Government to us has been executed but has not been registered with the appropriate municipal authorities. The formal transfer deed and physical delivery of possession of the DOT’s non-real estate assets has resulted in the transfer of such non-real estate assets of the DOT to us in Delhi and Mumbai. See Item 4D. “Property, Plant and Equipment-Properties” in this report.
Indian law also requires payment of stamp duty (at rates which vary among states) on instruments, which effect transfer of title to real estate or in respect of leases of real estate. We may be liable for stamp duty, if any, upon registration (other than with respect to the DOT properties acquired from the Government as at March 30, 1987). All liabilities for stamp duties in respect of the DOT properties acquired by us from the Government as at March 30, 1987 are to be borne by the Government. We have been advised by our counsel that, although we have valid possession (including the risks and rewards of ownership) and title to all of our property, we need to have certain documents relating to transfer or lease of real property duly registered and stamped to enable us to perfect and thereby acquire marketable titl e to real property in our possession. Accordingly, we cannot sell our properties without payment of stamp duties and registering the properties in our name.
Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance. In certain areas management concluded that there were material weaknesses in our internal controls.
We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If we fail to comply with new or changed laws or regulations and standards differ, our business and reputation may be harmed.
8
We are incorporated in India and investors should be aware that there are differences in the governance standards and shareholder rights for a company incorporated in the United States and those applicable to a foreign issuer such as us. Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Sarbanes-Oxley Act of 2002, U.S. Securities and Exchange Commission (SEC) or New York Stock Exchange (NYSE) rules or regulations, Securities and Exchange Board of India (SEBI) rules, and Indian stock market listing regulations create uncertainty for companies like ours. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in p ractice may evolve over time, as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such corporate governance standards. See Item 16G. “Corporate Governance” in this report.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment requires the commitment of significant financial and managerial resources and external auditor’s independent assessment of the internal controls over financial reporting. We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our controls are functioning as documented. Additional governance standards are expected to be imposed on companies whose securities are listed in the United States in the near future based upon the recent ena ctment of the Dodd-Frank Act.
It is also possible that laws in India may be made more stringent with respect to standards of accounting, auditing, public disclosure and corporate governance. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
As of March 31, 2010, management had concluded that our internal controls over periodic reporting were not effective by reason of certain material weaknesses, particularly as to reconciliation of subscriber deposits, accounting for related party transactions and information technology controls. These deficiencies could result in misstatements in reporting in those areas. We had undertaken and completed certain initiatives and remedial action in those areas during the 2010 fiscal year and are continuing such remedial action. See Item 15. “Controls and Procedures” in this report.
Our net income would decrease if the Government of India imposes additional taxes or withdraws or reduces tax benefits or other incentives.
In recent years, the government of India has introduced taxes on various services provided within India. The Finance Act, 2008 included services provided in relation to information technology software under the ambit of service tax, if it is in the course or furtherance of the business. As a result, service providers are required to pay a tax of 10% (excluding applicable education cess) on the value of services provided to customers. The government of India may expand the services covered under the ambit of this tax to include various services provided by us. This tax, if expanded, could increase our expenses, and could adversely affect our operating margins and revenues. Although currently there are no material pending or threatened claims against us for service taxes, such claim s may be asserted against us in the future. Defending these claims would be expensive and divert our attention and resources from our operations.
9
Risks Relating to Investments in Indian Companies
There are risks of political uncertainty in India that could affect our business.
During the past decade, the government of India has pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. Nevertheless, the role of the Indian central and state governments in the Indian economy as producers, consumers and regulators has remained significant. A coalition government is in power. We cannot assure that these liberalization policies will continue in the future. The rate of economic liberalization could change, and specific laws and policies affecting foreign investment, currency exchange rates and other matters affecting investment in our securities could change as well, and also could result in increases in wages. A significant change in India’s economic liberalization and deregulation policies could disrupt business and economic conditions in I ndia generally and could adversely affect the telecommunications licensing and regulatory framework in which we operate our business.
A slowdown in economic growth in India may adversely affect our business and results of operations.
Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. Any future slowdown in the Indian economy, as well as in other countries where we do significant business, could harm our customers and other contractual counterparties, and thus negatively impact us. In addition, the Indian economy is in a state of transition. The share of the services sector of the economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business, however, our revenues would be adversely affected by slowdowns in the IT sector.
BlackBerry services in India might be banned which could affect our customers and us.
The government of India recently raised concerns about BlackBerry services in India relating to the security of e-mails and messaging transmitted or received on BlackBerry devices. Indian security agencies are unable to intercept and monitor BlackBerry services because of encryption mode of communication and non-availability of BlackBerry servers in India. We are among the nine operators providing BlackBerry services to users in India. Although discussions have been held to deal with the Government’s concerns, any action taken by the Government in the interest of security of India could affect the BlackBerry users and providers, including us, such as our incurring additional costs or sustaining loss of revenues.
Recent introduction of Direct Tax Code (DTC) and Goods and Services Tax Act (GST) by the Government might affect our future net income.
In August 2010, the government of India introduced major tax changes in Parliament. The Direct Tax Code 2010 (DTC) is proposed to take effect from the fiscal year beginning from April 1, 2012. It would replace much of the current income tax laws. The Government would be able to withdraw tax benefits, reduce incentives, change tax rates, impose additional taxes and otherwise revise the tax structure. The DTC could result in additional tax liabilities and costs, thereby affect our future net income.
The Goods and Services Tax (GST) would impose a new indirect tax regime upon coming into operation at the planned April 1, 2011 implementation date. The GST may be defined as a tax on goods and services which is levied at each point of sale or provision of service, in which at the time of sale of goods or provision of service the seller or service provider may claim the input credit of tax which it has paid while purchasing the goods or procuring the services. The GST would replace the sales tax and similar taxes. The implementation of the GST could result in additional costs to us and also could adversely impact our future revenues.
Financial instability in other countries, particularly emerging market countries in Asia, could adversely affect the Indian economy and cause our business and the market for our equity shares and ADSs to suffer.
The recent global economic and credit conditions in the United States, Europe and Asia have affected the Indian economy in varying degrees. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. A loss of investor confidence in the financial systems of other emerging markets may cause increased volatility in Indian financial markets and, indirectly, in the Indian economy in general. Any worldwide financial instability could influence the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our equity shares and ADSs, and upon the exchange rates for the Indian rupee.
10
Regional conflicts in South Asia, social conflict, terrorism and related military activity may adversely affect the Indian economy or world economic activity, either of which could adversely affect our business and the prices of our equity shares and ADSs.
Terrorist attacks, such as the attacks in November 2008 and July 2006 in Mumbai, and other acts of violence or war in India and surrounding area have the potential to have a direct impact on our business, as the majority of our revenues are derived from customers located in Delhi and Mumbai. Furthermore, such terrorist attacks, threats or war in India could cause a disruption in the delivery of our services to our customers, and could have a negative impact on our business, personnel, assets and results of operations, and could cause our customers or potential customers to delay or postpone the purchase or use of our services, as well as create a greater perception that investments in Indian companies involve higher degrees of risk. This, in turn, could have an adverse impact on the market for securities of Indian companies , including our equity shares and our ADSs.
The markets in which we operate are subject to the risk of earthquakes, floods and other natural disasters.
Some of the regions that we operate in are prone to earthquakes, flooding and other natural disasters. In the event that any of our business centers are affected by any such disasters, we may sustain damage to our operations and properties and suffer significant financial losses. Further, in the event of a natural disaster, we may also incur costs in redeploying personnel and property. In addition if there is a major earthquake, flood or other natural disaster in any of the locations in which a substantial number of our customers are located, we face the risk that our customers may incur sustained business interruption which may materially impair our ability to service such customers.
Risks Relating to the ADSs and Equity Shares
Ability to withdraw equity shares from the depositary facility is uncertain and may be subject to delays.
India’s restrictions on foreign ownership of Indian companies limit the number of shares that may be owned by foreign investors and generally require government approval for foreign ownership. The maximum foreign ownership permitted in MTNL without prior governmental approval is 49% under the sectoral caps currently provided for by the government of India and the Reserve Bank of India. Investors who withdraw equity shares from the depositary facility will be subject to Indian regulatory restrictions on foreign ownership of equity shares upon withdrawal. It is possible that this withdrawal process may be subject to delays. See Item 10. “Additional Information - Indian Foreign Exchange Controls and Securities Regulation” in this report.
Ability to sell in India any equity shares withdrawn from the depositary facility may be subject to delays.
Persons seeking to sell in India any equity shares withdrawn upon surrender of an ADS will require Reserve Bank of India approval for each such transaction. Because of possible delays in obtaining necessary approvals, holders of equity shares may be prevented from realizing gains during periods of price increases or limiting losses during periods of price declines.
Ability to withdraw and redeposit shares in the depositary facility is limited, which may cause our equity shares to trade at a discount or premium to the market price of our ADSs.
Because of Indian legal restrictions, despite recent relaxations, the supply of ADSs may be limited. Under procedures recently adopted by the Reserve Bank of India, the depositary is permitted to accept deposits of our outstanding equity shares and deliver ADSs representing the deposited equity shares to the extent, and limited to the number, of ADSs that have previously been converted into underlying equity shares. Under these new procedures, if you elect to surrender your ADSs and receive equity shares, you may be unable to re-deposit those outstanding equity shares with our depositary and receive ADSs because the number of new ADSs that can be issued cannot, at any time, exceed the number of ADSs converted into underlying equity shares or result in foreign equity in MTNL exceeding 49%. This may rest rict your ability to re-convert the equity shares obtained by you to ADSs. Also, investors who exchange ADSs for the underlying equity shares and are not holders of record will be required to declare to us details of the holder of record. Any investor who fails to comply may be liable for a fine of up to Rs.1,000 for each day such failure continues. See Item 10. “Additional Information—Indian Foreign Exchange Controls and Securities Regulations” in this report.
11
The restrictions described above may cause our equity shares to trade at a discount or premium to our ADSs.
Conditions in the Indian securities market may affect the price or liquidity of the equity shares and the ADSs.
The Indian securities markets are generally smaller and more volatile than securities markets in the world’s major financial centers. Indian stock exchanges have also experienced problems that have affected the market price and liquidity of the securities of Indian companies. These problems have included temporary exchange closures, the suspension of stock exchange administration, broker defaults, settlement delays and strikes by brokers. In addition, the governing bodies of the Indian stock exchanges have from time to time imposed restrictions on trading in certain securities, limitations on price movements and margin requirements. Further, from time to time, disputes have occurred between listed companies and stock exchanges and other regulatory bodies, which, in some cases, may have had a negative effect on market sentiment. Similar problems could happen in the future and, if they do, they could affect the market price and liquidity of our equity shares and our ADSs.
Because there may be less company information available in Indian securities markets than securities markets in more developed countries, the price of our equity shares could fluctuate unexpectedly.
There is a difference between the level of regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants and that of markets in the United States and other developed economies. The Securities and Exchange Board of India is responsible for improving disclosure and other regulatory standards for the Indian securities markets. The Securities and Exchange Board of India has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed economies. As a result, shareholders could act on incomplete information and cause the price of our equity shares to fluctua te unexpectedly.
ADS holders may be unable to exercise preemptive rights available to shareholders and therefore may suffer future dilution of their ownership position.
A company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any new equity shares, unless these rights have been waived by at least 75% of the company’s shareholders present and voting at a shareholders’ general meeting. Holders of our ADSs as well as our shareholders located in the United States may be unable to exercise preemptive rights for our equity shares underlying our ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and poten tial liabilities associated with any such registration statement, as well as the perceived benefits of enabling investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We do not commit to filing a registration statement under these circumstances. If we issue any such rights in the future, the rights would be issued to the depositary, which may sell the rights in the securities markets in India for the benefit of the holders of our ADSs. There can be no assurance as to the value, if any, the depositary would receive upon the sale of the rights. To the extent that holders of our ADSs as well as our shareholders located in the United States are unable to exercise preemptive rights, their proportional interests in us would be reduced.
12
ADS holders may be subject to potential losses arising out of exchange rate risk on the Indian rupee and risks associated with the conversion of rupee proceeds into foreign currency.
Holders of ADSs as well as our shareholders located outside India are subject to currency fluctuation risks and convertibility risks, as our equity shares are quoted in Indian rupees on the Indian stock exchanges on which they are listed. Dividends on our equity shares will also be paid in Indian rupees, and then converted into US dollars for distribution to ADS holders. Holders that seek to convert the rupee proceeds of a sale of equity shares withdrawn upon surrender of ADSs into foreign currency and export the foreign currency will need to obtain the approval of the Reserve Bank of India for each transaction. In addition, holders that seek to sell equity shares withdrawn from the depositary facility will have to obtain approval from the Reserve Bank of India, unless the sale is made on a stock excha nge or in connection with an offer made under the regulations regarding takeovers. Holders of Indian rupees in India may also generally not purchase foreign currency without general or special approval from the Reserve Bank of India.
ADS holders may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the sale of the underlying equity shares in India are subject to Indian capital gains tax. For the purpose of computing the amount of capital gains subject to tax, Indian law specifies that the cost of acquisition of the equity shares will be deemed to be the share price prevailing on The Stock Exchange, Mumbai or the National Stock Exchange on the date the depositary advises the custodian to deliver equity shares upon surrender of ADSs. The period of holding of equity shares, for determining whether the gain is long-term or short-term, commences on the date of the giving of such notice by the depositary to the custodian.
Investors are advised to consult their own tax advisers and to consider carefully the potential tax consequences of an investment in our ADSs.
ADS holders may not be able to enforce a judgment of a foreign court against us.
We are a limited liability company incorporated under the laws of India. All our directors and executive officers are residents of India and almost all of our assets and the assets of such persons are located in India. India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments. We have been advised by counsel that recognition and enforcement of foreign judgments is provided for on a statutory basis and that foreign judgments shall be conclusive regarding any matter directly adjudicated upon except where:
· | the judgment has not been pronounced by a court of competent jurisdiction; |
· | the judgment has not been given on the merits of the case; |
· | it appears on the face of the proceedings that the judgment is founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which Indian law is applicable; |
· | the proceedings in which the judgment was obtained were opposed to natural justice; |
· | the judgment has been obtained by fraud; or |
· | the judgment sustains a claim founded on a breach of any law in force in India. |
It may not be possible for holders of our ADSs or our shareholders to effect service of process upon us or our directors and executive officers and experts named in the report that are residents of India outside India or to enforce judgments obtained against us or them in foreign courts predicated upon the liability provisions of foreign countries, including the civil liability provisions of the federal securities laws of the United States.
Moreover, it is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages as excessive or inconsistent with Indian practice. An Indian court may not enforce a foreign judgment involving more than actual and quantifiable damages.
13
An active or liquid trading market for our ADSs is not assured.
An active, liquid trading market for our ADSs may not be maintained in the long term. We cannot predict the extent to which an active, liquid public trading market for our ADSs will continue. If there is no longer any active trading market for our ADSs, or if we fail to meet eligibility requirements, we may be required to delist from the NYSE, which could adversely affect the price of our ADSs and, potentially, our equity shares. Although holders of ADSs are entitled to withdraw the equity shares underlying our ADSs from our depositary at any time, there is no public market for our equity shares in the United States.
ADS holders may be restricted in their ability to exercise voting rights.
At our request, the depositary will mail to ADS holders any notice of shareholders’ meeting received from us along with information explaining how to instruct our depositary to exercise the voting rights of the securities represented by ADSs. If the depositary receives voting instructions from ADS holders in time, relating to matters that have been forwarded to them, it will endeavor to vote the securities represented by those ADSs in accordance with such voting instructions. However, the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure that all ADS holders will receive voting materials in time to enable them to return voting instructions to the depositary in a timely manner. 160; Securities for which no voting instructions have been received will not be voted. There may be other communications, notices or offerings that we only make to holders of our equity shares, which will not be forwarded to holders of ADSs. Accordingly, ADS holders may not be able to participate in all offerings, transactions or votes that are made available to direct holders of our equity shares.
Although announced policy indicates there is no intention to do so, possible sales of our equity shares by the government of India could affect the value of our ADSs.
The government of India holds approximately 56.25% of our outstanding equity shares. There have been no indications that the current government of India plans to further reduce its shareholding in us through a sale of equity. As a result, this ownership affects the voting by shareholders and the ability to influence any third party transactions, such as mergers or other business combinations.
Any future disposal of equity shares by the Indian government could adversely affect the trading price of our equity shares and ADSs.
Item 4. | Information on the Company |
4A. | History and Development of the Company |
The Company was incorporated in New Delhi, India, on February 28, 1986 under the Indian Companies Act, 1956. Our principal executive office is located at 12th floor, Jeevan Bharati Tower—1, 124 Connaught Circus, New Delhi—110001, India, and our telephone number is +91-11-2374-2212.
HISTORY AND DEVELOPMENT OF THE INDIAN TELECOMMUNICATIONS INDUSTRY
Until the mid-1980s, the telecommunications sector in India was a monopoly controlled by the government of India through the Department of Posts and Telegraphs of the Ministry of Communications, providing all telecommunications services, both domestic and international. The Indian Telegraph Act of 1885 established the government of India’s monopoly in the sector and, together with the Indian Wireless Telegraphy Act of 1933, provided the legal framework for the regulation of the Indian telecommunications industry.
Development of the telecommunications sector historically was seen as a relatively low priority and received limited budgetary support from the government of India. As a result, the telecommunications infrastructure in India grew relatively slowly. In the mid-1980s, faced with rapidly increasing demand for telecommunications services and equipment, the government of India commenced a reorganization of the sector designed to facilitate the rapid introduction of new technology, stimulate the growth of the telecommunications industry and tap the resources of the private sector in facilitating such technological innovation and growth. The reorganization included the division of the Department of Posts and Telegraphs into the DOT and the Department of Posts.
14
We were incorporated on February 28, 1986 under the Companies Act as a wholly-owned government of India company and, on April 1, 1986, assumed responsibility for the control, management and operation of the telecommunications networks in Delhi and Mumbai, two of the largest metropolitan areas in India. Videsh Sanchar Nigam Limited (VSNL) (now Tata Communications Ltd) was established at the same time to provide international telecommunications services and the DOT retained responsibility for providing all other telecommunications services throughout India. The DOT also assumed regulatory authority over the Indian telecommunications industry. Simultaneously, the Telecom Commission was established in 1986 as an executive body under the Ministry of Communications to make policy decisions and to accelerate the development of all aspects of the telecommunications sector and the implementation of new telecommunications policies.
In December 1991, with a view towards fulfilling its objective of facilitating the rapid introduction of new services and technology, the DOT invited bids from Indian companies with a maximum of 49% foreign ownership for two non-exclusive GSM cellular licenses in each of the cities of Kolkata (formerly called Calcutta), Chennai (formerly called Madras), Delhi and Mumbai. The private operators commenced cellular services in late 1995. In October 1997 we were permitted to provide GSM cellular service in Mumbai and Delhi. Beginning in 1995, the DOT also invited tenders and awarded cellular licenses for the regional “circles” established for the purpose of licensing cellular services in the rest of India. We believe that as of May 31, 2010, there were approximately 584 million wirele ss subscribers in India.
Since 1992, as part of its general policy of gradually reducing its holdings in public sector enterprises, the Indian government sold a portion of its equity holdings in us and VSNL (now Tata Communications Ltd) to certain mutual funds, banks and financial institutions controlled by the government of India. In our 1997 global depositary receipt offering, the Indian government sold 40 million of our equity shares represented by 20 million global depositary receipts, constituting 6.3% of our then outstanding equity shares. Additionally, in 1997 and 1999, the Indian government sold additional equity shares of VSNL in the form of global depositary receipts, thereby reducing its equity interest in that company to 51%. In February 2002, the government of India divested an additional 25% interest in VSNL to t he Tata Group through a competitive bidding process.
In May 1994, the government of India announced its National Telecom Policy, which was aimed at achieving accelerated telecommunications growth and network expansion. The broad objectives of this policy were higher national telephone penetration, reduction of waiting lists, improvement in the quality of networks, improved rural access to telecommunications services, introduction of value-added services and private sector participation in the provision of basic and cellular services.
In order to achieve these objectives, the Indian government decided to permit private sector involvement in basic telecommunications services, which, in the Indian context, includes basic fixed-line access service and a number of other telecommunications services (including CDMA-based fixed wireless and mobile services (without roaming)), other than long distance services, cellular service and Internet access. Accordingly, in September 1994, the Indian government announced its “Guidelines for Private Sector Entry into Basic Telecom Services,” and beginning in 1995 began to invite tenders from companies with no more than 49% foreign ownership for basic service licenses for the regional “circles” established for licensing basic telecommunications services. After a period of consolidation, th e most prominent private-sector providers of basic telecommunications services currently include Bharti Airtel Limited, Tata Teleservices and Reliance Infocomm, each of which operates in multiple circles. Tata Teleservices, Bharti Airtel Limited and Reliance Infocomm both operate in the circles that include Mumbai and Delhi, and hence now compete with us in those areas.
In February 1997, a multilateral agreement on basic telecommunications services was agreed to among member governments of the World Trade Organization. As part of this agreement, the Indian government has reaffirmed its commitment to further liberalize the Indian telecommunications sector through the licensing of new basic and cellular service providers.
In March 1997, the government established the Telecom Regulatory Authority of India (TRAI), an independent regulatory authority with broad regulatory powers over the telecommunications industry in India, including the power to set rates on domestic and international telecommunications services and determine the terms and conditions of interconnect arrangements between service providers. These regulatory powers had previously been vested in the DOT, which controls MTNL and is part of the Ministry of Communications. However, the power to grant, renew or revoke licenses remains with the DOT.
15
In November 1998, the government of India announced its Internet policy, which aims to increase Internet usage by, among other things, allowing up to 49% foreign ownership of Internet service providers (ISPs) and declaring a license fee moratorium for five years. (Currently the foreign ownership limit for ISPs is up to 74% in most cases.)
In March 1999, the government of India announced its New Telecom Policy 1999 which sets forth as one of its central goals the fostering of increased competition in the Indian telecommunications industry and the liberalization of government telecommunications regulation.
Additionally, effective May 1, 1999, the TRAI implemented the 1999 tariff order pursuant to which the TRAI seeks to align tariffs charged by service providers with the corresponding costs associated with such services so as to limit cross-subsidization of services by a provider while allowing providers to set tariffs at any level below certain maximum levels. The TRAI has since adjusted tariffs several times under the tariff order.
In October 1999, the DOT, which had both performed the role of licensor and policy maker for the Ministry of Communications and operated as India’s domestic long distance service provider and basic service provider (except for the areas of Delhi and Mumbai, which are covered by us), was bifurcated into two departments. The DOT/Telecom Commission, or the DOT, now performs the role of licensor and policy maker, and the Department of Telecom Services, functions as the government of India’s local and long distance network service provider.
In October 2000, the Department of Telecom Services’ local and long distance business was corporatized into a new company named BSNL. The Indian government has also recently established an independent Information Technology Department within the Ministry of Communications (now formally known as the Ministry of Communications and Information Technology). The IT department will, among other things, promote the Internet, e-commerce and knowledge based industries. Internet licensing functions will remain with the DOT. The DOT controls the equity shares in MTNL that are held by the Indian government and appoints all of the directors on our board. See Item 6A. “Directors and Senior Management” in this report.
ILD and NLD Licenses Simplified
The Government has constantly endeavored to usher in policy decisions that could facilitate affordable public telecom facilities, in accordance with the New Telecom Policy, 1999. In line with this strategy, in December 2005, the Government made a major decision to further liberalise the NLD (national long distance) and ILD (international long distance) licenses in order to facilitate the growth of the IT and IT-enabled services in India. Some of the changes brought about by such decisions are as follows:
(a) | NLD Service License. The entry fee for new NLD licenses was reduced from Rs.100 crore to Rs.2.5 crore. Likewise, the annual license fee for NLD licenses was reduced from 15% to 6% of AGR effective January 2006. Mandatory roll out obligations to set up a point of presence in each long distance area. The net worth requirement and paid up capital requirement of the applicant company for NLD licenses was reduced to the level of Rs.2.5 crore from Rs.250 crore. To facilitate promotion of the BPO/KPO industry, NLD service providers were permitted to access the subscribers directly for provision of leased circuits/closed user groups i.e. they can provide last mile connectivity. |
(b) | ILD Service License. The entry fee for new ILD licenses was reduced from Rs.25 crore to Rs.2.5 crore. The annual license fee for ILD licenses was reduced from 15% to 6% of AGR, effective January 2006. There was no further need to have mandatory roll out obligation for ILD service licenses except for having at least one switch in India. ILD service providers could access the subscriber directly only for provision of leased circuits/closed user groups. The net worth and paid up capital of the applicant company for ILD service license was reduced to Rs.2.5 crore. |
(c) | Requirement of experience in telecom sector grant of licenses. Prior experience in telecom sector is no longer a prerequisite for being granted telecom service licenses. |
16
(d) | Provision of Internet telephony, Internet Services and Broadband services by Access Providers. Access service provider can provide Internet telephony, Internet services and Broadband services. If required, access service provider can use the network of NLD/ILD service licensee. |
(e) | IP-II and ISPs with IP-VPN Licenses |
(i) | The Government decided to do away with IP II and IPVPN licenses. Existing IP-II/IP-VPN licenses were allowed to migrate to NLD/ILD service license. |
(ii) | ISP with Internet telephony (restricted) have been charged a license fee at 6% of AGR since January 2006. |
(iii) | The access providers can provide broadband services including triple play i.e. voice, video and data. ISPs can provide Internet Access/Internet Content Services where Internet has been defined as a global information system that is logically linked by a globally unique address based on IP or its subsequent enhancement/upgradation. ISPs cannot provide content services on a managed network (virtual/real) not derived from Internet. |
(f) | VSAT commercial |
Annual license fee charged at 6% of AGR effective January 2006. The approximate number of licenses for providing telecom services issued as of March 31, 2010 were:
SUMMARY OF LICENSES | ||||
LICENSEES | NO. OF LICENSEES | |||
Basic Licensees | 2 | |||
CMTS Licensees | 39 | |||
UAS Licensees | 240 | |||
NLD Licensees | 29 | |||
ILD Licensees | 24 | |||
Total Licensees | 334 |
The table indicates that the increased nature of competition among the telecom service providers. We are making efforts to keep the pace with the industry.
(g) | 3G Spectrum |
Pursuant to DOT requirements, there is a one time spectrum fee at a price equal to highest bid as determined in Delhi and Mumbai payable by us. Furthermore, we also pay an annual spectrum usage charge of 1% of AGR after a period of one year from the date the frequencies were earmarked.
The auction process for 3G spectrum has been completed. The 3G auction price for Delhi was Rs.3,316.9 crore and for Mumbai was Rs.3,247.1 crore. As a result, we paid equivalent fees pursuant to DOT requirements and paid a total Rs.6,564 crore for these two circles.
(h) | Broadband Wireless Access Services |
Similarly we are required to pay a one-time spectrum fee at a price equal to highest bid as determined in Delhi and Mumbai pursuant to a DOT letter. The auction process for BWA has been completed. The BWA auction price for Delhi was Rs.2,241.02 crore and for Mumbai was Rs.2,292.95 crore. As a result, we paid equivalent fees pursuant, a total Rs.4,533.97 crore for these two circles. Furthermore, we are also required to pay an annual spectrum usage charge of 1% of AGR after a period of one year from the date the frequencies were earmarked.
17
The following chart illustrates the current operational and regulatory structure of India’s telecommunications services industry:
In November 2003, the DOT issued guidelines for Unified Access License which cover within a service area both basic telecommunications services and cellular services. In the Indian context, “basic telecommunications services” or “basic services” include basic fixed-lined access service and a number of other telecommunications services, other than long distance services, cellular service and Internet access. Basic services also include CDMA-based fixed wireless and mobile services (without roaming). We have submitted a request to the DOT to migrate to UAS Licenses for our service area under mobile licenses for Delhi and Mumbai to be able to provide services at par with other operators in these areas. In September 2006, our request for migration of our CMTS Licenses to UAS Licenses as our operating cellular service in the licensed area was not accepted by the DOT. In October 2006, we sought reconsideration and grant of permission for migration to UAS Licenses.
18
In April 2008, we received in-principal approval to use CDMA technology under the existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai service areas. We are using CDMA technology (in addition to GSM technology being used by us) under the CMTS license for Delhi and Mumbai service areas.
In October 2008, we submitted a request to the DOT that instead of migration to Unified Access Service License (UASL) from the CMTS license, we may be permitted to use dual technology (both GSM and CDMA) under the existing CMTS License for the service areas of Delhi and Mumbai.
On July 28, 2010, the DOT issued an amendment to the license agreement for security and security management related concerns for expansion of Telecom Services in various zones of India.
In November 2006, the DOT announced the instructions that all licensees shall ensure adequate verification of each customer before enrolling him as a subscriber. In December 2008, the DOT issued regulations prescribing financial penalties for violations of the subscriber verification rules.
For ensuring that the complete subscriber information is available with all the service providers and the same is duly verified, the DOT also decided that each licensee shall take up re-verification of the existing subscribers on priority and ensure that the re-verification of the existing subscribers is completed by March 31, 2007. By re-verification, it is meant that there shall be 100% check of CAF/SAF documentary proof of identity and documentary proof of address and it would be ensured that the subscriber information available in service provider’s database matches with that in CAF/SAF and associated documents. Further the licensee company would cross-verify the information from the actual user by calling the respective subscriber. There shall not be any connection working after March 31, 20 07 in licensee’s network without having the subscriber information duly verified.
After March 31, 2007, if any subscriber number is found working without proper verification, a minimum penalty of Rs.1,000 per violation of subscriber number verification would be levied on the licensee apart from immediate disconnection of the subscriber number by the licensee.
In response to the above DOT instructions, our GSM subscriber base reduced from approximately 2.7 million to 2.5 million during the period March 2007 to April 2007. As of March 31, 2008, 2009 and 2010, our GSM subscriber base has increased to 3.35 million 4.26 million and 4.86 million, respectively.
For verification of identity /address proof, the DOT issued the following instructions /clarification, letter no ADG(VAS-11) 842-725/2005/157, dated March 23, 2009, regarding booking of mobile customers for compliance with immediate effect.
-- Outstation Customers: Applicants for mobile phone connections from within the license service area or the state/UT concerned, whichever is more encompassing, should not be treated as outstation customers. For local reference of outstation customer, the name, address and contact phone number of local referee must be obtained from outstation customer apart from PIA (Proof of Identity/Address). The local reference must be verified telephonically at the point of sale before issue of SIM card and cross-verified by the service provider at the time of verifying clause 3(ii) of the DOT, dated November 22, 2006.
-- Proof of Identity: The instructions clarified that because in rural areas in some of the states, the head of Panchyat may be known by different name, a certificate of photo identity/address as the case may be issued by Head of village Panchayat or its equivalent authority should also be accepted as proof of identity or address.
With reference to DOT letter NO 800-08/2007-AS-11/24, dated April 16, 2008, the instructions clarified that a ration card with photo and address shall also be accepted as PIA in all license service areas for issue of mobile connection.
19
-- Additional Documents: The following documents also would be acceptable as proof of identity/address
1. address card with photo issued by Dept of Posts as PIA
2. smart card issued by CSD, Defence/Paramilitary as POI
3. current passbook of Post office/PSU bank as POA, with photo as PIA
-- PIA for foreign tourists: In case of foreign tourists visiting India, apart from details of local reference mentioned above for additional documents, a copy of a passport with valid visa stamp therein would be acceptable for issuing mobile connections. In case of no local reference, the address of stay would be indicated.
We have implemented the procedure for ‘Do not call’ for Telecom Unsolicited Commercial Communication in the service areas of Delhi and Mumbai, in accordance with a March 2008 amendment by Telecom Regulatory Authority of India, the Telecom Unsolicited Commercial Communications Regulations, 2007 (4 of 2007).
On April 20, 2010, the DOT announced the methodology for verification of telephone subscriber’s data requiring all service providers to submit the information about subscribers by state and license area each month to TERM cell and the Economic Research Unit of the DOT.
Mahanagar Telephone Nigam Limited
Mahanagar Telephone Nigam Limited was established by the government of India in 1986 to provide fixed-line and other basic telecommunications services in Delhi and Mumbai. Delhi and Mumbai are two of the largest, most densely populated and wealthiest metropolitan areas in India. As of March 31, 2010, our fixed-line telecommunications networks in Delhi and Mumbai had an aggregate of approximately 3.62 million fixed lines in service. In February 2001, we launched our cellular services using global system for mobile communications or GSM technology in Delhi and Mumbai and, as of March 31, 2010, had approximately 4.78 million subscribers. GSM is the European and Asian standard for digital mobile telephone networks. We launched CDMA-based services in 1997 based on limited mobility, and at March 31, 2010 had approximately 0.18 million limited mobile subscribers in Mumbai and Delhi. CDMA is a digital wireless technology that increases network capacity by allowing more than one user to simultaneously occupy a single radio frequency band with reduced interference. We began providing Internet service in both Delhi and Mumbai in February 1999 and had approximately 1.49 million Internet access subscribers at March 31, 2010. In December 2008, we were the first operator to inaugurate the 3G services in India, with commercial launch in February 2009 in Delhi and in May 2009 in Mumbai.
We believe that the size of the markets in Delhi and Mumbai, the economic environment, the Indian government’s ongoing liberalization of the telecommunications industry and the still low level of penetration of fixed-line, mobile and cellular services in these two areas and the low level of penetration of Internet services in India provide opportunities for future industry growth.
The number of our access lines in service grew at a compound annual growth rate of 7.08% from March 31, 2000 to March 31, 2010. In fiscal year 2010, these lines increased by 6.64%, due to cellular services. In fiscal year 2010, our network had approximately 3.94 million access lines in service in Delhi and approximately 4.65 million access lines in service in Mumbai. In addition, our access lines in service per employee increased from 65.98 at March 31, 2000 to 191.29 at March 31, 2010.
We derive our revenue primarily from local, domestic long distance and international calls that originate from our network. In fiscal year 2010, approximately 22% of our revenues were derived from call charges, 65% from rentals of telephones, access lines and other telecommunications equipment and use of our value-added services and 4% from public call offices. Interconnect revenue, which is revenue derived from other telecommunications service providers for calls made into our network, accounted for 9% of our revenues in fiscal year 2010. Local calls are carried on our network, unless the termination point is in the network of one of the cellular operators or one of the new private-sector basic service providers in the locality. We have been carrying our own traffic between Delhi and Mumbai since May 2006. Other domestic long distance calls continue to be passed from our network to the domestic telecommunications network operated by BSNL, although we have entered into interconnect agreements with the new private-sector domestic long distance service providers and intend to pass such domestic long distance calls also through such other providers. In addition, currently all international outgoing calls continue to be passed from our network to international gateways operated by VSNL, India’s former government-controlled international long distance carrier, although we have entered into interconnect agreements with other private-sector international long distance carriers and have plans for joint development with BSNL of submarine cable to connect the east and west coasts of India with Malaysia and the Middle East (and ultimately Europe and the USA).
20
We expect competition to continue to increase in all major sectors of the Indian telecommunications industry, as both government and private-sector companies continue to invest in capacity expansion and seize opportunities to enter new geographical areas and lines of business. See “— Business Overview—Competition” below.
Licenses/License Areas
We provide all of our telecommunications services, other than Internet, under a single, general, non-exclusive license. The license initially granted to us in 1986 was effective for a five-year period that ended on March 31, 1991. The term of the license has been extended for a 25-year period ending March 31, 2013 for basic services.
In October 1997, our license was amended to explicitly include cellular services and radio paging, and our license for such additional services currently extends to October 2017. The license is not specific as to the type of cellular technology that we may use. The license covers areas within the territorial jurisdiction of the State of Delhi and the areas covered by the municipalities of Mumbai, Navi Mumbai and Thane. The DOT has extended the scope of our license to allow us to provide cellular services in certain surrounding areas of Delhi and Mumbai covered by other cellular operators in those cities. The license specifies that we may provide local, domestic long distance access (through interconnection with domestic long distance operators) and international long distance access (through interconnection with networks of international long distance operators), as well as telex and leased line services. Specifically, our license permits us to originate, terminate and transit domestic and international long distance calls. However, we believe that our license would need to be amended if we wanted to enter the market for domestic long distance utilizing our network. In June 2008, we were granted the ILD license for providing international long distance services.
The DOT retains the right to revoke our license after giving us one month’s notice. The DOT also retains the right, after giving notice to us, to modify the terms and conditions of our license at any time if in their opinion it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunications sector. A revocation of the license or a change in significant terms of the license, such as its duration, the amount of license fee payable, the range of services permitted and the scope of exclusivity could limit our ability to operate particular lines of our business or result in increased costs in the form of increased license fees or costs associated with applying for new licenses, or contesting limitations on our licenses.
We provide our Internet services in Delhi and Mumbai under separate non-exclusive license agreements. These licenses were granted in November 1998, and currently extend to September, 2017. In addition, our wholly-owned subsidiary, Millennium Telecom Limited (MTL), provides Internet access services throughout India under a license granted in 2000 for an initial period of 15 years. The government of India agreed in principle that BSNL have an equal equity participation in MTL, however no transaction has been effected.
Delhi. According to the government of India’s provisional 2001 population census data, Delhi had a total population of approximately 12.8 million. In addition to being India’s political capital, Delhi has the highest per capita income of all the states in India. Delhi has a high concentration of service and manufacturing industries and houses the central government, the head offices for many major public sector enterprises, embassies, high commissions and various government missions and development agencies.
21
Mumbai. The city of Mumbai, the financial capital of India and the capital of the State of Maharashtra, is India’s most populous city, with a population of approximately 16.4 million according to the 2001 census data. Mumbai accounted for 36% of India’s income tax contributions in fiscal year 2000.
Strategy
Key elements of our strategy include the following:
· | Expand GSM Cellular and CDMA Mobile Services in Delhi and Mumbai. We launched our cellular services using GSM technology in Delhi and Mumbai in February 2001, and currently have an installed capacity of 17.75 lakh lines in Delhi and 23.25 lakh lines in Mumbai. We believe that current penetration rates in Mumbai and Delhi remain attractive for continued high growth in subscriber base. To meet the growing demand of our cellular service, the Indian Government permitted the further expansion of GSM capacity in each of Delhi and Mumbai by 2 million each (including 750K line 3G). Capacity expansion has now been completed in Delhi and 500K capacity is yet to be added and is under installation in Mumbai. |
· | 3G Services. Our 3G network is HSDPA (High Speed Downlink Access) with download speeds up to 3.6 Mbps. We also plan to upgrade our 3G network supporting speeds up to 384Kbps, and also to upgrade this to HSUPA (High Speed Uplink Access) supporting speeds up to 5.3 Mbps. |
· | 3G Data Cards. We have adopted the following two strategies to provide 3G data cards to our subscribers. First, bundling of 3G data cards with our 3G services, which will allow suppliers to sell their 3G data cards bundled with our 3G services. Before allowing such data cards with our 3G services, we will thoroughly test the data card for its performance in our 3G network. Second, we have also procured 10,000 nos. of 3G data cards and are providing them to our customers. |
· | Further Develop and Modernize our Network. We intend to continue to invest in expanding and upgrading our network to improve our quality of service. Through expansion and modernization of our network, we seek to improve the capacity of our network, reduce network failure rates, improve call completion rates and decrease average waiting time for new lines as well as support our Internet and value-added services. |
· | We placed a PO for the supply of 42 terminals (20 for Delhi and 22 for Mumbai) of 40 channel 10 GB/channel DWDM equipment to strengthen the transmission network. The installation of the equipment is in the final stages. |
· | We have introduced broadband technology based on ADSL2+, capable of providing triple play services (video, voice and data), in a significant way. We placed a PO for the further addition of one million broadband ports for Delhi and Mumbai. The installation of the first phase (500K lines) of equipment has been completed. 300k of Broadband equipment for Mumbai has already been commissioned, and approximately 150K for Delhi has also been commissioned, while the remaining 50K is in advanced stages of commissioning. Furthermore, in fiscal year 2008, we commissioned a state of art IP/MPLS core network in Delhi and Mumbai to provide a converged IP network for all services. This network is currently carrying our Broadband, IPTV and GSM traffic. Layer 2 and Layer 3 VPN services are also being provided by us through this network. We are working on the expansion of the IP/MPS network so as to further extend the IP reach of this network. |
22
· | In addition, we are replacing our old PDH transmission network with synchronous digital hierarchy technology and are continuing to implement fiber-in-local-loop and wireless-in-loop technologies where appropriate. |
· | Enhance Value-added Services. We provide our subscribers with value-added services such as call-waiting, call-forwarding, wake-up calls, absent subscriber service and caller identification at no charge or for a nominal fee. Tie up has been done with various content providers to provide VAS on WAP, SMS, GRPS and voice portals, as well as news, weather, cricket, astrology, chat, monophonic ring tones, picture manage and logos, PNR alerts, job alerts, commodity and stock status on SMS and Premium SMS services. Polyphonic Ring tone, True tone sing tone, video ring tones, video clip download, video games, Bluetooth games, animated pictures, video download on non-video phones, booking of movies ticket, and e-mail access over GPRS service are also being provided. |
· | We also provide our Intelligent Network services to subscribers, which include our calling card services, a toll-free calling service, a premium rate “0900” number service, universal access service and a televoting service. We also provide high speed data transmission services using integrated services digital network technology, which allows simultaneous high speed transmission of voice, data and images. We expect that our value-added service offerings will increase use of our network, enhance overall customer satisfaction and provide new sources of revenue. |
· | Selectively Target International Opportunities. We plan to selectively target expansion opportunities outside India where we can leverage our expertise and relationships. Our Nepal joint venture, United Telecom Limited, in which we hold a 26.68% equity interest, has commenced wireless in local loop services and provides other services as the first private-sector telecommunications operator in that country. It had a subscriber base of approximately 437,000 as of April 30, 2010. We have also been awarded licenses to provide basic, mobile and international long distance service in Mauritius, where we operate through a 100%-owned subsidiary. As of March 31, 2010, we had approximately 104,000 customers in Mauritius. We are also examining other international opportunities. |
· | Expand Internet Services. We commenced our Internet service provider operations in February 1999 with an initial network capacity to support up to 5,000 subscribers in each of Delhi and Mumbai. As of March 31, 2010, we had approximately 1.49 million Internet access users. We have also started providing high speed internet services on broadband. |
· | Focus on Customer Service. In order to strengthen the loyalty of our customers, attract cellular subscribers and improve our competitive position, we have a program to improve customer service and become more responsive to the needs of our subscribers. We have introduced improved bill collection and payment procedures (including bill payment over the Internet and via credit card), opened Tele-marts at which most subscriber services are available, introduced telephone directories on the Internet and on CD-ROM and implemented a customer service management system. Our customer service management system enables our staff to provide customers with access to a range of “on-line” services, including registration for new telephone lines, changes of address and issuances of bills, and allows us to monitor complaints from a single point of contact. We have identified high usage “commercially important persons” and are making all efforts to strengthen our relationship with these subscribers. We also have strengthened the customer care help lines for all services and posted additional trained staff on these help lines as well as in Sanchar Haats to provide on the spot solutions to all the requirements of our customers. |
23
4B. | Business Overview |
Services
Our primary business is providing basic telecommunications services in Delhi and Mumbai, which include:
1. | Basic fixed-line access (including phone plus facilities) in Delhi and Mumbai: We provide basic fixed-line access, which consists of installation and provision of basic voice telephony services. Rental charges include maintenance of connections between a subscriber’s premises and our network, 60 pulses of calls per month as well as the use of a basic handset (although subscribers may elect to buy their own handset and have their installation charges reduced accordingly). Phone plus facilities in basic fixed-line include such services as abbreviated dialing, call transfer, hotline facility, three party conferencing, absentee facility, CLIP facility, call hunting, call alert and morning alarm. |
2. | Public call offices: Public call offices consist of both manned offices where people can make local, long distance and international calls, and coin operated telephone booths. At March 31, 2010, public call offices accounted for 5.39% of our total wire lines in service. The coin-operated public call offices offer only local call service, while the franchised public call offices offer local, domestic long distance and international call services. We pay a commission to the franchisees amounting to 40% of the tariffs charged by the franchisee on local calls and 20-30% of the tariffs charged by the franchisee on domestic long distance depending on the number of calls per fortnight and international calls. The franchisees charge the same tariffs we do for these services. |
3. | 3G cellular services: In December 2008, we inaugurated 3G mobile services in Delhi, which was the first launch of 3G services by any operator in India. The 3G technology is the natural evolution of 2G services and will facilitate higher speed and data throughputs enabling the delivery of a wide range of multimedia services such as video streaming, movie downloads, mobile TV, M-commerce and other functions. |
In February 2009, we launched 3G services in the NDMC area of Delhi (with 50 Node B) with the brand name “Jadoo”. These services are now available in almost all of Delhi’s GSM licensed service area. In Mumbai, 3G services were launched in May 2009 and network deployment is in progress. As on May 31, 2010, 734 Nodes B in Delhi and 565 Nodes B in Mumbai are operational.
In August 2008, we were earmarked frequencies in 2100 MHz band for deployment of 3G services in Delhi and Mumbai. We have been allotted one carrier of 5 MHz each in Delhi and Mumbai for the deployment. We plan to deploy 750K 3G capacity each in Delhi and Mumbai. As of May 2010, 3G capacity deployment has been completed in Delhi while 500K capacity deployment is being undertaken in Mumbai.
In order to provide world class service/ experience to our customers, we appointed Qualcomm to carry out a technical audit of the 3G networks being deployed in Delhi and Mumbai. The auditing included network dimensioning evaluation and performance of 3G/WCDMA Networks of Delhi and Mumbai. The auditor is also responsible to clearly evaluate additional requirements, if any, to ensure a network of global quality. Qualcomm has already completed the work and submitted the report which we are reviewing.
With the view to optimally utilize deployed infrastructure and generate additional revenues, we have already floated an EoI (Expression of Interest) for roaming arrangements with other operators. We are also considering appointing a franchisee for marketing 3G services in Delhi and Mumbai. We are also bundling our services with data cards and handsets from various vendors. All of our cellular subscribers have been provided with 3G services and they select the 3G services depending upon the availability of 3G handsets.
In addition, in 2008, we were awarded 3G spectrum. Under the rules, we have been allowed to continue offering 3G services in Mumbai and Delhi, but were required to match the winning bid of the 3G auction, which ended on May 20, 2010. As a result, we paid Rs.6,564 crore for 3G spectrum for Delhi and Mumbai Licensed Service Areas.
24
4. | GSM cellular services (including value-added services) in Delhi and Mumbai: In February 2001, we launched our cellular mobile services using GSM technology (the European and Asian standard for digital cellular telephony) in Delhi and Mumbai under the brand name 'Dolphin'. In 2002, we introduced our prepaid cellular services under the brand name 'Trump'. As of March 31, 2010, we had approximately 48.58 lakhs GSM cellular subscribers. We provide national roaming facilities for our GSM cellular customers through the networks of BSNL outside Mumbai and Delhi and have established roaming facilities for our customers in approximately 200 countries. As of March 31, 2010, we had installed a cellular network with a capacity of 30.25 lakh lines in Delhi and 28.25 lakh lines in Mumbai. |
5. | Value-added services: We offer value-added services on GSM such as call-waiting, call-forwarding, wake-up calls, absent subscriber service (informing callers that the subscriber is unavailable) and caller identification, friends & family, night talk, VMS call conference, WAP and voice mail. |
6. | Mobile and fixed-wireless services based on CDMA technology: In May 1997, we began implementing wireless-in-local-loop services using CDMA technology for fixed wireless and mobile operations on a commercially experimental basis with a single exchange and capacity for 1,000 subscribers in Delhi. Wireless-in-local-loop services use wireless links from a local exchange in place of conventional cables. Two types of service are provided. One type employs a handset that is fixed to a subscriber’s premises for “fixed wireless” service, while the other employs a mobile telephone -or “mobile” or “limited mobility” services. CDMA fixed wireless is a substitute for fixed-line access. Fixed wireless allows us to enhance basic service penetration, provide quicker installation and cover areas where the installation of cable would not be economical. Our CDMA mobile service is marketed under the brand name Garuda. |
Our CDMA mobile service initially offered only limited mobility within Delhi and Mumbai. We have launched roaming facility in Garuda/CDMA in Delhi and Mumbai. On March 31, 2010, the current capacity of WLL was approximately 55,000 and 54,000 for Delhi and Mumbai, respectively. At such date, we had approximately 180,000 CDMA mobile connections and 130,000 fixed wireless connections.
7. | ISDN services: We provide narrow-band ISDN services that allow subscribers to send high speed data make telephone calls with high quality voice transmission and hold desktop video conference over a single line. In the past, the development of independent networks for a variety of services (such as voice, telex, packet-switched data and leased lines) made each of them relatively expensive. ISDN technology allows a wide range of data services to be made available to the subscriber through a single connection and at a reduced cost. We believe these high speed data transmission products will help us attract high usage subscribers. We introduced narrow-band ISDN services in August 1996, and we had approximately 25,000 subscribers to this service at March 31, 2009 and 2010. |
8. | Broadband and Internet services: We commenced our Internet service provider operations in February 1999 with initial equipment capacity to support up to 5,000 subscribers in each of Delhi and Mumbai. We experienced significant demand for this service and have since expanded our Internet services capacity to support additional subscribers in each of Delhi and Mumbai. As of March 31, 2010, we provided our Internet services to a total of approximately 1.49 million subscribers in Delhi and Mumbai, as compared to approximately 1.43 million subscribers at March 31, 2009. |
We also enable our customers to access the Internet without having to subscribe for Internet service. They can access the service and later be billed on the basis of calling line identification usage. The number of customers who use this service is much higher than our number of Internet subscribers. In 2004, we launched our broadband services under the brand name “Triband” in Delhi and Mumbai simultaneously. This service has found significant acceptability, with customers and subscribers bases grown rapidly.
We plan to expand broadband services on a large scale based on the ADSL technology. ADSL means asymmetric digital subscriber loop, a technology that allows combinations of services including voice, data technology and one-way full motion video to be compressed and delivered over existing copper cables. These high speed data services are in strong demand from large corporate, financial, media, public service and education institutions. We began using ADSL 2+ in January 2005. The broadband customer base as on March 31, 2010 was 8.16 lakh as compared to 6.96 lakh at March 31, 2009. The installed capacity of broadband ports as of March 31, 2010 was 14.18 lakh as compared to 10.15 lakh at March 31, 2009.
25
9. | Leased line service: We provide point-to-point leased line services for local, domestic long distance and international connectivity. Subscribers can use our leased lines to assemble their own private networks between offices within Delhi and Mumbai or together with BSNL, between Delhi and Mumbai and to other Indian cities. Leased line services can be used for voice and data transmission at various bandwidths. In addition, we earn revenues from leasing circuits to cellular operators in Delhi and Mumbai to interconnect their networks to our network. At March 31, 2009 and 2010, we had approximately 53,000 leased line subscribers. |
10. | Telex and Intelligent Network services: We have introduced Intelligent Network services over our entire network which at present includes: |
· | calling card service |
· | toll free calling service |
· | premium rate “0900”number service |
· | televoting service. |
11. | Interconnection with domestic international long distance carriers and with basic and cellular operators in Delhi and Mumbai: We provide local telephone services in Delhi and Mumbai as well as domestic and international long distance through our connectivity with BSNL’s domestic long distance network and. VSNL’s international gateways. Since May 2006, we have carried our own traffic between Delhi and Mumbai. We derive revenues from tariffs we collect on local domestic long distance and international calls that originate on our network. Tariffs, or usage charges, consist of charges for local, domestic long distance and international calls. Usage is measured by pulses, which are time-based limits of measure, metered at the relevant exchanges. A set of pulse durations is established for each category of calls (i.e., local, domestic long distance or international long distance), and within each category, pulse durations vary depending on one or more of the following factors: call distance; time of day; type of network on which the call is terminating (i.e. fixed, GSM cellular or CDMA mobile); destination country (for international long distance only); subscriber plan (for local calls only); and whether the call is within a circle or between two different circles (for domestic long distance only). We estimate that based upon recent sample data, local calls constituted approximately 72.3%, STD calls approximately 27.1% and ISD calls approximately 0.7% of our total customer calls. We are focused on increasing call volumes by promoting use of our value-added services and the use of long distance services. In June 2008, we received a license to enter the international long distance service market. |
12. | Interconnection. We connect our network with BSNL and have entered into interconnect agreements with certain other licensed domestic long distance service carriers to provide our customers with domestic long distance service and intend to pass traffic to these other providers also (we have been carrying our own traffic between Delhi and Mumbai since May 2006). We connect our network with VSNL and have entered into interconnect agreements with certain other licensed international long distance carriers to provide our customers with international long distance service. We connect our network with the other basic, cellular operators and Unified Access Service Providers in Mumbai and Delhi to offer our customers comprehensive access in our coverage areas. The terms and conditions of our interconnect arrangements are g overned by regulations of the TRAI and interconnect agreements that we have with many of these other operators. The TRAI is also responsible for ensuring technical compatibility among operators. Effective May 1, 2003, under the authority’s interconnection usage charges regulation, interconnect charges have been established for all major types of interconnection based on a “calling party pays” principle. See “—License Fees and Network Utilization/Interconnection Arrangements” and “—Telecommunications Regulation in India.” |
26
Recently Introduced Services and Capacity Upgrades
We have been focusing on the expansion of existing mobile and broadband services in both Delhi and Mumbai to provide high speed internet, high quality video and new generation wireless services. Recent additions included:
· | 500 K 2G GSM capacity added in Delhi. |
· | 250 K 3G capacity installed in Delhi. |
· | 500K 2G GSM capacity commissioned in Mumbai. |
· | 500K broadband equipment (200K in Mumbai and 300K in Delhi) installed. |
Services Under Development
We plan to add one million lines in net switching capacity including capacity for WLL and GSM and 120,000 KMs. of optical fiber in Delhi and Mumbai in fiscal 2011. Our other plans include:
· | GSM capacity expansion - We placed a PO for the expansion of 1000K 2G/3G GSM capacity in Delhi and Mumbai with Motorola and ITI, respectively. All the equipment has been deployed except for 500K equipment in Mumbai which is being installed. |
· | DWDM - We placed a PO for the supply of 42 terminals (20 Delhi and 22 Mumbai) of 40 channels 10 GB/channel DWDM equipment to strengthen our transmission network. The installation of the equipment is in the final stages and should be completed by the end of calendar 2010. |
· | Convergent billing - We are installing a state of the art convergent billing and CRM system. This will facilitate CDR based billing, single bill for all services to the subscribers, flexibility in billing and innovative tariff packages for subscribers and thus should help in reducing billing complaints. Presently, the printing of bills and IUC billing in Delhi is being done on converged billing platform. We have also commissioned interconnect billing (with offline data), printing solution, and Call center for CDMA and BB. The convergent billing system is under active testing phase. Software SIT and trial run of GSM / CDMA LOB is in progress in Mumbai. The remainder of LoB will be commissioned as needed. |
· | Wi-Max – We have been allotted 20 MHz spectrum in TDD mode for providing Broadband Wireless Access (BWA) service. In August 2009, we floated an Expression of Interest (EOI) for the launch of WiMax 802.16e networks in Delhi and Mumbai on revenue share basis. After finalization of spectrum auction prices by DOT, we made certain changes in the eligibility requirements of the EOI and extended the date for submission of the bids. We also paid Rs.4,533.97 crore for the BWA spectrum allotted in Delhi and Mumbai. Our plan to launch WiMax based Wireless Broadband Services. An EOI is under finalization. |
· | FTTH (Fiber to the home) – We are adding optical fibre in our access network and are planning to introduce FTTH based on GPON so as to provide customers with fibre connectivity to their homes. This will help them meet their increased bandwidth requirements for both data and video applications. We have placed an advance purchase order for the FTTH equipment. A techno commercial evaluation report for FTTH passive tender is under approval. |
27
New projects to be taken up in the near future.
· | NGN Class V / IMS - we plan to introduce NGN Class V services. This will help replace TDM switches in a phased manner. A tender for has been invited, and we are in the process of clarifying vendor queries. |
· | IP-MPLS- we have deployed strong IP MPLS network to meet the requirements of CWG-2010 in Delhi. After October 2010, the equipment will be redeployed in Delhi and Mumbai to create a strong IP-MPLS backbone to meet IP/data traffic, including the requirements of business customers. |
· | NLD (National Long Distances) Service- we have a license for operating NLD Services, and are planning to establish NLD hubs in 15 major cities, including Delhi and Mumbai. The existing NGN switch in Delhi will be augmented to handle NLD Services. |
· | ILD (International Long Distance) Service- we have an ILD Service License and plan to upgrade the existing NGN switch in Mumbai to meet ILD service requirements. |
· | Carrier Ethernet- we are planning to deploy carrier Ethernet technology in our transmission networks in Delhi and Mumbai to meet the IP/Pocket data carriage requirements of our enterprise customers. This will gradually replace the TDM based SDH technology which is becoming obsolete. |
Telecommunications Services in Other Countries
We have been selectively targeting expansion opportunities outside India where we hope to leverage our expertise and relationships in an effort to expand our overseas operations. Currently we are in the process of exploring the potential in a few Asian and African countries. United Telecom Limited, a joint venture involving MTNL (26.68%), Telecommunications Consultants India Limited (26.66%), VSNL (now Tata Communications Ltd) (26.66%) and Nepal Ventures Private Limited (20%), provides wireless in local loop services as well as basic, mobile, NLD, ILD and data services, as the first private-sector telecommunications operator in Nepal. As of April 2010, the customer base was approximately 437,000 and our network covered 36 of the 75 districts of Nepal. Through our Mauritius subsidiary, MTML ( Mahanagar Telephone Mauritius Limited), we provide basic and international long distance service as well as mobile services in Mauritius and have begun to offer fixed wireless services, mobile services, international long distance services and Internet services. We intend to continue the build out of our network there to provide additional services and are seeking to expand the capacity of the core network.
Revenues
Fixed-Line Services. Tariffs, or usage charges, consist of charges for local, domestic long distance and international calls. Usage is measured by pulses, which are time-based units of measure, metered at the relevant exchanges. Pulses vary, depending on one or more factors. Local call pulse duration depends upon the type of network on which the call is terminating (i.e., fixed, GSM cellular or CDMA mobile) and the subscriber plan chosen, while domestic long distance call pulse duration depends upon the call distance, type of network on which the call is terminating and whether the call is within a regional circle or between two circles. International call pulse duration varies depending upon the country of destinati on. For operator assisted domestic and international calls, a slab system of tariffs applies which differs depending upon the speed at which the call is completed. The subscriber is billed at a fixed price per pulse that depends upon the subscriber plan chosen and usage volume (low usage customers are offered a lower price per pulse). We currently offer several fixed-line plans, tailored to meet the needs of different user profiles.
For fixed-line services, customers also pay access charges consisting of a one-time refundable security deposit, installation charges and monthly subscription/rental charges.
28
We have adopted a policy not to reduce our basic tariffs and related charges unless in a response to tariff reductions by competitors. However, since the 1999 tariff order, the TRAI has in several stages significantly reduced tariffs on domestic and international long distance calls. Effective July 20, 2002, international long distance call rates were reduced by about 40% and effective October 2, 2004 national long distance call rates were reduced varying up to 60% for various designations Because we retain the remainder of prices of domestic and international long distance calls originating on our network, net of interconnect charges, by lowering long distance rates the tariff reductions have reduced the revenue we receive per call. While these rate reductions have been part of a “rebalancing” effort aimed at reducing cross-subsidization between long distance (historically priced at a premium) and local calls (historically subsidized) by at the same time phasing out subsidization of local calls, the negative impact of the long distance rate reductions have to date outweighed any positive impact of other aspects of the tariff rebalancing effort. Also effective May 1, 2003, as part of its effort to reduce subsidies, the TRAI changed the standard plan that we must offer all customers by increasing monthly rentals for basic services by 12% from Rs.250 to Rs.280, reduced the local call pulse duration (for calls made to fixed and fixed wireless lines) from three minutes to two minutes and the number of free monthly call pulses.
GSM Cellular Services. We offer our GSM cellular subscribers in Delhi and Mumbai a choice of several plans, tailored to meet the needs of different user profiles. One of the plans is the standard plan, which, under TRAI regulations, we are required to offer all customers and the terms of which the authority establishes. Generally, in addition to call charges for local and long distance calls, our plans include the following types of charges: refundable, non-interest bearing security deposit; installation charges; monthly rental charges; and airtime charges. Effective February 1, 2004, with the adoption by the TRAI of the interconnection usage charge regulation and the “calling party pays” principle, charges for inco ming cellular calls (other than any roaming charges) have been eliminated. In addition, we provide the following value-added services free to all our GSM cellular subscribers: national roaming, call forwarding/divert, call hold, call waiting, caller identification, conference call facility and WAP rental.
However, airtime charges on use apply to these services. In addition, we offer our GSM cellular subscribers value-added services like SMS, voice mail, WAP, CRBT, GPRS/MMS, missed call alert and content-based SMS for a fee.
In fiscal year 2002, we introduced pre-paid GSM cellular services under the brand name “Trump” in Delhi and Mumbai. This market is also highly competitive, with rates changing with market conditions.
Broadband Service. We started offering Broadband service in January 2005 to subscribers in Delhi and Mumbai with choice of several plans, tailored to meet the needs of different user profiles. Generally, in addition to usage charges for usage and data download, our plans include the following types of charges: non-interest bearing security deposit; installation and testing charges; monthly DSL usage charges, monthly rental for modem, if provided by us.
Internet Protocol Television (IPTV). We started offering IPTV service in October 2006 to subscribers in Mumbai and in November 2006 to subscribers in Delhi.
Voice over Internet Protocol (VOIP). We started offering Prepaid VOIP service in August 2007 to subscribers in Delhi and Mumbai.
Video Phone Services. We launched Video Phone Services on a regular basis in April 2008 for the Mumbai service area.
3G Services. We launched 3G services for the Delhi service area in February 2009 and for the Mumbai service area in June 2009. The salient features are as follows:
· | making video calls |
· | the HSDPA card on offer will support data download speeds up to 3.6 Mbps, data upload speeds up to 384 Kbps and SMS services |
· | it will be downward compatible, i.e. it will support 2.75 and 2.5G data services |
The technical specifications of the MTNL compatible cards and names of the vendors are:
1) | M/S BTTL (HUAWEI MAKE) E156G |
29
· | up to 3.6. MBPS DL and 384 KBPS UL |
· | frequency Single Band: UMTS 2100 MHZ GSM/GPRS/EDGE: 850/900/ 1800/1900 MHZ |
· | data/SMS support |
2) | Capitel Wireless |
· | up to 7.2 Mbps DL and up to 2 Mbps UL |
· | frequency single band: WCDMA 2100 MHZ GSM/GPRS/EDGE:850/900 /1800/1900 MHZ |
“Pay per second” plans. In December 2009, we introduced “pay per second” plans for GSM service in the Delhi and Mumbai service areas. Competitive reasons and market conditions led us and other operators to offer these plans.
Blackberry Services. Effective April 24, 2010, we introduced 2G and 3G Blackberry unlimited data plan and reduced the cost of handset for Delhi. We had previously introduced Blackberry services on a promotional basis. Our Blackberry Service provides the user with wireless access to a full suite of business applications like email, phone, SMS, MMS, browser, organizer, instant messenger, social networking and more, on a single Blackberry Smartphone.
Leaseline Services: In May 2005, we implemented leased line tariff at par with BSNL under revised tariff ceilings prescribed by the TRAI.
CDMA Services. For CDMA mobile services, including the use of a CDMA handset, our subscribers are charged a refundable security deposit, a monthly charge and a monthly handset rental, in addition to airtime charges. We have not charged users for incoming calls. We offer our CDMA mobile subscribers a choice of several plans, tailored to meet the needs of different user profiles. Following commissioning in July 2006 of CDMA 20001X system in Mumbai, which has mobility between Mumbai and Navi Mumbai, we provide the following value added services free to all our CDMA subscribers: call hunting, call waiting, caller identification, STD/ISD dynamic lock, call forwarding, three-party conference, abbreviated dialing, voice mail service, internet connectivity, data card for Internet connectivity, conference call and dynamic locking.
We started new Garuda (CDMA) mobile connection by giving RUIM cards for postpaid/prepaid Garuda connections since April 2007 to subscribers in Delhi and since December 2007 to subscribers in Mumbai.
We offer different tariff plans and value added services to cater to and fulfill the need of the various segments of customers.
Other Services
For access to narrow-band ISDN services, we charge our subscribers a monthly rental and no registration fee. Subscribers can also have primary rate access for an initial fee. Usage charges for local, domestic long distance and international calls are the same as for the basic fixed-line telephone.
Tariffs charged by public telephone operators for telephone usage are at a fixed rate of Rs.1.00 per pulse, of 60 seconds for local calls and long distance pulse durations varying depending upon the distance.
We do not charge any registration fees for our Internet access services. Our Internet access fees have been falling considerably in response to competitive pressures. Internet users do not have to subscribe for Internet services. They can access the service and later be billed on the basis of calling line identification usage.
Subscribers for point-to-point leased line services are charged an annual fee based on the type of service offered, the distance between the points and the duration of the lease entered into by the subscriber.
30
License Fees and Network Utilization/Interconnection Arrangements
License Fees and Network Utilization Charges. The DOT periodically adjusts the license fees and network utilization charges. The license fee had been revised at 10% of Adjusted Gross Revenue with effect from April 1, 2004. The license fee for the NLD (national long distance) and ILD (international long distance) service license which we have obtained is 6% of AGR. A license fee on Internet services of 6% of AGR has been in effect since January 2006.
Cellular License Fees and Spectrum Allocation Charges. Each Indian cellular service provider operating in top-tier circles, including us, currently pays a cellular license fee of 10% of adjusted gross revenues received from its cellular services plus spectrum charges of 2% of adjusted gross revenues for up to 4.4 MHz of spectrum allocation and 3% of adjusted gross revenues for spectrum allocation of up to 6.2 MHz and 4% of adjusted gross revenue for spectrum allocation of up to 8 MHz. The license fee has been revised from April 2004 at 10% of AGR.
As of April 1, 2010, the DOT revised these Spectrum Charges for CDMA and GSM Access network of Telecom Service. See “Telecommunications Regulation in India- Revised Spectrum Charges for CDMA and GSM” below.
Private telecom operators have challenged this order of the DOT in the Honorable TDSAT and obtained stay orders. The stay is applicable to the operators who approached the tribunal. We have also requested the DOT to allow us to pay the spectrum charges in accordance with the earlier rates to maintain a level playing field, and are awaiting a response from the DOT.
Unified Access License. In November 2003, the DOT issued guidelines for Unified Access Licenses which cover within a service area both basic telecommunications services and cellular services. In the Indian context, “basic telecommunications services” or “basic services” include basic fixed-lined access service and a number of other telecommunications services, other than long distance services, cellular service and Internet access. Basic services also include CDMA-based fixed wireless and mobile services (without roaming).
We have submitted a request to the DOT to migrate to UAS Licenses for our service area under mobile licenses for Delhi and Mumbai to be able to provide services at par with other operators in these areas.
In September 2006, the DOT did not accept our request for migration of our CMTS Licenses to UAS Licenses as our operating cellular service in the licensed area. In October 2006, we sought reconsideration and grant of permission for migration to UAS Licenses. In April 2008, in-principal approval has been received to use CDMA technology under the existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai Service Areas. We conveyed to the DOT our acceptance to use CDMA technology (in addition to GSM technology being used by us) under the existing CMTS License for Delhi and Mumbai Service Areas.
The DOT accepted our request to migrate to Unified Access Services Licenses and also issued Amendment to License Agreements regarding spectrum allocation using dual technology for Delhi and Mumbai service areas. As the DOT amended our CMTS license for the use of dual technology i.e. both GSM and CDMA, we withdrew our request of migration to USAL from CMTS license. We can now also provide roaming services to CDMA subscribers.
Interconnection Usage Charges Regulation. The TRAI established Interconnection Usage Charges (IUC) and Access Deficit Charges (ADC) regimes through “The Telecommunication Interconnection Usage Charges Regulation 2003” (1 of 2003) dated January 24, 2003. These regimes became effective in May 2003. The above regimes were reviewed and the revised IUC and ADC regimes were notified through “The Telecommunication Interconnection Usage Charges Regulation, 2003” (4 of 2003), dated October 29, 2003 which superseded the earlier Regulations referred above and became effective February 2004. This became the principal regulation, and it has been amended from time to time keeping in view the TRAI’s emphasis on consistent decline in tariffs to g ive sustained boost to subscriber growth and teledensity.
Through the principal regulations and subsequent amendments a framework was established for initiation, continuance and phasing out of ADC through an elaborate consultative process. The framework briefly described the ADC regime as a depleting regime that was phased out from October 1, 2008 and, from the 2008 fiscal year, any further support required would be from the Universal Service Obligation Fund (USOF).
31
The latest amendment is IUC Regulation 2009 (2 of 2009) issued by TRAI on March 9, 2009 and implemented effective from April 1, 2009. The salient features of this Regulation are as follows:
· | Termination charges for Local and NLD calls were reduced from Rs.0.30 to Rs.0.20 per minute. |
· | Termination charges for incoming ILD calls were increased from Rs.0.30 to Rs.0.40 per minute. |
· | TAX transit charges for intra circle calls are less than Rs.0.15 per minute instead of less than Rs.0.20 per minute. |
· | Level II TAX transit charges for intra circle calls are Rs.0.15 per minute instead of less than Rs.0.20 per minute. |
Port Charges Regulation: In fiscal year 2007, the TRAI issued the Regulation on Port Charges (1 of 2007) and applicable from April 1, 2007, considerably reducing port charges.
As Regulation 1 of 2007 of TRAI in relation to payment of port charges was believed contrary to the judgment of the Hon’ble TDSAT, dated April 27, 2005 and March 3, 2005, BSNL has filed an appeal against these regulations. We also impleaded into this case. On May 28, 2010, the Honorable TDSAT decreed its final judgment in favor of BSNL, but provided that BSNL would not be entitled to claim any amount in terms of the judgment from private telecom operators during the appeal period. This condition is also applicable to us because we had supported BSNL’s appeal. We have filed an appeal in Supreme Court challenging the proviso of the TDSAT decision and claiming that we are entitled to the payment by the private telecom operators towards port charges at the agreed rates and in terms o f the interconnect agreements between the parties for this entire period.
Network Utilization. We finalized the charges for network utilization and domestic long distance agreements with BSNL. Until October 30, 2006, NLD carriage charges were paid as per TRAI IUC Regulation and effective November 2006 are at the negotiable rates. These rates are not applicable to NLD for traffic between Delhi and Mumbai, which is routed on our own leased bandwidth.
We are responsible for collecting payments for calls from our subscribers and bear the risk of non-collection of these charges. Until the May 1, 2003 effectiveness of the interconnection usage charges regulation, we did not receive any payments for calls coming into our network from BSNL’s network. BSNL has also established its Trunk Automatic Exchanges (TAXs) at Delhi and Mumbai. All the other private operators of Delhi and Mumbai have established interconnection with these TAXs and consequently we have stopped transiting their long distance calls to minimize the risk of bad debts.
Long Distance Interconnect Arrangements. We have signed interconnect agreements with several private-sector domestic long distance service providers. Until March 2010, we had relied on BSNL to route substantially of our domestic long distance calls. Since April 2010, we started routing our long distance traffic through private NLD operators also on the basis of bidding process.
International Long Distance Interconnect Arrangements. Although we have signed interconnect agreements with several international long distance carriers, earlier we were routing all our international calls through VSNL (now Tata Communications Ltd). In April 2009, on the basis of tender, or an open competitive bidding process, we allowed Tata Telecommunications, Aircel and Reliance Infocomm to carry outgoing long distance traffic. Now, international traffic is offered to ILD operators through a tender.
Interconnect Arrangements with Other Cellular, Basic Service Providers and Unified Access Service Providers in Mumbai and Delhi. We have entered into interconnect agreements with the other cellular, Unified Access and basic service providers in Mumbai and Delhi to formalize our network integration with them. In addition to usage-based interconnect charges, each cellular/unified/basic service operator in Delhi and Mumbai pays us an annual fee for lines leased from us to connect to our network.
32
Interconnection for Intelligent Network (IN) Service. The TRAI issued IN Regulations, 2006 (13 of 2006) dated November 27, 2006, which had to be implemented by February 27, 2007.
We signed the addenda to the interconnect agreement for IN service with Idea Cellular, Reliance Infocomm, Tata Teleservices, Bharti Airtel, Vodafone, Aircel, Unitech, Data Com (now Videocon Telecommunications Ltd) Etislat DB Telecom Private Limited, and Sistema Shyam Teleservices Ltd. (and for UAN services with Tata Teleservices), which enables the subscribers to access the toll free services of the other operators and vice versa.
However, IN agreements with a few private operators for bringing PAN-India calls, originated in their network, to our toll free numbers are yet signed as these operators are insisting on carrying charges for such types of calls in addition to the revenue share for IN calls to our toll free numbers.
The above case regarding the payment of carrying charges in addition to the revenue share with private operators for bringing calls from their service areas outside Delhi and Mumbai has been taken up with the TRAI. We have conveyed to the TRAI that the payment of additional carriage charges to any operator is not acceptable to us.
Customers and Customer Service. We classify our subscribers by use level and estimate that in the last three months of fiscal year 2010, approximately 47% of our access lines in service accounted for 8% of our call units. The following table sets forth certain information with respect to our subscribers for the final three months of fiscal year 2010:
Average number of | Average call units | ||
Subscribers per segment as | per segment as a | ||
Subscriber segments | a percentage of total | percentage of all | |
(use of pulses on a bi-monthly basis) | Subscribers | metered calls | |
0-100 | 40.70 | 2.54 | |
101-500 | 38.47 | 26.54 | |
501-1,000 | 12.81 | 24.01 | |
1,001-2,000 | 5.81 | 21.23 | |
2,001-5,000 | 1.90 | 14.48 | |
Greater than 5,000 | 0.31 | 11.20 |
Our general marketing strategy is to stimulate demand for telephone services in order to increase average usage and revenue per line in service. We have identified high usage subscribers as “commercially important persons” and are taking initiatives to strengthen our relationship with these individuals. These initiatives include regular visits and conducting surveys to obtain feedback and determine client-specific needs and introduce value-added services tailored to commercially important persons. Also, in certain areas we have constructed a digital local loop network with better quality transmission dedicated for use by commercially important persons. Some of the commercially important persons are also being connected to our network via fiber-in-local-loop technology. ;We also use visual media and print advertising to educate the general public about our telephone services and other value-added services.
No single subscriber accounted for more than 5% of our revenues in fiscal year 2008, 2009 or 2010. Government of India entities in the aggregate constitute the largest user of our services. We deal, however, with the various departments and agencies of the government of India as separate subscribers and the provision of services to any one department or agency does not constitute a material part of our revenue.
Our subscribers are billed by mail or courier once every billing period. Subscribers with access to long distance service are billed monthly; subscribers with access to local services only are billed bi-monthly. We have introduced four billing cycles in respect of each billing period which enables us to bill different subscribers at different times in the billing period. Cycle billing reduces the burden on the billing system at any particular time of the month and provides more consistent cash flow.
33
Billing is computerized and processing takes place at decentralized bill processing facilities with printing at conversion billing facilities in Delhi and Mumbai for ease of operation and better handling of customer complaints. A subscriber can inquire by an automated telephone service or at one of our customer service centers to determine the amount of his bill. Payment may be made by mail or at a collection center such as a national bank or a customer service center. Payments may also be made under our voluntary deposit scheme, where customers set up an interest bearing deposit with us, or under our electronic clearance system, where payment is directly debited from the subscriber’s bank account. We have also introduced a program through which subscribers can pay bills through the In ternet or at any of our Tele-mart centers. We allow subscribers to pay bills using a credit card and at the post office, and plan to allow subscribers to pay bills at local merchants and through other mechanisms to improve bill collection and remittance. We have also launched a new web-based service email bill alert for delivery of telephone bills on email.
We have developed our billing system jointly with Tata Consultancy Services in Delhi and Mumbai. This billing system is a part of a customized software program known as a “customer service management system.” The billing system is an integrated revenue billing system, which includes pre-connection and post-connection services, accounting, billing collection and access to subscriber records. Other benefits of this system are one point data capture for all subscribers, increased efficiency and reduction of lead time to process queries. This system enables our staff to handle, at a single point of contact, various activities “on-line” such as registration of a new telephone connection, change of address and category, issuance of work orders, issuance of duplicate bills, requests fo r transfer of telephone for domestic long distance and international connectivity, collection of payments of bills, status of outstanding bills, and monitoring of subscriber complaints.
Payment is due within 21 days from the date of issue of the bill. If the charges are not paid on time, we generally give a reminder by telephone after the due date, cut off all services after 35 days from the date of issue of the bill. Subscribers with large amounts overdue may have their telecommunications services terminated earlier. Subscribers are charged a surcharge on amounts overdue after 21 days (with maximum surcharge being Rs.2,000).
We provide operator assisted services, including value-added products such as wake-up calls, as well as operator connected and reverse charge calls to all of our subscribers. In addition, we provide free operator assisted directory services. Our strategy is to continue to enhance the level of subscriber satisfaction by increasing access to operators and improving the quality of subscriber interface, while also improving operational efficiency and productivity. We have also launched 3G, Black Berry, Wi-Fi and Wi-max services during the year to sustain competition and provide better services to the customers. We published a Delhi directory in March 1999 and a Mumbai directory in February 2000. Both of these directories are available free of charge on our website. We have introduced directory i nformation on CD-ROMs, which are available for Rs.50 each, as well as an on-line directory inquiry service which is available to telephone users with personal computers and communication software
Our service centers also provide various types of services such as registration for new connections, shifting telephone connections, billing information and collection of bill payments. We have customer service centers in many locations in both Delhi and in Mumbai. Generally, three to five employees provide these services in each center.
Insurance
We maintain comprehensive insurance for our assets under a single comprehensive policy renewable annually. The policy is renewed in July of each year. We do not anticipate having any difficulty in renewing our insurance policies and believe our insurance coverage is reasonable and consistent with industry standards in India.
Competition
One of the primary objectives of the 1999 telecom policy was to encourage competition within India’s telecommunications industry. Accordingly, we have been encountering increased competition in each of our markets as existing and additional service providers actively seek to penetrate these markets through the introduction of high quality products and services.
34
In October 2008, we made a request to the DOT to permit us to use dual technology (both GSM and CDMA) under the existing CMTS license for the service areas of Delhi and Mumbai instead of migrating to UASL from a CMTS license.
The 1999 telecom policy allows the DOT to license, at its discretion, multiple additional basic and cellular service providers in any service area. Under a Unified Access Service License, such competitors as Reliance Infocomm, Bharti Airtel, Tata Teleservices Limited, Idea Cellular Ltd., Aircel Limited, Unitech Wireless Limited and Etisalat DB Telecom are currently competing with us for Basic and GSM services in both Mumbai and Delhi and Videocom Telecommunication Limited is currently competing with us for GSM services in Mumbai. All of these companies already have significant telecommunications infrastructure in Delhi and Mumbai, including, with respect to Tata Teleservices, Reliance Infocom and Sistema Shyam in low-cost CDMA mobile and fixed wireless technology. With approximately 47% of o ur call units having been derived from approximately 8% of our access lines in service (last three months of fiscal year 2010), we are particularly vulnerable to losing market share if these or other new operators aggressively target our largest subscribers.
We experience significant competition in the market for GSM cellular services. As of March 2010, we had approximately 13% and 16% of the mobile subscribers in Delhi and in Mumbai, respectively. Our largest competitors in Delhi are Bharti Airtel, Idea Cellular, Vodafone, Aircel, Sistema Shyam and Etisalat DB Telecom. In Mumbai, our main competitors are Bharti Airtel, Vodafone, BPL Mobile (now Loop Mobile), Idea Cellular, Aircel Sistema Shyam, Etisalat DB Telecom and Videocon. Cellular operators also face significant competition from rapidly growing CDMA-based mobile services, which are priced considerably lower than GSM cellular services.
We commenced providing our Internet services in Delhi and Mumbai in February 1999. The competition among Internet service providers throughout India is intense with approximately 378 licenses for providing Internet services issued as of July 31, 2010.
In June 2008, we entered the international long distance business. Our revenues from international calls are adversely affected by competition from “call-back” services. Call-back services were officially declared illegal by the Ministry of Communications in July 1995. Nevertheless, the volume of international calls made from India through call-back services has continued to grow.
On September 23, 2009, the TRAI issued “Telecommunication Mobile Number Portability Regulations (MNP), 2009” which allows subscribers to retain their existing mobile number when they move from one service provider to another service provider on payment of certain charges and on fulfilling certain other conditions. These regulations were to be implemented by December 31, 2009 in our license areas. The DOT decided to extend the time line for implementation of MNP to October 31, 2010. Management believes that the movement of subscribers from one service provider to another service provider increases competition between the service providers and would act as a catalyst for the service providers to improve their quality of service. This could have a material effect both favorable and adverse on our business, financia l condition and results of operations.
On November 20, 2009, the TRAI issued the Telecommunication Mobile Number Portability Per Port Transaction Charge and Dipping Charge Regulations, 2009 (9 of 2009). The salient features of the MNP under these regulations are as follows:
· | The Per Port Transaction charge shall be Rs.19/-. |
· | The Dipping charge is left to mutual negotiation between the telecom service providers and the respective MNP service providers. |
· | Porting charge, i.e. the amount to be paid by the subscriber, shall not be more than the per port transaction charge, i.e. Rs.19/-. The operators are free to charge any amount less than or equal to this charge. |
35
Increased competition, as well as significant consolidation of the telecommunications industry in India, has kept and will likely continue to keep downward pressure on prices and has required and will likely continue to require us to increase our capital investment to improve and expand our services. These developments, in turn, have had and may continue to have a negative impact on our profitability. In the tariff order, no minimum tariff levels are specified and service providers have the flexibility to determine the tariff below the maximum levels. Our board of directors has decided not to reduce fixed line tariffs unless such a reduction is in response to a tariff reduction by a competitor. However, the TRAI may prescribe minimum tariffs or prohibit providers from reducing tariffs in res ponse to competition. Additionally, the tariff order prescribes tariffs based on the estimated cost to provide particular services. These estimates and corresponding tariffs may not accurately reflect our actual costs.
In order to compete with other basic and cellular operators and Internet service providers, we are increasingly focused on the timely introduction of new and improved products and services and pay increased attention to customer service. An inability to compete effectively would also damage our longer-term business prospects through loss of customers and market share.
If recommendations on Internet Telephony for permission to ISPs are approved by the government of India, then calls may become cheaper and with increased competition in the Indian telecommunications industry. These recommendations permit ISPs to provide Internet telephone calls to PSTN/PLMN and vice-versa within India; interconnection with NLD operators for unrestricted internet telephony; and permit NLD operators to connect with ISPs through public Internet. See “Telecommunications Regulation in India - Internet Policy” below.
LEGAL PROCEEDINGS
Except as described below and except with respect to regulatory proceedings described elsewhere, we are not currently a party to any material legal or arbitration proceedings or disputes.
Deduction of Claim of Benefit U/S 80IA for New Undertakings.
Pursuant to section 80IA of the Indian Income Tax Act, 1961 a company, which starts to operate telecommunication services at any time on or after April 1, 1995, but before March 31, 2000, is entitled to a tax holiday for a period of 10 years beginning with the year in which such services are started. Pursuant to the tax holiday, 100% of the profits derived from such services are exempt from tax in the first five years, and 30% of such profits are exempt from tax for the next five years. On the basis of advice from our legal counsel, we have historically claimed such benefit. Our claim have been rejected at the first appellate level and the case has been referred to the Committee of Disputes, which is a body formed by the Government to settle disputes between Government controlled undertakings and the Government. The Committee has refe rred the case to the Tax appellate authorities for reconsideration. During the 2006 fiscal year, the case has been set aside by the Income Tax Appellate Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has referred the matter back to the Assessing Officer for a fresh assessment after hearing the case again. For the years ending up to and including March 31, 2006, considering that the benefit claimed by us in the above years may not be ultimately allowed by tax authorities, the provision for current taxes in these years had been accounted in the basis of normal tax rates. During the 2007 fiscal year the assessing officer has made fresh assessment for calculation of deduction under section 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to us. We have filed appeals against that partial allowance to the higher authority. Also refer note 23iii(b)(ii) to notes to the consolidated financial stat ements.
During the 2008 fiscal year, we received refunds from Income Tax Authority in respect of penalty levied for the 1996, 1997, 2001 and 2002 fiscal years. These penalties pertained to the claims we had made under section 80IA of the Indian Income Tax Act. The penalty amount has been refunded by the income tax department along with interest thereon which has duly been accounted for in our statement of income for the 2008 fiscal year.
During the 2009 fiscal year, the Assessing Officer allowed partial refunds in respect of deductions under section 80IA for assessment years 2001-02 and 2003-04.
During the 2010 fiscal year, the Honorable ITAT allowed deduction under section 80IA for six assessment years (1998-99, 1999-00, 2000-01, 2001-02, 2002-03 and 2005-06) to exempt up to 75% of the income we earned from services. The Income Tax Authorities have refunded the tax amount of Rs.2,819 million (including interest of Rs.1,361.84) for assessment year 1998-99, and the rest of the years are pending. We have filed a further appeal during the 2011 fiscal year in Honorable High Court of Delhi for a 100% claim under section 80IA, based upon the treatment of BSNL which is similarly situated.
36
Disputes with BSNL
In accordance with the Interconnect Usage Charges Regulations, we accounted for networking charges payable to BSNL amounting to Rs.6,924 million and Rs.3,627 million for the 2004 and 2005 fiscal years, respectively. However BSNL had raised a bill for the interconnection charges for the calls originating from our network and terminating/transiting at/from BSNL amounting to Rs.12,165 million and Rs.8,030 million for the 2004 and 2005 fiscal years, respectively. Our contention was that the claim was not adequately supported by BSNL and hence not accepted by us.
In the absence of an interconnection agreement, we had provided NLD/ILD access charges for the period ended March 31, 2002 at the rates lower than those demanded by BSNL. Subsequent to the 2004 fiscal year, in a meeting held among the DOT, BSNL and us, the rates for NLD calls for the 2002 fiscal year were agreed upon, and accordingly we have accounted additional liability of Rs.233 million during the 2004 fiscal year.
During the 2006 fiscal year, the DOT constituted a three member committee from its Telecommunications Department comprising the Member (Production), Member (Finance), and Deputy Director General (Business Solution) to resolve the issues relating to networking charges. Based on the recommendations of the Committee in their minutes dated January 2006, the networking charges payable to BSNL for the years March 31, 2004 and March 31, 2005 have been settled at Rs.14,078 million as against Rs.10,551 million. Further, the Committee has also settled networking charges for the 2000 to 2003 fiscal years in the meeting held in January 2006. Accordingly, an amount of Rs.3,809 million (including the incremental charge of Rs.3,527 million for the 2004 and 2005 fiscal years) has been accounted as networking charges in the statement of ope rations for the 2006 fiscal year.
Subsequent to the 2006 fiscal year, meetings have been held between BSNL and us wherein BSNL has raised additional claims for the year up to March 31, 2005 aggregating Rs.2,678 million and claims amounting to Rs.5,256 million for the 2006 fiscal year on account of networking and others charges. As against these claim for the 2006 fiscal year, we have accounted Rs.4,040 million for networking charges payable to BSNL.
Our contention is that since all claims relating to networking and other charges for the period up to March 31, 2005 have already been settled in accordance with the minutes of the DOT committee held on January 2006 and the claims for the 2006 fiscal year were not adequately supported by the BSNL, and hence not accepted by us. Further, as we are in the process of discussing/reconciling with BSNL its claims for the 2006 fiscal year and may be required to pay an additional amount based on the final settlement, however such payments will not have a material adverse effect upon our results of operations, financial condition and cash flows. Management believes that an adverse outcome in respect of the above is unlikely.
During the 2006 fiscal year, we raised claims against BSNL for duct charges, TAX claims and reciprocal service claims amounting to Rs.2,116 million, Rs.2,482 million and Rs.320 million, respectively. The duct charges pertain to annual usage of infrastructure (ducts) for the period October 1, 2000 to March 31, 2006, the TAX claims pertain to our Trunk Automatic Exchange (“TAX”) used by BSNL for the period from February 1, 2004 to March 31, 2006 and the reciprocal service claims are on account of Reciprocal Service Connections provided to BSNL employees for the period October 1, 2000 to March 31, 2006. Management has not recognized these claims as income in the statement of operations considering the history of other disputed claims with BSNL the fact that currently there is no separate agree ment for these services, and that BSNL has not accepted these claims. During the 2007 fiscal year, we raised claims against BSNL for duct charges and TAX uses charges amounting Rs.478 million and Rs.1,251 million, respectively. We have not recognized these claims as income in the statement of operations considering the history of other disputed claims with BSNL, that currently there is no separate agreement for these services, and that BSNL has not accepted these claims, though BSNL has accepted that it uses the ducts and the TAX.
During the 2008 fiscal year, we raised claims against BSNL for duct charges and TAX usage charges amounting to Rs.515 million and Rs.546 million, respectively. We have not recognized these claims as income in our statement of operations considering the history of other disputed claims with BSNL, that currently there is no separate agreement for these services and that BSNL has not accepted these claims.
37
During the 2009 fiscal year, we raised claims against BSNL for duct charges and tax usage charges amounting to Rs.522.12 million and Rs.1,223.55 million, respectively. We have not recognized these claims as income in our statement of operations as BSNL has rebutted such claims.
During the 2010 fiscal year, we had raised bills on BSNL for infrastructure charges amounting to Rs.403.17 million and for electricity and other charges amounting to Rs.86.12 million, which has not been rebutted by BSNL. Management believes that the income claimed will be recoverable from BSNL. Accordingly, these amounts have been recognized as income in our statement of operations. Further, during the 2010 fiscal year, we had raised claims against BSNL for tax usage charges amounting to Rs.700.83 million. We have not recognized these claims as income in our statement of operations due to absence of any interconnect agreement with BSNL.
Disputes with the DOT
On the formation of the Company, employees were deputed to us on deemed deputation status from the DOT and we were required to contribute for the Leave Salary and Pension Contribution (“LSPC”) pursuant to the rates prescribed by the Government (11% for leave salary and 14% for pension contribution). We had accrued for these expenses amounting to Rs.2,885 million for the period 1986 to 1998, and subsequently paid them to the DOT.
During the 2006 fiscal year, a Committee was set up to examine the amount of LSPC contributions payable by us to the DOT. The Committee concluded that an additional amount of Rs.656 million was payable on account of short payment of the LSPC contribution and an amount of Rs.1,738 million is payable on account of interest payable on delayed payment of the LSPC contributions. We accepted the claim of the DOT for Rs.656 million and we had expensed it in our statement of income for the 2006 fiscal year. In respect of Rs.1,738 million, we have contested the claim from the DOT on the contention we had abided by the DOT’s decision at all stages and deposited substantial sums as required. During the 2009 fiscal year, the DOT had requested various information from us, which we supplied to the respective u nits of the DOT. In connection with this, the terms and conditions as laid down in fundamental rules and service rules (FRSR) of the government of India with regard to prior intimation of calculation of contribution of the pension amount have not been communicated to us, and management believes that an adverse outcome in respect of the above is unlikely.
Other Disputes
We have resolved the disputed issues with the Central Tax Authority of India regarding our deducting license fees paid by us to the DOT.
In 1998, M&N Publications made claims against us for Rs.5,415 million. These claims arose out of contracts for the printing of telephone directories for Delhi and Mumbai, and include claims for loss of reputation and loss of business opportunities. We asserted counterclaims of Rs.4,169 million against M&N Publications for failure to perform the contracts. These claims are pending before a sole arbitrator. We believe that we have valid defenses to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
In the 2005 fiscal year, Alcatel brought claims against us aggregating Rs.151.53 million (including interest from 1996 on the claims made of Rs.103.89 million) at March 31, 2010. These claims arose out of contracts for supply of digital local telephone exchange equipment, and include claims for loss of reputation and loss of business opportunity. We believe we have a valid defense to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
We have received claims aggregating Rs.424.11 million (including interest) at March 31, 2010 from various PRM service providers (World Phone, Voice Infotech and ITC). These claims arose from the contracts for PRM services, which were started in the 2000 fiscal year. We had not paid commission payable for these services to these providers, as the amount was subsequently not recovered from the subscribers. The claims include Rs.119 million towards loss of profit and wasteful expenditure incurred by the parties. We believe we have a valid defense to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
38
We have received claims from CMC Limited aggregating Rs.644.88 million (including interest) at March 31, 2010. These claims arose out of the usage of leased circuits for which we have charged them rent for CUG services pursuant to the revised tariff plan which is disputed by CMC Limited. These claims include claims for loss of reputation, business opportunity and undue harassment aggregating to Rs.220 million. We believe we have a valid defense to these claims and, based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
We have received claims from M/s Haryana Telecom aggregating Rs.150.25 million (including interest) at March 31, 2010 for a dispute in respect of reduction of notified rates for supply of PIJF cables to us against DOT T.E. No. 14-21/94-MMT(MMS), which claims also seeks interest at the rate of 24% per annum from June 1997 through the date of payment. We believe we have a valid defense to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
Additionally, at March 31, 2010, we were also involved in law suits and claims amounting to Rs.3,587 million pending at various authorities which arose in the ordinary course of the business. Management believes that we have valid defenses against these claims and adverse outcomes are unlikely. These law suits and claims would not have a material adverse effect upon our results of operations, financial condition and cash flows.
Dispute with Other Operator
During the 2005 fiscal year, we noticed that a very large number of calls were received from certain levels of another operator’s network. On further investigation/analysis, it came to our notice that these were actually ILD calls, which were being received on Local/NLD trunks and that the CLIs (Caller line Identification) of these calls had been tampered by the other operator. We raised a demand on the other operator based on the relevant penal clauses of its agreement aggregating Rs.3,412 million for a period of six months beginning April 2004. The other operator has disputed the above claim and under repeated threats of disconnection, obtained a stay order from High Court of Delhi. In the 2005 fiscal year, during the course of the hearings, the honorable High Court directed the other operator to pay Rs.2,368 million to us. During the 2007 fiscal year, the other operator under directions from the honorable High Court has further deposited Rs.1,040 million with U.S. During the 2007 fiscal year, the petition filed by the other operator before the High Court has been dismissed as withdrawn with the liberty to take such in accordance with law. Management believes that it is a remote possibility that these amounts will have to be refunded. However, these amounts have not been recognized as income.
4C. | Organizational Structure |
We are controlled by the Indian government and are not part of any group.
We have no subsidiaries which are considered “significant subsidiaries”.
4D. | Property, Plants and Equipment |
Infrastructure
We believe that we have created one of the most technologically advanced networks in India. Our network capacity is growing rapidly, and as of March 31, 2010 we had a total capacity of approximately 11.9 million lines.
We operate entirely separate but similar networks in each of Delhi and Mumbai. Each network comprises a switching and transmission network, which we refer to as our “switching network” and a local loop network. The local loop network principally consists of copper wire based lines, connecting subscribers to the main exchanges or the remote line units. A number of subscribers are connected to the switching network via fiber-optic cable and wireless-in-local-loop technology. The switching network includes the trunk automatic exchanges, which are used for routing domestic long distance and international calls, the main switching exchanges, through which all calls are routed, and remote line units, which are connected to the main exchanges. The local loop network comprises all connections between the main exchanges or the remote line units and the subscriber. Subscribers are either connected directly to the main exchanges or, depending upon the distance from the main exchanges, via remote line units. All domestic long distance traffic, including traffic between Delhi and Mumbai, is routed through BSNL’s network.
39
Overview of Our Network
At March 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
Delhi | ||||||||||||||||||||
Access lines in service (access lines in service) (thousands) | 1,621 | 2,999 | 3,181 | 3,586 | 3,942 | |||||||||||||||
Equipped capacity (thousands) (1) | 4,219 | 4,385 | 5,135 | 5,135 | 5,847 | |||||||||||||||
Number of exchanges: | ||||||||||||||||||||
TAXs (2) | 4 | 4 | 4 | 4 | 4 | |||||||||||||||
Main exchanges and RLUs (3) | 336 | 336 | 342 | 344 | 342 | |||||||||||||||
Digital lines (thousands) (1) | 4,219 | 4,385 | 5,135 | 5,135 | 5,847 | |||||||||||||||
Digitalization rate (4) | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Mumbai | ||||||||||||||||||||
Access lines in service (access lines in service) (thousands) | 2,256 | 3,668 | 4,028 | 4,470 | 4,649 | |||||||||||||||
Equipped capacity (thousands) (1) | 4,217 | 4,717 | 4,734 | 5,734 | 6,092 | |||||||||||||||
Number of exchanges: | ||||||||||||||||||||
TAXs (2) | 4 | 4 | 4 | 4 | 4 | |||||||||||||||
Main exchanges and RLUs (3) | 193 | 202 | 210 | 216 | 212 | |||||||||||||||
Digital lines (in thousands) (1) | 4,217 | 4,717 | 4,734 | 5,734 | 6,092 | |||||||||||||||
Digitalization rate (4) | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
(1) | Represents lines that are connected to digital switches. |
(2) | TAX means trunk automatic exchange, a switch that routes calls to BSNL’s domestic fixed-line network and VSNL’s international gateways. |
(3) | RLU means remote line units, which are switches that connect a subscriber to the main exchange. |
(4) | Percentage of total equipped capacity that consists of digital lines. |
Switching Equipment
All of our exchanges are fully automated and our switching capacity is 100% digital. As of March 31, 2010, our switching network consisted of 342 nodes in Delhi and 212 nodes in Mumbai. Each node has a capacity of between 1,000 and 100,000 lines.
At March 31, 2010, there were 92 main exchanges and 250 remote line units in Delhi and 80 main exchanges and 132 remote line units in Mumbai. Because one or more main exchanges in each node are connected to one or more main exchanges in every other node, traffic is routed in a “mesh” configuration. We have also installed high capacity tandem switches in Delhi and Mumbai to more efficiently route traffic between exchanges. A majority of calls to our main exchanges are now being routed through the tandem switch to another node. This has resulted in a more integrated network and has reduced the amount of capital expenditure required to install additional capacity in our switching network.
Each node is connected to each trunk automatic exchange. Interconnection to basic service providers, private cellular operators and Internet service providers is provided by dedicated access to the main exchanges or tandem switches. Our entire switching network is connected by fiber optic links.
40
Transmission
Our transmission network has considered largely of plesiochronous digital hierarchy, or PDH, and synchronous digital hierarchy, or SDH, optical fiber. PDH and SDH are transmission standards for digital signal transmission. However, in order to improve and upgrade our network efficiency, we are replacing our old PDH transmission network with SDH.
In addition, in order to provide a converged IP network for all services, in the 2008 fiscal year we commissioned a state of art IP/MPLS core network in Delhi and Mumbai. This network is currently carrying our Broadband, IPTV and GSM traffic. We also are providing Layer 2 and 3 VPN services through this network. We are working on the expansion of this IP/MPS network so as to further extend the IP reach of this network.
Access Network
We construct our access network with copper cable, which is extended to distribution points to terminate connections. We have commenced deploying five pair underground cable into subscribers’ premises where an internal distribution point is installed. We believe this access network will reduce the number of telephone poles and improve reliability of the service.
We have also implemented fiber-to-the-curb/building access and offer increased bandwidth for business and high usage subscribers. Fiber-to-the-curb/building is also intended to supplement existing copper wire with optic fiber. We have provided digital loop carriers, or DLCs, for this purpose.
We have installed wireless-in-local-loop services using CDMA technology where feasible in Delhi and Mumbai as a substitute for fixed-line access to enhance basic service penetration, provide quicker installation and cover areas where the installation of cable would not be economical.
Quality of Our Network
We are meeting most of the Quality of Service (QoS) parameters for PSTN, GSM, CDMA, Internet and Broadband services, which are prescribed by the TRAI. These are comparable with other telecom service providers based upon various QoS reports issued from time to time by the TRAI.
QoS improvement is a continuous process. For further improvement in QoS, we have undertaken the following:
· | Improving the legacy PSTN Network by change of cables, drop wire etc. as required |
· | Rehabilitating outdoor network to reduce fault rate and MTTR |
· | Providing new RSUs/ DLCs are being provided to reduce faults |
· | In cellular network measures, like BTS addition, undertaking capacity augmentation and upgradation, antenna tilting, optimization of network and drive test on a continuous basis. |
We conduct an ongoing program to improve the quality of services offered. Our principal quality measures are call completion rate and fault rate. The table below shows the quality improvements we have made since our inception in 1986. We achieved this primarily by focusing on improvements to our switching network. Part of our local loop network is comprised of old paper core copper cables, which are a principal cause of network faults. We are in the process of upgrading and replacing copper access lines and believe that this has had a positive impact on call completion rates and fault rates.
41
Year Ended March 31, | ||||||||||||||||||||||||
1986 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
(inception) | ||||||||||||||||||||||||
Fault rate/100 (1) Telephones/month: | ||||||||||||||||||||||||
Delhi | 34.9 | 10.7 | 9.4 | 6.5 | 6.7 | 7.7 | ||||||||||||||||||
Mumbai | 21.2 | 8.4 | 10.5 | 9.3 | 9.1 | 7.3 | ||||||||||||||||||
Call completion rate (2) | ||||||||||||||||||||||||
Delhi | ||||||||||||||||||||||||
Local calls | 77.3 | % | 47.3 | 48.3 | 52.8 | 50.5 | 53.0 | |||||||||||||||||
Domestic long distance calls | 30.0 | % | 33.6 | 38.5 | 43.5 | 48.4 | 48.7 | |||||||||||||||||
Mumbai | ||||||||||||||||||||||||
Local calls | 93.0 | % | 55.1 | 56.7 | 54.4 | 53.2 | 53.9 | |||||||||||||||||
Domestic long distance calls | 23.9 | % | 36.6 | 37.0 | 45.6 | 48.9 | 50.7 |
(1) | The fault rate is calculated by dividing the total number of verified customer complaints of malfunctioning telephone equipment and services by the total number of access lines in service and multiplying the result by 100. |
(2) | For dates covering years after 1986, the call completion rate was measured on the basis of actual calls completed. Call completion rates measured on this basis are lower than if measured on a free-to-free test basis since calls that are not answered because the recipient’s line is engaged or where the network cannot complete the call because of congestion are deemed incomplete. Call completion rates measured on different bases are not comparable. |
Suppliers
In carrying out our development program, we have used a core group of international equipment suppliers to purchase key switching equipment in order to maintain technological compatibility while simultaneously decreasing dependence on any one vendor. We believe that we have developed stable relationships with our suppliers.
Development Activities
Development activities are carried out by a planning group in each of the Delhi and Mumbai operations, with overall planning activity coordinated at the corporate office in Delhi. The main focus of each planning group is the expansion of existing services, the development of new services and the introduction of new technologies that are tested for their reliability, compliance with internal and DOT technical specifications and compatibility with our network.
GSM Cellular and CDMA Networks
We launched our cellular services using GSM technology in Delhi and Mumbai in February 2001, and as of March 31, 2010, had an installed capacity of 25.25 lakh lines in Delhi and 28.25 lakh lines in Mumbai. We believe that current penetration rates remain attractive for continued high growth in subscriber base. In fiscal year 2008, we had awarded a tender for adding two million lines of GSM capacity in each of Delhi and Mumbai, of which full capacity has already been commissioned in Delhi and 500K capacity is under installation in Mumbai.
In addition, we have launched lower-cost CDMA-based limited mobility services each in Mumbai and Delhi, and presently have a total of approximately 1.83 lakh subscribers with an installed capacity of approximately 10.92 lakh, most of which are based on more advanced CDMA 2000 1X technology). We believe that this new limited mobile service will enable us to target a wider customer base that is more price sensitive than GSM customers and that does not require India-wide and international roaming facilities. We intend to compete effectively in these growing markets by providing high quality service at affordable rates. Our CDMA mobile service is marketed under the brand name Garuda. The DOT accepted our request to migr ate to Unified Access Services License and also issued Amendment to License Agreements regarding spectrum allocation using dual technology for Delhi and Mumbai service areas. We can now provide roaming services to CDMA subscribers.
42
Network Modernization
We have historically planned our capital expenditures on five-year programs that are subject to approval by the DOT and the Planning Commission of the Indian government. The Eleventh MTNL Plan is the five-year investment plan covering the period from April 1, 2007 to March 31, 2012. Generally, five-year plan investment targets are much higher than actual investment levels. Additionally, rapid changes in communications technology and customer preferences render detailed investment planning for five years impossible.
Our current estimate for capital expenditures for fiscal year 2011 is Rs.12,041 million; however, based on our experience in past years, we expect that the actual amount of capital expenditures for the year will be less than our estimate.
The following table shows our network-related capital expenditures for the periods indicated.
(Rs. in millions) Year Ended March 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
Local switching and access lines (including CDMA)/ | ||||||||||||||||||||
Transmission/network modernization/expansion abroad | 4,241 | 4,460 | 5,107 | 5,098 | 4,955 | |||||||||||||||
Information technology | 124 | 1,730 | 52 | 817 | 281 | |||||||||||||||
Land, buildings and vehicles | 881 | 817 | 926 | 790 | 889 | |||||||||||||||
Build-out of GSM cellular networks | 1,608 | 951 | 3,239 | 2,006 | 5,955 | |||||||||||||||
3G and BWA license fees | - | - | - | - | 110,980 | |||||||||||||||
Total | 6,854 | 7,958 | 9,324 | 8,711 | 123,060 |
We have funded our recent capital expenditures to the extent incurred, and intend to fund the remaining capital expenditures, primarily from cash flow from operations and existing cash balances. Our capital expenditures may be higher as we introduce international long distance service, if demand for our GSM cellular service or CDMA-based mobile service is higher than anticipated or if we otherwise enter new markets or provide additional services.
Properties
Our principal executive offices are located in Delhi and are leased from the Life Insurance Corporation of India. We have interests in various properties in Delhi and Mumbai that consist of land and buildings for offices, administrative centers and technical facilities. We believe that all of our owned and leased properties are well maintained and adequate for their present use.
In 1987, the assets and properties of the DOT located in Delhi and Mumbai were transferred to us by an order of the government of India and a deed of sale with a consideration of Rs.9,000 million paid by us. Indian law generally requires that to perfect the transfer or lease of real property, the transfer should be evidenced by a formal duly stamped deed of transfer and registered with the Central Land Registrar within a specified period after the execution of the deed of transfer or lease. A formal transfer deed for real property of the DOT transferred by the government of India to us has been executed but has not been registered with the appropriate authorities. The formal transfer deed and the physical delivery of possession of the DOT’s non-real estate assets has resulted in the transfer of t hese non-real estate assets of the DOT to us in Delhi and Mumbai. We believe that our use of these properties is not affected by the fact that this deed has not been registered with the appropriate authorities.
Indian law requires payment of stamp duty (at rates which vary among states) on instruments, which effect transfer of title to real estate or in respect of leases of real estate. Applicable stamp duty has not been paid in respect of any of the properties acquired or leased by us. Accordingly, we may be liable for stamp duty and related penalties if a deed is executed by us in the future under the applicable rates of stamp duty and penalty payable in the state where the property is located (other than with respect to the DOT properties acquired from the government of India as at March 30, 1987). All liabilities for stamp duties in respect of the DOT properties acquired by us from the government of India as at March 30, 1987 are to be borne by the government of India. We have been advised by o ur counsel that, although we have valid possession (including the risks and rewards of ownership) and title to all of our property, we need to have certain documents relating to transfer or lease of real property duly registered and stamped to enable us to perfect and thereby acquire marketable title to real property in our possession. In preparing our financial statements, the provision for this stamp duty has been made on a best estimate basis.
43
Intellectual Property
Intellectual property rights are not important to our operations.
TELECOMMUNICATIONS REGULATION IN INDIA
The Telecom Regulatory Authority of India
In March 1997, the Indian government established the TRAI, an independent regulatory authority under the provisions of the Telecom Regulatory Authority of India Act. The TRAI is an autonomous body comprised of a chairperson and not more than two full-time members and not more than two part-time members appointed by the Central government, and has primary responsibility for making non-binding recommendations to the DOT, either at the request of the DOT or on its own, as to:
· | the need for and the timing of the introduction of new service providers; |
· | the terms and conditions of licenses to new or existing service providers; |
· | revocation of existing licenses for non-compliance |
· | measures to facilitate competition and promote efficiency to facilitate growth in the industry; |
· | technology and equipment improvements in providers’ infrastructures and in the industry generally; |
· | ensuring compliance of providers with license terms; |
· | ensuring technical compatibility between providers; |
· | regulating revenue sharing between providers; |
· | establishing quality standards and ensuring compliance through periodic reviews of providers; and |
· | determining time schedules pursuant to which providers will establish inter-connection between their networks. |
The TRAI also has the authority to, from time to time, set the rates at which domestic and international telecommunications services are provided in India. The TRAI does not have authority to grant licenses to service providers or renew licenses (those functions remain with the DOT). The TRAI, however, has the power to:
· | call upon service providers to furnish information relating to their operations; |
· | appoint persons to make official inquiries; |
· | inspect books; and |
· | issue directions to service providers to ensure their proper functioning. |
44
The TRAI had previously acted in both a regulatory and an adjudicatory role. Failure to follow TRAI directives may lead to the imposition of fines. The Indian government has amended the provisions of the Telecom Regulatory Authority of India Act providing a separate adjudicative body called the Telecom Disputes Settlement and Appellate Tribunal, also known as the Appellate Tribunal, to adjudicate disputes between
· | a licensor (i.e., the DOT) and a licensee; |
· | regulator and service providers; |
· | two or more service providers; and |
· | between a service provider and consumer advocacy groups. |
Additionally, the government of India, any Indian state or local government or any person may apply to the Appellate Tribunal for adjudication of any of the disputes listed above or appeal any order of the TRAI to the Appellate Tribunal.
Unified License
In July 2003, the TRAI issued a consultation paper on, among other things, introduction of a unified telecommunications license, under which it would be possible for a telecommunications service provider to provide both basic services and cellular services. The consultation paper also addressed the possibility of licensing the provision of international and national long distance services and internet services under this one unified license.
On October 27, 2003, the TRAI recommended that considering the vision of the government of India through various policies (e.g., NTP94, NTP99, Convergence Bill), technological development, market trends, international trends, the need to accelerate growth of telephone density, public interest and for the proper conduct of the Service/telegraphs, and also recommended that within six months a “Unified Licensing” regime be initiated for all services covering all geographical areas using any technology.
On November 15, 2003, the government of India accepted the TRAI’s recommendations implementing unified licensing for all telecom services within a time bound manner, starting with unified access licensing. Based upon those recommendations, the DOT issued guidelines for Unified Access (Basic and Cellular) Service License through their letter No.808-26/2003-VAS dated November 11, 2003.
New Telecom Policy 1999 and Subsequent Developments
In March 1999, the Indian government introduced its 1999 telecom policy, which sets forth a new policy framework for telecommunications regulation in India. One of the stated goals of the 1999 telecom policy was to foster greater competition in the telecommunications industry. To that end, the 1999 telecom policy liberalized the regulation of the industry by allowing multiple basic service providers in any service area, with the number of new entrants and their mode of service to be determined by the government of India. It also allowed direct interconnectivity and sharing of infrastructure between a basic service provider and any other type of service provider in its area of operations. Such service providers must negotiate the terms of any interconnection.
In addition, the 1999 telecom policy provided that either the DOT (now operating through BSNL) or us may be licensed as an additional cellular operator in any service area it wishes to enter. Additional cellular service operators may be licensed in the future, based on the recommendation of the TRAI, following its ongoing review (to occur at a minimum of at least once every two years) of frequency spectrum utilization by existing providers, the optimal use of available spectrum and the requirements of the market, competition and the public interest.
Further, the 1999 telecom policy stated that competition in the international long distance market will be reviewed and VSNL (now Tata Telecommunications Ltd) will no longer have monopoly in this field. The Indian government opened this market for competition in April 2002. Licenses have been granted to a few companies like the Reliance Infocomm Limited, Bharti Televentures Limited, BSNL and us. After the change in the terms and conditions to grant ILD licenses effective January 2006, many operators obtained an ILD license for the provision of international long distance services. A total of 24 LD licenses have been granted as of March 31, 2010.
45
The 1999 telecom policy stated that the Indian telecommunications industry must expand at a significantly greater pace and the Indian government must liberalize regulation commensurate with worldwide trends in order for the Indian telecommunications industry to fully develop in terms of technology, services, quality and market penetration. As the teledensity in India has reached a level of more than 56% as of June 2010, the industry has achieved a major requirement of the country in terms of policy objectives.
The recommendations of the 1999 telecom policy, and certain important subsequent developments, are as follows:
Basic Services, including CDMA-based Fixed Wireless and Mobile Services
The 1999 telecom policy permits direct interconnectivity between basic service providers and any other type of service provider (including another basic service provider or a cellular service provider) in their areas of operation and sharing of infrastructure with any type of service provider. It allows the basic service providers to directly interconnect with VSNL after the opening up of national long distance service from January 1, 2000. The basic service providers have been permitted to utilize last mile linkages or transmission links within its service area made available by other service providers.
In accordance with the 1999 telecom policy, the TRAI undertook a review of interconnectivity between providers in different service areas. In July 2002, the authority adopted a reference interconnect offer regulation which included the model reference interconnect offer/draft agreement and the reference interconnect offer guidelines. Pursuant to this, service providers are permitted to interconnect with other service providers on the basis that they shall not discriminate as to the terms and conditions offered to different service providers. Effective May 1, 2003, the authority implemented a regulation providing a complete set of interconnect usage charges. The regulation adopts a calling party pays principle, so that the operator responsible for origination of a call bears liability for pay ment of the interconnect fees for transmission and/or termination.
In January 2001, the DOT issued guidelines for basic services, including provisions for wireless access systems limited within the local area. In April 2001, the Indian government announced that all basic licensees, including us, may offer wireless-in-local loop services under their basic service licenses. On August 26, 2005, the DOT clarified that fixed wireless service has the character of limited mobile service and, therefore, is categorized into limited mobile service within the scope of a basic service license.
Currently, the basic service license is not being provided to new operators, only cellular service and Unified Access service licenses (UASL) are being granted to new entrants. UASL operators can provide basic services along with mobile services. Currently, we and BSNL are the only basic service providers in our respective licensed service areas.
Cellular Service
The 1999 telecom policy also provides for greater competition among cellular service providers. The government of India proposes to review spectrum utilization from time to time in view of emerging spectrum availability, optimal use of spectrum, market requirements, competition and the public interest. The TRAI will provide recommendations to the government of India with respect to new licenses at least every two years.
The 1999 telecom policy permits direct interconnectivity between licensed cellular service providers and any other type of service provider (including another cellular service provider) in their area of operation including sharing of infrastructure with any other type of service provider. The cellular service providers have been allowed to directly interconnect with the VSNL after opening of national long distance from January 1, 2000. Interconnectivity between service providers in different service areas is now governed by the July 2002 reference interconnect offer regulation and the May 2003 interconnection usage charges regulation. With the interconnection usage charges regulation and related tariff changes, the TRAI introduced the calling party pays principle, resulting in the elimination of custom er charges (other than roaming charges) for incoming cellular calls.
46
Unified Access License
In November 2003, the DOT issued guidelines for Unified Access Licenses which cover within a service area both basic telecommunications services and cellular services. In the Indian context, “basic telecommunications services” or “basic services” include basic fixed-lined access service and a number of other telecommunications services, other than long distance services, cellular service and Internet access. Basic services also include CDMA-based fixed wireless and mobile services (without roaming).
We have submitted a request to the DOT to migrate to UAS Licenses for our service area under mobile licenses for Delhi and Mumbai to be able to provide services at par with other operators in these areas. In April 2008, in-principle approval has been received to use CDMA technology under the existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai Service Areas. We conveyed to the DOT our acceptance to use CDMA technology (in addition to GSM technology being used by us) under the existing CMTS License for Delhi and Mumbai Service Areas.
The DOT accepted our request to migrate to Unified Access Services Licenses and also issued Amendment to License Agreements regarding spectrum allocation using dual technology for Delhi and Mumbai service areas. As the DOT amended our CMTS license for the use of dual technology i.e. both GSM and CDMA, we withdrew our request of migration to USAL from CMTS license. Now, we can also provide roaming services to CDMA subscribers.
Domestic Long Distance
On August 13, 2000, the Indian government published guidelines for the liberalization of the domestic long distance market subsequent to which applications were received for domestic long distance licenses. The Bharti Group and Reliance Group have been awarded domestic long distance licenses. These guidelines do not restrict the number of new entrants into this market, but entrants must satisfy a number of requirements.
In addition, entrants into the domestic long distance market must pay a one time entry fee of Rs.1 billion and provide bank guarantees of Rs.4 billion which will be refunded upon completion of their network obligations.
Effective January 1, 2006, the Government, with a view towards promoting growth of NLD service and also to encourage competition, reduced the entry fee from Rs.100 crore to Rs.2.5 crore and annual license fee from 15% to 6% of AGR , modified and simplified the terms and conditions for NLD service. As a result, there were 79 NLD licensees on March 31, 2010.
In May 2006, we were awarded a license for providing national long distance (NLD) service. Since June 2006, we have carried our own domestic long distance service between Mumbai and Delhi on leased bandwidth.
International Long Distance
The Indian government has issued licenses to several private sector companies for the provision of international long distance services.
In December 2005, the Government, with a view to promote growth of ILD service and also to encourage competition, reduced the entry fee, annual license fee, modified and simplified other terms and conditions for ILD services. As a result, there were 24 ILD operators on March 31, 2010.
In June 2008, we received a license to provide ILD service.
Other Service Providers
New Telecom Policy (NTP) 1999 for providing application like tele-banking, telemedicine, tele-trading, tele-education, e-commerce and call centres. Other Service Providers (OSPs) are allowed to operate by using infrastructure provided by various Access Service Providers. Such OSPs are required to be registered with the DOT.
47
Effective September 2007, the Government decentralized the registrations of call centres (Domestic and International) under the ‘Other Service Provider’ (OSP) category and the Telemarketers under ‘Telemarketing’ category from the Department of Telecom (Headquarters) to the respective Vigilance Telecom Monitoring (VTM) Cells of 10 circles in the first phase. The decentralization of registration has been successful and pendency has come down. Therefore, registration under OSP/Telemarketing was decentralized further to all VTM Cells with effect from June 1, 2008.
Infrastructure Providers
In June 2007, we registered with the DOT to provide Infrastructure Provider Category-1 (IP-1). Companies registered as IP-1 can provide assets such as Dark Fiber, Right of Way, Duct space and Tower.
Provision of Internet, Broadband, Internet telephony and IPTV services by Access Providers
Internet Policy. The government of India passed the Information Technology Act, 2000 to facilitate the development of a secure environment for electronic commerce. This Act establishes a regulatory authority for electronic commerce, provides legal validity to information in the form of electronic records and permits, unless otherwise agreed, an acceptance of a contract to be expressed by electronic means of communication. It facilitates electronic intercourse in trade and commerce by providing the legal framework for authentication and origin of electronic record/communication through digital signature and eliminates uncertainties over writing and signature requirements.
We believe that as of July 31, 2010 approximately 378 licenses had been issued for providing Internet services issued in India.
The National Broadband Policy 2004 has the target of 20 million broadband connections by the end of year 2010, however, only 8.75 million connections are working by the end of March 31, 2010. In order to ensure the growth of Broadband, the TRAI has initiated a consultation process.
Internet telephony had initially not been permitted in India. In December 2005, it was decided that access service providers can provide Internet telephony, Internet services and Broadband services. If required, access service providers can use the network of NLD/ILD service licensee.
IPTV Service. We have launched IPTV service to our customers of our available fixed line network as Value Added Service in Mumbai in October 2006 and in Delhi in November 2006 under Basic Service License as Value Added Service.
Internet Telephony. Since August 2007, we have been offering Prepaid Internet Telephony service to subscribers in Delhi and Mumbai.
IP-II and ISPs with IP-VPN Licenses. The Government has decided to do away with IP-II and IP-VPN licenses. Existing IP-II/IP-VPN licensees will be allowed to migrate to NLD/ILD service license. Effective January 2006, ISP with Internet telephony (Restricted) charged license fee at 6% of AGR. IP-II licensees not interested in migrating to NLD/ILD are not permitted to provide National/International leased line/bandwidth to individual subscribers as per existing IP-II license guidelines. IP-VPN licensees not interested in migrating to NLD/ILD are not permitted to carry voice traffic over VPN network.
VSAT commercial. Annual license fee charged at 6% of AGR effective January 2006.
MPLS Services (Multi-Protocol Label Switching). In July 2007, we launched MPLS Service. MPLS is a backbone for our various IP Based Services.
Keeping with our trend of introducing modern and latest technologies at affordable rates to our customers, we utilize IP based MPLS Technology to offer world class IP-VPN (Virtual Private Network) services. MPLS was developed to provide faster data packet movement than traditional IP routing.
48
The technology enables secure VPN to be built and allows scalability that will make it possible for us to offer assured growth to our customers without having to make significant investments. We are now geared to provide bandwidth on demand, IPTV, Video Conferencing, Voice Over IP (VoIP) and a host of other value added services that could significantly change the way a corporate business works.
Standards of Quality of Service Regulations. In fiscal year 2009, the TRAI issued the Telecommunication the Standards of Quality of Service of Basic Telephone Service (wireline) and Cellular Mobile Telephone Service Regulations, 2009, dated March 20, 2009, and revised the benchmarks for various QOS parameters for these services and services. These regulations became effective as of July 1, 2009.
Mobile Number Portability. In May 2009, the DOT issued instructions regarding requirements to provide Mobile Number Portability (MNP). On September 23, 2009, the TRAI issued “Telecommunication Mobile Number Portability Regulations (MNP), 2009” which allows subscribers to retain their existing mobile number when they move from one service provider to another service provider on payment of certain charges and on fulfilling certain other conditions. On November 20, 2009, the TRAI issued the Telecommunication Mobile Number Portability Per Port Transaction Charge and Dipping Charge Regulations 2009(9 of 2009). The DOT decided to implement MNP by October 31, 2010.
Revised Spectrum Charges for CDMA and GSM
On February 25, 2010, the DOT revised the Spectrum Charges for CDMA and GSM Access network of Telecom Service as follows:
Amount of GSM spectrum | Amount of CDMA spectrum | Spectrum charges as a percentage(%) of Adjusted Gross Revenue |
Up to 2 x 4.4 MHz | Up to 2 x 5.0 MHz | 3% |
Up to 2 x 6.2 MHz | Up to 2 x 6.25 MHz | 4% |
Up to 2 x 8.2 MHz | Up to 2 x 7.5 MHz | 5% |
Up to 2 x 10.2 MHz | Up to 2 x 10.0 MHz | 6% |
Up to 2 x 12.2 MHz | Up to 2 x 12.5 MHz | 7% |
Up to 2 x 15.2 MHz | Up to 2 x 15.0 MHz | 8% |
The Tariff Order
Effective May 1, 1999, the TRAI implemented The Telecommunications Tariff Order 1999. The intention of the tariff order was to protect consumers by aligning tariffs that telecommunications providers may charge for the service provided while ensuring the commercial viability of the various service providers and so encouraging the expansion of the Indian telecommunications industry. This “rebalancing” of tariffs took place in stages.
Since October 2004, we have reduced drastically the ISD tariff. We increased the pulse rate between Delhi and Mumbai for Basic to WLL(M) of our network from 30 sec. to 180 sec. uniform for all plans excluding One India Plan. For all other places STD rate is flat Rs.1.20 per minute from Fixed, WLL (M) and STD rate for Cellular service is Rs.1.30/1.25 per minute for Mumbai/Delhi.
We have also reduced ILD tariff on promotional basis for our GSM postpaid and prepaid subscribers as under the GSM service license for the licensed service area for 90 days effective as of June 26, 2010 for Delhi and July 1, 2010 for Mumbai.
As per Tariff orders, tariff plans initiated by an Access Provider are to be available to a subscriber for a minimum period of six months from the date of enrollment of the subscriber to that tariff plan. The tariff order also prescribes a reporting requirement that a service provider must report any change in tariff to the TRAI within seven days from implementation.
49
Because we retain the remainder of prices of domestic and international long distance calls originating on our network, net of interconnect charges, by lowering long distance rates the tariff reductions have reduced the revenue we receive per call. We believe that, to date, the tariff order has not resulted in significantly higher long distance usage and that, accordingly, the tariff order has had a negative impact on our revenues and earnings as the lower charges have not been offset by higher usage.
The tariff order prescribes a reporting requirement such that a service provider must report any change in tariff to the TRAI within seven days from implementation.
The TRAI has fixed revised ceiling tariff for the most commonly used capacities/speed i.e. 64 kbps, 128 kbps, 256 kbps, E1 (speed of 2 Mbps), DS-3 (speed of 45 Mbps) and STM-1 (speed of 155 Mbps). The revised ceiling tariffs (for distance slab above 500 Km) in respect of DLC are summarized in the table below:
Capacity / Speed | Ceiling Tariff (Rs. in lakhs) |
64 Kbps | 0.44 |
128 Kbps | 0.79 |
256 Kbps | 1.36 |
E1 (2 Mbps) | 8.50 |
DS-3 (45 Mbps) | 62 |
STM-1 (155 Mbps) | 165 |
Foreign Direct Investment Controls.
The current Indian government policy on foreign direct investment (“FDI”) in the telecom sector is summarized as follows:
· | For basic Cellular, Value Added Services and Global Mobile Personal Communications by Satellite, FDI is permitted up to 49%, subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which the investment is being made) to the license conditions for foreign equity cap and lock-in period for transfer and addition of equity and other license provisions. |
· | For ISPs with gateways, radio paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. |
· | No equity cap is applicable to manufacturing activities. |
· | FDI up to 100% is allowed for the following activities in the telecom sector: ISPs not providing gateways (both for satellite and submarine cables); Infrastructure Providers providing dark fiber (IP Category I); Electronic Mail; and Voice Mail. |
The above policy guidelines would be subject to the following conditions: FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world; the above services would be subject to licensing and security requirements, wherever required; and proposal for FDI beyond 49% shall be considered by FIPB on case to case basis.
Item 4A. | Unresolved Staff Comments |
Not applicable.
50
Item 5. | Operating and Financial Review and Prospects |
You should read the following discussion in conjunction with the Item 3A. “Selected Financial and Operating Data, ”Item 3D. “Risk Factors” and our consolidated financial statements and the related notes, which appear elsewhere in this report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.
5A. | Operating Results |
Overview
A number of developments have significantly affected our operating results. These developments and a number of potential developments may affect our results of operations, liquidity, capital resources and capital expenditures in future periods. These developments include:
· | adoption of the comprehensive interconnection usage charges regulation based on the calling party pays principle, effective since May 1, 2003 and further revised from time to time; |
· | our expansion into new businesses such as providing cellular/3G service and CDMA-based fixed wireless and mobile services and the rapid introduction by several other operators of low-cost CDMA-based technologies that can be used for both fixed wireless and mobile services; |
· | growing competition; |
· | our expansion into foreign markets - to date, Nepal and Mauritius; |
· | new interconnect arrangements with international long distance carriers, including revenue sharing on incoming calls; |
· | industry consolidation; and |
· | our investment programs to expand and modernize our network. |
Potential future developments include:
· | increased competition from basic and cellular operators, including the continued rapid introduction by several operators of low-cost CDMA-based technologies that can be used for both fixed wireless and mobile services; |
· | continued consolidation in the industry; |
· | further rate reductions as a result of intensifying competition or tariff reductions; |
· | new interconnect agreements with private operators; |
· | license fee revisions, including revisions that may be applied retrospectively; |
· | further expansion and penetration of broadband; |
· | the benefits of our new International Long Distance License obtained in July 2008; |
· | possible direct or reverse merger with BSNL; |
· | the implementation of voluntary retirement schemes for our employees; and |
51
· | further regulatory changes. |
Our future results of operations are also likely to be affected by macroeconomic trends such as the rate of growth of the Indian economy, particularly in Delhi and Mumbai, and the introduction of new technologies and products by our competitors and us. Many of these factors are beyond our control. See Item 3D. “Risk Factors” in this report.
Critical Accounting Policies and Estimates
We have prepared the consolidated financial statements for the three fiscal years ended March 31, 2010 in accordance with US GAAP.
Our accounting policies are described in Note 2 of the Notes to our consolidated financial statements. Our consolidated financial statements which are part of this Annual Report are prepared in conformity with US GAAP, which require U.S. to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.
Recognition of Revenues. Revenues include amounts invoiced for call revenue, fixed monthly rental charges, roaming charges, activation fees, internet services, access and interconnection revenue and fees for value added services (‘VAS’). Revenues for fixed line and cellular telephonic services are recognized based upon metered call units (MCU) of traffic processed. Rental revenues and leased circuits rentals are recognized based upon contracted fees schedule. Revenues from internet services are recognized based on usage by subscribers. Revenues associated with access and interconnection for usage of our telephone network by other operators for local, national long distance and international long distance calls are recognized in accordance with the Interconnect Usage Charges Regulation released by the TRAI. The TRAI regulation specifies per minute rates for metered call units (MCU) of traffic terminated on our network. Revenues are shown net of service tax and applicable discounts and allowance. Unbilled receivables represent revenues recognized in respect of services provided from the last bill cycle date to the end of the year. These are billed in subsequent periods as per the terms of the billing plans. Billings in advance for services to be rendered and amounts charged for new connections are classified in current liabilities under the heading “Deferred income”. Amounts charged for new connections are recognized over the average life of the customer relationship. A significant portion of our revenue is derived from interconnect and access charges for calls terminating at our network. The related rules and t elecommunication industry related policies are framed and determined by the government of India through its departments and regulatory authorities such as the DOT and the TRAI. Since interconnect and access charges are presently governed by IUC regime, we have not entered into separate agreements with certain other operators. Any subsequent amendment to the presently applicable guidelines with retrospective effect relating to tariff and interconnect/access charges will impact our revenues significantly.
For the year ended March 31, 2010, a 10% increase or decrease in the rates for call revenue for Basic services, including public call office revenue, would have increased or decreased the total revenue by approximately Rs. 971.67 million. A 2% increase or decrease in metered call units in respect of fixed line call revenue, including public call office revenue, would have increased or decreased the total revenue by approximately Rs.194.34 million for the year ended March 31, 2010. Further, a 5% increase or decrease in rental charges would have increased or decreased the total revenue by approximately Rs.528.95 million, as applicable, while a 5% increase or decrease in rates for interconnection services would have increased or decreased the total revenue by approximately Rs135.74 million for the year ended March 31, 2010.
License Fees. We are paying license fee and spectrum charges to the DOT in accordance with conditions governing license fee for Basic Telephone Service and Cellular Telephone Service prescribed by the DOT under the Revenues Sharing Regime, whereby the license fee is computed as a specified percentage of adjusted gross revenue. The license fee is expensed as incurred. In view of the uncertain political environment and the fact that the license fee is determined on the basis of guidelines prescribed by regulatory authorities, the license fees is subject to change in the event any of these guidelines are modified subsequently with retrospective effect. During the year ended March 31, 2010, the applicable percentage of license fee was 10%. A change in the specified percentage to 12% or 8% would have increased or decreased the license fee charges by approximately Rs.632.70 million. Refer to the discussion in the “Comparison of Year Ended March 31, 2010 with Year Ended March 31, 2009 (as Restated)” below.
52
Network Charges. Charges associated with access to and interconnection to other operators’ network by us for local, national long distance and international long distance calls are recognized in accordance with the Interconnect Usage Charges Regulation released by the TRAI, where applicable, and in accordance with the terms of agreements entered into with other operators. TRAI regulation specifies per minute charges for metered call units (MCU) of traffic terminated on the other operators’ network. In view of the uncertain political environment and the fact that the network charges are determined on the basis of guidelines prescribed by regulatory authorities, the network charges are subject to change in the event any of these guidelines are modified subsequently with retrospective effect. Refer to the discussion in the “Comparison of Year Ended March 31, 2010 with Year Ended March 31, 2009 (as Restated)” below.
Pension and Other Retirement Benefits. We sponsor pension and other retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors, which attempt to forecast future events, are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by us, within certain guidelines. In addition, we also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions we used may differ materially from actual results due to changing market and economic condition s, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences and the fact we have not invested pension and other retirement benefit funds to cover retirement liability may result in a significant impact to the amount of pension and other retirement benefit expense recorded by us. During the 2008 year, we made an adhoc arrangement of medical scheme for retirees with effect from September 1, 2007. According to this ad hoc arrangement the respective units were allowed to settle such claims on case to case basis. This scheme was discontinued with effect from March 20, 2008; however, the employees who are under treatment will continue to get the benefits till discharge from the hospital. Effective October 2008, we implemented a Retired Employee Contribution Group Health Insurance scheme for a one year period, which has been extended till September 30, 2010.
Income Taxes. In accordance with the provisions of SFAS 109, Accounting for Income Taxes, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period such changes are enacted. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations. The enacted tax rate applicable to us was 33.99% during the year ended March 31, 2010. A 1% increase or decrease in the tax rate to 32.99% or 34 .99% would have increased or decreased the income tax expense for the year by Rs.NIL, since there is no taxable income.
53
As per section 80IA of the Indian Income Tax Act, 1961 a company, which starts to operate telecommunication services at any time on or after April 1, 1995, but before March 31, 2000, is entitled to a tax holiday for a period of 10 years beginning with the year in which such services are started. As per the tax holiday, 100% of the profits derived from such services are exempt from tax in the first five years, and 30% of such profits are exempt from tax for the next five years. We, on the basis of advice from our legal counsel, have historically claimed such benefit. Our claim had been rejected at the first appellate level and the case has been referred to the Committee of Disputes, which is a body formed by the Government to settle disputes between Government controlled undertakings and the Government. The Commit tee has referred the case to the Tax appellate authorities for reconsideration. During the year ended March 31, 2006, the case has been set aside by the Income Tax Appellate Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has referred the matter back to the Assessing Officer for a fresh assessment after hearing the case again. For the years ending up to and including March 31, 2006, considering that the benefit claimed by us in the above years may not be ultimately allowed by tax authorities, the provision for current taxes in these years had been accounted in the basis of normal tax rates. During the year 2006-07 the assessing officer made fresh assessment for calculation of deduction under Section 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to us. We have filed appeals against that partial allowance to the higher authority. Also refer to Note 23iii(b)(ii) to the notes to the consoli dated financial statements. During the year ended March 31, 2008, we received funds from Income Tax Authority in respect of penalty levied for the years 1995-96, 1996-97, 2000-01 and 2001-02. These penalty refunds pertain to the claims made by us under 80IA of the Indian Income Tax Act. The penalty amount was refunded by the income tax department along with interest thereon which had duly been accounted for in the statement of operations for the year ended March 31, 2008. An excess provision amounting to Rs.6,050 million were made to the tax expenses during the year ended March 31, 2008.
During the year ended March 31, 2008, the Assessing Officer allowed partial refunds in respect of deductions under Section 80IA for assessment years 2001-02 and 2003-04. During the 2009-10 fiscal year, the Honorable ITAT allowed our claim under section 80IA for six assessment years (1998-99, 1999-00, 2000-01, 2001-02, 2002-03 and 2005-06) to exempt up to 75% of the income we earned from services. The Income Tax authorities has refunded the tax amount Rs. 2819.00 million (including Interest of Rs.1361.84) for assessment year 1998-99 and rest of the years are in progress. We have filed further appeal in the year 2010-11in Honorable High Court of Delhi for a 100% claim under section 80IA, based upon the treatment of BSNL, which is similarly situated.
Legal Contingencies. As discussed in Note 23 to the notes to the consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened against us. We have accrued amounts as appropriate that represent our estimate of the probable outcome of these matters. The judgments we make with regard to whether to establish a reserve are based on an evaluation of all relevant factors by internal and external legal counsel, as well as subject matter experts and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Claims are continually monitored and reevaluated as new information is obtained. We may not establish a liability for a particular matter until long after the litigation is filed, once a liability becomes probable and estimable. The actual settlement of such matters could differ from the judgments made in determining how much, if any, to accrue. We do not believe these proceedings will have a material adverse effect on our consolidated financial position. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, our results of operations may be over or understated.
Recoverability of DOT Receivables. We are a Government company under the Indian Companies Act. As of March 31, 2010, the Government owned 56.25% of our issued share capital. Consequently, the Government, acting through the DOT, continues to control MTNL and will have the power to determine the outcome of transactions with the DOT or the assertion of claims against the DOT. We also provide and receive services to/from other Governmental departments and other public sector organizations on normal commercial terms. Refer to the notes to the consolidated financial statements for a further discussion on our related party transactions and significant risks and uncertainties. The receivables from the DOT constitu te a significant portion of our assets and our assessment of the recoverability of these assets involves critical accounting estimates. The assessments reflect management’s best assumptions and estimates. Significant management judgment is involved in estimating these factors, and they include inherent uncertainties. Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates may change from period to period. If other assumptions and estimates had been used in the current period, the balances for these assets could have been materially impacted. Furthermore, if management uses different assumptions or if different conditions occur in future periods, future operating results could be materially impacted.
Allowance for Accounts Receivable. We estimate the amount of uncollectible receivables each period and establish an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of customers, and other relevant information. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known.
54
Estimated Useful Lives of Property and Equipment. We estimate the useful lives of plant and equipment in order to determine the amount of depreciation expense to be recorded during any reporting period. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. Likewise, if the anticipated technological or other changes occur more slowly than expected, the useful lives could be extended. This could result in a reduction of depreciation expense in future periods. Further, property and equipment are being depreciated over their useful lives wh ich exceed the license term since the Company believes that its licenses will be extended beyond their current term.
Impairment of Long-Lived Assets. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review these types of assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over the remaining life of the asset or asset group. In order to determine if the asset or asset group is recoverable, we determine if the expected future undiscounted cash flows directly related to the asset or asset group are less than the carrying amount of the asset or asset group. If so, we then determine if the carrying amount of the asset or asset group exceeds its fair value. We determine fair value using estimated discounted cash flows. If impairment is indicated, the asset or asset group is written down to its fair value. Assets to be disposed are reported at the lower of the carrying value or the fair value less cost to sell. The discounted cash flows calculation uses various assumptions and estimates regarding future revenue - which is a factor of the future subscriber base and the average revenue per subscriber, expenses, terminal values of the assets and the cash flows projections over the estimated remaining useful life of the asset or asset group. These forecasts are subject to changes in external factors including adverse regulatory and legal rulings. We carried out an impairment review of our long lived assets in 2010. Based on our review, the expected future cash flows directly associated with the asset groups exceed their carrying amount and hence there is no impairment of long lived assets in 2010.
Impairment of Held to Maturity Securities. We invested Rs.1,000 million in 8.75% cumulative preference shares of ITI Limited (“ITI”) and Rs.2,500 million in bonds issued by Maharashtra Krishna Valley Development Corporation (“MKVDC”), a wholly-owned subsidiary of Government of Maharashtra.
The ITI share purchase agreement includes a provision for a letter of comfort from Department of Telecommunication (Government of India) to us endorsing the investment and also provides us a right to set off amounts receivable in respect of principal outstanding from the amounts payable to ITI in connection with our purchase of exchanges and cable supplies.
As of September 30, 2009, ITI had not redeemed the first, second, third, fourth and last tranches amounting to Rs.200 million each pursuant to the original repayment schedule.
Management has evaluated the investment in ITI for impairment, on the basis that the first, second and third tranches for repayment have not been settled by ITI. Management has evaluated the financial condition and business outlook of ITI including the new purchase orders received by ITI for supply of GSM equipment from BSNL and us. We currently have accounts payable to ITI of Rs.142 million as of March 31, 2010, which, pursuant to the share agreement, we can legally settle against the repayments owing under the cumulative preference shares. In addition, we have the intent and ability to retain the debt security for a period of time sufficient to allow for anticipated recovery in value.
Based on this evaluation and specifically considering that the share purchase agreement includes a provision for a letter of comfort from the Department of Telecommunication (government of India) to us endorsing the investment and also provides us a right to set off amounts receivable in respect of principal outstanding from the dues payable to ITI. However, out of the total investment of Rs.1,000 million, Rs.800 million had been charged as an impairment during the 2008 fiscal year, another Rs.200 million of the debt security was impaired as of March 31, 2009. The entire amount of investment in ITI has been impaired up to fiscal year 2009.
The DOT, by letter dated July 31, 2009, deferred the repayment schedule of the above cumulative preference shares to beginning 2012-13 and payable in five equal annual installments.
55
The MKVDC bonds have a coupon rate of 11.5% per annum and are redeemable at the end of the 10th year from the date of allotment (May 31, 2002). The repayment of these bonds is guaranteed by the Government of Mahrashtra. Based on our assessment of carrying value of investment in MKVDC bonds, we believe that there is no impairment of investments as of March 31, 2010.
Revenue
We derive a substantial portion of our revenue from local, domestic long distance and international calls that originate on our network and from telephone rentals. We realize revenue in the form of installation charges, ongoing subscription/rental charges and usage charges. We also derive revenues from providing Internet and broadband services, our Intelligent Network services, public call office or public payphone services, interconnection with basic service, long distance service and cellular operators, narrow-band ISDN services, CDMA-based mobile and fixed wireless services, leased-line services, telex services, trunk services, VOIP, IPTV, GSM cellular services in Delhi and Mumbai, those value-added services for which we charge a fee.
We began receiving interconnect payments in respect of incoming international long distance calls since April 1, 2002, when several interconnect agreements, including our agreement with VSNL, took effect. In fiscal year 2003, revenue sharing with BSNL and other operators for incoming and outgoing domestic long distance or subscriber trunk dialing calls was done on the basis of the TRAI’s Interconnect Usage Charges Regulation 2003 (1 of 2003) implemented from May 1, 2003 and modified by Interconnect Usage Charges Regulation 2003 (2 of 2003) effective February 1, 2004, and further amended from time to time. Call revenue is generally a function of the number of access lines in service, the volume of traffic carried and the level of call charges. Telephone and other rental revenue is a function of the number of access lines in service and the rental tariffs we charge. Public call office revenue is driven by the number of our public call offices, the volume of traffic carried and the level of call charges. Interconnect revenue is a function of the contractual and legal/regulatory rates prescribed for interconnection and the level of call volumes originating from sources that pay interconnect fees. There has been a continuous decrease in the number of fixed lines that, coupled with a decrease in the related tariffs, and also downfall in the GSM revenue though there are significant additions in GSM connections, is mainly attributable to reduction in tariff. However, there has been an increase in revenue due to increased broadband connections, despite a drastic decrease in related tariffs for the year ended March 31, 2010.
Since Octobert 2004, we have drastically reduced the ISD tariff. Recently, we reduced the ILD tariff on a promotional basis for our GSM postpaid and prepaid subscribers under the GSM service license for the licensed service area for 90 days effective as of June 26, 2010 for Delhi and July 1, 2010 for Mumbai.
The calls within our own networks of Delhi and Mumbai are treated as local calls. For all other places the STD rate is flat (i.e. Rs.120 per minute from Fixed and WLL(M)) and the STD rate for Cellular service is Rs.1.30/1.25 per minute for Mumbai and Delhi, respectively. We have also reduced roaming charges between Mumbai and Maharashtra.
Primarily as a result of these tariff reductions, excluding termination revenues, our average revenue per access line in service has been declining. Any further tariff rebalancing may result in lower call charges, particularly for domestic long distance and international calls, which might be offset by an increase in rental tariffs. We are not able to assess at this time the full long-term impact that the tariff order will have on subscriber calling patterns or on revenues. As competition intensifies, we expect call charges will likely decline and, to the extent that call volumes do not increase as a result of lower call charges, excluding termination revenues, our revenue per access line in service may continue to decline.
We expect that call revenue and revenue from public call offices may decline as a percentage of total revenue as demand for our other products and services, particularly our GSM cellular services, increases and if rental charges increase as a result of further tariff rebalancing.
Cost of Revenues
Our operating costs include staff costs, license fees and network utilization charges, depreciation expenses, maintenance costs and commissions paid to public call office franchise operators.
56
Staff costs. In general, employees receive a base salary and salary-related housing and other allowances, productivity-based incentive payments and certain benefits, including a pension/gratuity plan and medical benefits for themselves and certain members of their immediate families. The increase in our staff costs was primarily due to implementation of wage revision with effect from January 1, 2007 and consequent impact on retirement benefits in the 2009 and 2010 fiscal years.
In fiscal year 2000, substantially all of our non-executive employees originally employed by the DOT decided to terminate their services with the DOT and accept employment with us effective November 1998. Under the option given to them for pension benefits, most of our absorbed employees have opted for retaining pension benefits in accordance with the Central government pension rules. Some other employees have opted for retirement rules, which are applicable to our directly recruited employees, and opted to draw pro rata monthly pension until their absorption. Accordingly, with effect from November 1, 1998 we started accruing for pension and gratuity for these employees. In August/September 2002, the DOT indicated that the Government would pay fo r the pension benefits of the government employees absorbed by us who opted for either the Central government scheme of pension or for the pro rata pension scheme for the period served with the DOT. However, the terms of such payments are in the process of finalization. Once these terms are finalized and the payments are made to the DOT for the period of employment of these employees with us, we expect that our liability for post retirement obligations would be limited to monthly contributions on the basis of the rules to be prescribed by the government of India. Presently, in the absence of any further movement from the Government, we are discharging all such liabilities.
Approximately 98% of our executive employees have accepted absorption into our company and are now our direct employees. These employees are entitled to certain pension and gratuity benefits from the government of India.
We have finalized a new compensation structure for our senior executive employees. The new structure provides for higher salaries and benefits for our senior executive employees upon exercise of their option for our absorption.
As a public sector enterprise, we abide by general DOT and Department of Public Sector Enterprises personnel policies that, among other things, limit our ability to reduce employment levels and control the amount of salaries and other remuneration that we may pay to our employees. Our employee productivity measured by access lines in service per employee has been increasing steadily but remains significantly lower than the Asian and global averages. During the year ended March 31, 2005, we implemented a Voluntary Retirement Scheme (VRS) for executive as well as non-executive employees. Under the scheme, the eligible employees were given an option to voluntarily take retirement from service and make their choice within the specified period of time. The scheme provided for ex gratia payments t o eligible employees opting for voluntary retirement based on the respective employee’s salary and term of employment. The Scheme was closed in fiscal year 2007 itself. As of March 31, 2010, no employee had retired under this scheme.
License Fees and Network Utilization. The DOT periodically adjusts the license fees and network utilization charges. The license fee had been revised at 10% of Adjusted Gross Revenues with effect from April 1, 2004. The license fee for the NLD (national long distance) and ILD (international long distance) service license which we have obtained is 6% of AGR. A license fee on Internet services of 6% of AGR has been in effect since January 2006.
A method of calculation of the ISP license fee was implemented for the 2010 fiscal year, vide MTNL CO letter No. MTNL/RA/AGR/2009/Pt., dated March 29, 2010, and also extended for the previous year. The change was approved in theECM held on June 12, 2010, and accordingly the license fees were reduced by Rs.70.4 million in the 2009 fiscal year.
We finalized the charges for network utilization and domestic long distance agreements with BSNL. Until October 26, 2006, NLD carriage charges were paid pursuant to TRAI IUC Regulation and effective November 2006 have been at the negotiable rates. These rates are not applicable to NLD for traffic between Delhi and Mumbai, which is routed on our own leased bandwidth.
57
We are responsible for collecting payments for calls from our subscribers andbear the risk of non-collection of these charges. Until the May 1, 2003 effectiveness of the interconnection usage charges regulation,we did not receive any payments for call coming into our network from BSNL’s network. BSNL has also established its Trunk Automatic Exchanges (TAXs) at Delhi and Mumbai. All the other private operators in Delhi and Mumbai have established interconnection with these TAXs and consequently we have stopped transiting their long distance calls to minimize the risk of bad debts.
Inflation
We do not believe that inflation in India has had a material impact on our results of opertions in recent years. However, the TRAI has been granted the authority to determine tariffs, and we are therefore restricted in our ability to increase tariff’s to compensate for inflation. As a result, inflation could adversely affect our results of operations. See Item 4B. “Business Overview-Tarrifs and Other Charges” in this report.
Effect of New Accounting Pronouncements
There are a number of new accounting standards that been issued that will affect our information presented in accordance with US GAAP. For a description of these recent pronouncements, see Note 2(s) to our consolidated to our consolidated financial statements included elsewhere in this report.
Other Matters
See Item 4. “Information on the Company-Business Overview- Legal Proceedings” and Note 22 to our consolidated financial statements included elsewhere in this report for information about our contingent liabilities.
Restatement of Previously Reported Amounts
We have adjusted shareholders' equity, retained earnings and net income for the fiscal year ended March 31, 2009 to reflect the impact of the adjustment in our accounting by reason of payments for 3G and BWA spectrum as licence fees. The nature and impact of the adjustment is described in Note 3 to our consolidated financial statements and in Item 3. “Key Information” and Item 5. “Operating and Financial Review and Prospects” in this report.
The nature of adjustment was as follows:
We had provided for Rs.213.20 million during the 2009 fiscal year on account of 3G and BWA spectrum as license fees on the base reserve price subject to finalization of auction process by the DOT and therefore the accounting policy in this regard was not made on that date. On finalization of the auction process by the DOT, during the 2011 fiscal year, in accordance with DOT guidelines, the liability for Rs.110,979.7 million has been accounted for by creating intangible assets as one time charges payable to DOT for 3G and BWA spectrum. This is to be amortized for the period of 20 years and 15 years for 3G and BWA spectrum respectively on straight line basis. Accordingly, the amortized amount for the period from August 8, 2008, the date of allotment of spectrum, to March 31, 2009 is Rs.4,082.30 million.
The change in the method of calculation of ISP license fee implemented for the 2010 fiscal year was also extended for the previous year. This was approved in the ECM held on June 12, 2010, and accordingly the license fees were reduced by Rs.70.42 million in the 2009 fiscal year.
Segment Information
We have identified basic and cellular as our two operating segments. Basic services segment consists of voice, data through local calls, domestic long distance and international long distance calls on fixed line services in the cities of Delhi and Mumbai in India. Further, it includes revenues from Code Division Multiple Access, or CDMA, based cellular services and internet access services. Cellular consists of providing cellular services in cities of Delhi and Mumbai using Global System for Mobile communications, or GSM, technology. See Note 24 to our consolidated financial statements.
The cellular services have met the thresholds of significance as a reportable segment during the fiscal years ended March 31, 2008, 2009 and 2010.
Through our 100% subsidiary Mahanagar Telephone Mauritius Limited (“MTML”), we are providing fixed, mobile, ILD and Internet Services in Mauritius. MTML has installed the state of art CDMA IX EVDO switch having capacity of 110K, with a strategically spread radio network of base stations. The system is equipped to provide value added services, i.e, SMS, DATA, Multi Media service etc. MTML is also expanding the capacity of its core network to 310K lines and implementing a GSM network in Mauritius with 200K lines capacity the 110K core capacity of the CDMA IX EVDO network. See Item 4A. “History and Development of the Company - Telecommunications Services in Other Countries” in this report.
During the fiscal years ended March 31, 2008, 2009 and 2010, no single customer has contributed for revenue in excess of 10% of total revenue.
The amounts reviewed by the CODM are based on our internal accounting policies which are different from US GAAP.
Results of Operations
The following table sets forth selected income statement data expressed as a percentage of revenue for the period indicated, derived from financial statements that are prepared in accordance with US GAAP, included on pages F-1 to F-51 of this annual report.
58
Fiscal Years Ended March 31, | ||||||||||||
2008 | 2009 (Restated) | 2010 | ||||||||||
Revenues | 100 | % | 100 | % | 100 | % | ||||||
Cost of revenues (excluding depreciation & amortization shown separately below) | (68.3 | )% | (74.5 | )% | (135.0 | % | ||||||
Selling, general and administrative expenses (excluding depreciation & amortization shown separately below) | (19.1 | )% | (21.6 | )% | (50.3 | )% | ||||||
Depreciation & amortization | (18.6 | )% | (29.4 | )% | (41.6 | )% | ||||||
Excess liabilities written back | 0.7 | % | 1.2 | % | 1.6 | % | ||||||
Income / (loss) from operations | (5.2 | )% | (24.2 | )% | (125.2 | )% | ||||||
Interest and other income, net | 10.4 | % | 23.8 | % | 20.0 | % | ||||||
Income before income taxes and share of profits /(losses) from affiliates | 5.2 | % | (0.4 | )% | (105.2 | )% | ||||||
Income taxes | 0.3 | % | (3.0 | )% | 33.2 | % | ||||||
Equity in profits /(losses) of affiliates | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Net income | 5.5 | % | (3.4 | )% | (72.0 | )% |
Comparison of Year Ended March 31, 2010 with Year Ended March 31, 2009 (as Restated)
Revenues: Basic services: Our revenues from basic services decreased by 15.06% from Rs.33,610 million for the year ended March 31, 2009 to Rs.28,549 million for the year ended March 31, 2010. The decrease was primarily driven by a decrease in fixed line call revenue, including public call office (“PCO”) revenue, by 24.09% from Rs.12,800 million for the year ended March 31, 2009 to Rs.9717 million for the year ended March 31, 2010. Interconnect revenue is also decreased by 58.33% from Rs.6,515 million for the year ended March 31, 2009 to Rs2,715 million for the year ended March 31, 2010 because the reduction in IUC tariff as per the guidelines of TRAI. Revenue from telephone and other rentals and broadband services decreased by 1.41% from Rs.15,550 million f or the year ended March 31, 2009 to Rs.15,331 million for the year ended March 31, 2010.
Call revenue has gone down as a result of a decrease in the number of connections from 3,866,000 connections during the year ended March 31, 2009 to 3,806,317 connections during the year ended March 31, 2010. There was also a net decrease of 3,214 million units in billed Metered Call Units (“MCU”), from 16,507 million units during the year ended March 31, 2009 to 13,293 million units during the year ended March 31, 2010. Further, the call tariff rates were reduced during the current year due to increased competition in the market, resulting in a fall in average revenue per connection per month from Rs.618 during the year ended March 31, 2009 to Rs.561 during the current year, a decrease of Rs.57 per connection per month.
Cellular services: Our revenues from cellular services decreased by 15.36% from Rs.8,288 million for the year ended March 31, 2009 to Rs.6,964 million for the year ended March 31, 2010. The decrease was primarily driven by decrease in our income from roaming and prepaid trump by Rs.742 million from Rs.4,137 million for the year ended March 31, 2009 to Rs.3,395 million for the year ended March 31, 2010.
Cost of Revenues: Basic services: Our cost of revenues has increased from Rs.25,888(Restated) million for the year ended March 31, 2009 to Rs.42,925 million for the year ended March 31, 2010. The increase is primarily on account of increase in staff cost due to implementation of new wage revision by 150.56 % from Rs.13,056 million for the year ended March 31, 2009 to Rs.32,713 million for the year ended March 31, 2010. However, the same was offset by a decrease in interconnection charges by 33% from Rs.4,382 million for the year ended March 31, 2009 to Rs.2,917 million for the year ended March 31, 2010.
Cost of Revenues: Cellular services: Our cost of revenues has decreased by Rs.272 million from Rs.5,285 million for the year ended March 31, 2009 to Rs.5,013 million for the year ended March 31, 2010. The decrease is due to decrease in interconnect charges by Rs.676 million from Rs.3,178 million for the year ended March 31, 2009 to Rs.2,502 million for the year ended March 31, 2010 and an decrease in license fees by Rs.107 million from Rs.857 million for the year ended March 31, 2009 to Rs.750 million for the year ended March 31, 2010. However, the same is offset to some extent by increase in staff cost by Rs.508 million from Rs.390 million in the year ended March 31, 2009 to Rs.898 million for the year ended March 31, 2010.
59
As regards license fees payable as a percentage of the Adjusted Gross Revenues (“AGR”), the decrease is basically due to a 15.38% decrease in cellular revenue as compared to the previous year.
Selling, General and Administrative Expenses (SG&A)
Basic services: Our selling, general and administrative expenses went up by 104% from Rs.8,353 million during the year ended March 31, 2009 to Rs.17,049 million during the year ended March 31, 2010. The increase in mainly on account of increase in staff costs by Rs.8424 million from Rs.5,596 million for the year ended March 31, 2009 to Rs.14,020 million for the year ended March 31, 2010 and an increase in Misc exps by Rs.179 million from Rs.581 million for the year ended March 31, 2009 to Rs.401 million for the year ended March 31, 2010. However ,the same was set off to some extent mainly on account of loss on sale of assers by Rs.673 million from Rs.687 million for the year ended March 31, 2009 to Rs.14 million for the year ended March 31, 2010.
Cellular Services: Our selling, general and administrative expenses increased by Rs.130 million from Rs.675 million during the year ended March 31, 2009 to Rs.805 million during the year ended March 31, 2010. The increase in mainly on account of increase in staff costs by Rs.218 million from Rs.167 million for the year ended March 31, 2009 to Rs.385 million for the year ended March 31, 2010. However the same was offset by decrease in provision for doubtful debts by Rs.89 million from Rs.116 million for the year ended March 31, 2009 to Rs.27 million for the year ended March 31, 2010.
Income from Operations
Basic Services: Our loss from operations has increased by Rs.34,477 million from a loss from operations of Rs.9,496 million(Restated) for the fiscal year ended March 31, 2009 to a loss from operations of Rs.43,973 million for the fiscal year ended March 31, 2010. The increase in operating loss is mainly due to decreased in revenue by 13.88% from Rs.33,610 million for the year ended March 31, 2009 to Rs.28,945 million for the fiscal year ended March 31, 2010 and an increase in cost of revenues by Rs.17,037 million from Rs.25,888 million for the fiscal year ended March 31, 2009 to Rs.42,925 for the fiscal year ended March 31, 2010 and an increase in the selling, general and administrative expenses from Rs.8,353 million for the fiscal year ended March 31, 2009 to Rs.17,049 million f or the fiscal year ended March 31, 2010.
Cellular Services: Our loss from operations has decreased by Rs.150 million from a loss from operations of Rs.648 million(Restated) for the year ended March 31, 2009 to a loss from operations of Rs.498 million for the fiscal year ended March 31, 2010. The loss from operation is mainly attributable to decrease in revenue by Rs. 1264 million from Rs.8,228 million for the year ended March 31, 2009 to Rs.6,964 million for the fiscal year ended March 31, 2010.
Interest and Other Income: During the year ended March 31, 2010, our interest and other income has decreased by 29% from Rs.9,962 million for the year ended March 31, 2009 to Rs.7,105 million for the year ended March 31, 2010. The decrease is attributable to decrease in interest and other income by Rs.2,092 million from Rs.5,211 million for the year ended March 31, 2009 to Rs. 3119 million for the year ended March 31, 2010 and decrease in interest from bank deposits by Rs.765 million from Rs.4,751 million for the year ended March 31, 2009 to Rs.3,986 million for the year ended March 31, 2010.
Income Taxes: Income tax decreased by Rs.13047 million from Rs.(1,241) million (Restated) for the year ended March 31, 2009 to Rs.11,806 million for the year ended March 31, 2010. The decrease was attributable to decrease current tax by Rs.18,473 million from (Rs.2,282) million (Restated) for the year ended March 31, 2009 to Rs.16,191 million for the year ended March 31, 2010 and the same was offset to some extent by increase in deferred tax by Rs.5,426 million from Rs.(4,384) million (Restated) for the year ended March 31, 2009 to Rs.1,041 million for the year ended March 31, 2010.
60
Comparison of Year Ended March 31, 2009 (as Restated) with Year Ended March 31, 2008
Revenues: Basic services: Our revenues from basic services decreased by 7.28% from Rs.36,249 million for the year ended March 31, 2008 to Rs.33,610 million for the year ended March 31, 2009. The decrease was primarily driven by a decrease in fixed line call revenue, including public call office (“PCO”) revenue, by 27.37% from Rs.17,623 million for the year ended March 31, 2008 to Rs.12800 million for the year ended March 31, 2009. However, interconnect revenue increased by 35.99% from Rs.4,791 million for the year ended March 31, 2008 to Rs 6,515 million for the year ended March 31, 2009 and revenue from telephone and other rentals and broadband services increased by 2.67% from Rs.15,146 million for the year ended March 31, 2008 to Rs.15,550 million for the year ended March 31, 2009.
Call revenue has gone down as a result of a decrease in the average number of connections from approximately 3,944,000 connections during the year ended March 31, 2008 to approximately 3,866,000 connections during the year ended March 31, 2009. There was also a net decrease of 4,938 million units in billed Metered Call Units (“MCU”), from 21,445 million units during the year ended March 31, 2008 to 16,507 million units during the year ended March 31, 2009. Further, the call tariff rates were reduced during the current year due to increased competition in the market, resulting in a fall in average revenue per connection per month from Rs.679 during the year ended March 31, 2008 to Rs.618 during the current year, a decrease of Rs.61 per connection per month.
Cellular services: Our revenues from cellular services decreased by 2.69% from Rs.8,455 million for the year ended March 31, 2008 to Rs.8,228 million for the year ended March 31, 2009. The decrease was primarily driven by decrease in our income from roaming and prepaid trump by Rs.283 million from Rs.4,420 million for the year ended March 31, 2008 to Rs.4,137 million for the year ended March 31, 2009.
Cost of Revenues: Basic services: Our cost of revenues has increased from Rs.25,816 million for the year ended March 31, 2008 to Rs.25,888 million for the year ended March 31, 2009. The increase is primarily on account of increase in license fees by 24.69 % from Rs.3,892 million for the year ended March 31, 2008 to Rs.4,853 million for the year ended March 31, 2009. However, the same was offset by a decrease in interconnection charges by 13.02% from Rs.5,037 million for the year ended March 31, 2008 to Rs.4,382 million for the year ended March 31, 2009.
Cost of Revenues: Cellular services: Our cost of revenues has increased by Rs.579 million from Rs.4,706 million for the year ended March 31, 2008 to Rs.5,285 million for the year ended March 31, 2009. The increase is due to increase in interconnect charges by Rs.375 million from Rs.2,803 million for the year ended March 31, 2008 to Rs.3,178 million for the year ended March 31, 2009 and an increase in staff costs by Rs.245 million from Rs.145 million for the year ended March 31, 2008 to Rs.390 million for the year ended March 31, 2009. However, the same is offset to some extent by decrease in license fees and spectrum charges by Rs.75 million from Rs.932 million in the year ended March 31, 2008 to Rs.857 million for the year ended March 31, 2009 and decrease in miscellaneous expen ses by Rs.100 million from Rs.296 million for the year ended March 31, 2008 to Rs.196 million for the year ended March 31, 2009.
As regards license fees payable as a percentage of the Adjusted Gross Revenues (“AGR”), the decrease is basically due to a 2.69% decrease in cellular revenue as compared to the previous year.
Selling, General and Administrative Expenses (SG&A)
Basic services: Our selling, general and administrative expenses went up by 6.15% from Rs.7,869 million during the year ended March 31, 2008 to Rs.8,353 million during the year ended March 31, 2009. The increase in mainly on account of increase in staff costs by Rs.492 million from Rs.5,104 million for the year ended March 31, 2008 to Rs.5,596 million for the year ended March 31, 2009 and an increase in loss on sale of assets by Rs.246 million from Rs.441 million for the year ended March 31, 2008 to Rs.687 million for the year ended March 31, 2009. However, the same was set off to some extent mainly on account of decrease in miscellaneous expense by Rs.69 million from Rs.470 million for the year ended March 31, 2008 to Rs.401 million for the year ended March 31, 2009.
61
Cellular Services: Our selling, general and administrative expenses increased by Rs.26 million from Rs.648 million during the year ended March 31, 2008 to Rs.674 million during the year ended March 31, 2009. The increase in mainly on account of increase in staff costs by Rs.105 million from Rs.62 million for the year ended March 31, 2008 to Rs.167 million for the year ended March 31, 2009. However the same was offset by decrease in provision for doubtful debts by Rs.82 million from Rs.198 million for the year ended March 31, 2008 to Rs.116 million for the year ended March 31, 2009.
Income from Operations
Basic Services: Our loss from operations has increased by Rs.4754 million (Restated) from a loss from operations of Rs.4,742 million for the year ended March 31, 2008 to a loss from operations of Rs.9,496 million (Restated) for the year ended March 31, 2009. The increase in operating loss is mainly due to a 7.28 % decrease in revenue from Rs.36,249 million for the year ended March 31, 2008 to Rs.33,610 million for the year ended March 31, 2009, and an increase in cost of revenues by Rs.355 million from Rs.25,816 million for the year ended March 31, 2008 to Rs.25,888 for the year ended March 31, 2009 and an increase in the selling, general and administrative expenses from Rs.7,869 million for the year ended March 31, 2008 to Rs.8,353 million for the year ended March 31, 2009 and i ncrease in depreciation by Rs.3871 million(Restated) from Rs.7,627 million for the year ended March 31, 2008 to Rs.11498 million(Restated) for the year ended March 31, 2009.
Cellular Services: We have posted a loss of Rs. 648 million (Restated) against the income of Rs. Rs.2,419 million for the year ended March 31, 2008. The loss of Rs.648 million for the period ended occurred due to restatement of income from operation (Please refer Note 3). The decrease is mainly attributable to an decrease in revenue by Rs.227 million from Rs.8,455 million for the year ended March 31, 2008 to Rs.8,228 million for the year ended March 31, 2009 and an increase in costs of revenues by Rs.579 million from Rs.4,706 million for the year ended March 31, 2008 to Rs.5,285 million for the year ended March 31, 2009 and an increase in selling, general and administrative expenses by Rs.26 million from Rs.648 million for the year ended March 31, 2008 to Rs.674 million for the y ear ended March 31, 2009.
Interest and Other Income: During the year ended March 31, 2009, our interest and other income has increased by 113.74% from Rs.4,661 million for the year ended March 31, 2008 to Rs.9,962 million for the year ended March 31, 2009. The increase is attributable to increase in interest and other income by Rs.3168 million from Rs.2,043 million for the year ended March 31, 2008 to Rs.5,211 million for the year ended March 31, 2009 and an increase in interest from bank deposits by Rs.2,133 million from Rs.2,618 million for the year ended March 31, 2008 to Rs.4,751 million for the year ended March 31, 2009.
Income Taxes: Income tax increased by Rs.1,362 million from Rs.(121) million for the year ended March 31, 2008 to Rs.1,241 million (Restated) for the year ended March 31, 2009. The increase was attributable to an decrease in the deferred tax expense by Rs.983 million from Rs.(2,024) million for the year ended March 31, 2008 to Rs.(1,041) million (Restated) for the year ended March 31, 2009 and also increase in current tax by Rs.379 million from Rs.1,903 million for the year ended March 31, 2008 to Rs.2,282 million (Restated) for the year ended March 31, 2009.
The current tax expense has decreased mainly due to adjustments made while computation of tax during the year ended March 31, 2009.
The deferred tax assets have increased largely on account of deferment of charges in the financial statements in respect of provision for impairment of ITI investments, depreciation and amortization and loss on sale of assets.
62
5B. | Liquidity and Capital Resources |
A summary of our cash flows appears below:
(in millions of Rs.) Year Ended March 31 | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Net cash provided by the operating activities | 27,640 | 130849 | 13158 | |||||||||
Net cash used in investing activities | (25,006 | ) | (130037 | ) | (13521 | ) | ||||||
Net cash from financing activities | (2,948 | ) | (737 | ) | 0 | |||||||
Net increase/(decrease) in cash and cash equivalents | (314 | ) | 73 | (363 | ) | |||||||
Cash and cash equivalents at the beginning of the year | 1,660 | 1,346 | 1419 | |||||||||
Cash and cash equivalents at the end of the year | 1,346 | 1,419 | 1056 |
We have historically met our working capital and capital expenditure requirements principally from cash flows generated from operations. We have also from time to time undertaken external borrowings. As of March 31, 2010, we had no borrowings. We expect to meet our planned capital requirements for the next two years primarily from cash flow generated from operations, together with existing cash balances and supplemented by market borrowings, whenever required. At March 31, 2010, we had cash and cash equivalents of Rs.1,056 million and liquid short-term investments in bank deposits of Rs.47,835 million. We anticipate capital expenditures of approximately Rs.9,515 million in fiscal year 2010. We do not expect to have any liquidity problem in regard of possible adverse res ults in our pending litigations, as we would expect to discharge any obligations from cash in hand. We have significant amounts due from related parties, which if not settled, would significantly impact cash flow from operations. We believe that existing cash and cash equivalents and funds generated from operations will be sufficient to meet these requirements. However, we may significantly alter our proposed capital expenditures plans and accordingly, may require additional financing to meet our requirements. In either case, we cannot give any assurance that additional financing will be available at all or, if available, that such financing will be obtained on terms favorable to us or that any additional financing will not be dilutive to our shareholders.
Operating Activities
Net cash flow from operating activities was Rs.130.85 billion in fiscal 2009 and Rs.13.16 billion in fiscal 2010. The decrease in cash generation from operating activities during the current year is primarily attributable to decrease in other receivables by Rs.12.53 billion during the year ended March 31, 2010 from Rs.8.70 billion for the year ended March 31, 2009, and decrease in related party payables by Rs.107.82 billion during the year ended March, 2010 from Rs.114.21 billion for the year ended March 31, 2009. Net cash flow from operating activities was Rs.27.64 billion in fiscal 2008 and Rs.130.85 billion in fiscal 2009. The increase in cash generation from operating activities during the current year is primarily attributable to increase in related party payables by Rs.111.79 billion during the year ended March 31, 2009 from Rs. 2.39 billion for the year ended March 31, 2008 and increase in deferred tax by Rs.3.06 billion during the year ended March 31, 2009 from Rs.(2.02) billion for the year ended March 31, 2008.
Investing Activities
Net cash used in investing activities decreased from Rs.130.04 billion for fiscal 2009 to Rs.13.52 billion for fiscal 2010. This is mostly due to purchase of fixed assets to the tune of Rs.117.94 billion during the year ended March 31, 2009 as against Rs.12.15 billion during the year ended March 31, 2010 and less deposit during the year by Rs.13.71 billion from Rs.14.28 billion during for the year ended March 31, 2009 to Rs.1.11 billion during for the year ended March 31, 2010. Net cash used in investing activities increased from Rs.25.01 billion for fiscal 2008 to Rs.130.03 billion for fiscal 2009. This is mostly due to purchase of fixed assets amounting to Rs.117.93 billion as against Rs.9.57 billion in fiscal 2008.
63
Financing Activities
Net cash used in financing activities had decreased from Rs.0.74 billion for fiscal 2009 to Rs. Nil billion for fiscal 2010. This decrease is on account of no dividend pay out during the year. Net cash used in financing activities had decreased from Rs. 2.95 billion for fiscal 2008 to Rs.0.74 billion for fiscal 2009. This decrease had been on account of decrease in dividend paid during the previous year.
Capital Expenditure
See “Property, Plants and Equipment – Network Modernization” for a discussion of our capital requirements for capital expenditures.
5C. | Research and Development |
We did not incur research and development expenditures in the last three fiscal years.
5D. | Trend Information |
For a discussion of other important trends affecting us, see “—Operating Results—Overview” above.
5E. | Off-Balance Sheet Arrangements |
As of March 31, 2010, we were not a financial guarantor of obligations of any unconsolidated entity, and we were not a party to any similar off-balance sheet obligation or arrangement.
5F. | Tabular Disclosure of Contractual Obligations |
The following table shows our contractual payment obligations as of March 31, 2010, and the effect of such obligations for the specified future periods:
(in millions of Rs.) Payments due by period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Purchase obligations (capital commitments) | 9,515 | 9,515 | - | - | - | |||||||||||||||
Pension and other post-retirement obligations | 35,338 | 2,650 | 6,469 | 5,735 | 20,484 | |||||||||||||||
Total | 44,853 | 12,165 | 6,469 | 5,735 | 20,484 |
We are obligated to pay license fees and spectrum charges to DOT in accordance with conditions governing license fees for Basic Telephone Service and Cellular Telephone Service under the Revenue Sharing Regime. The specified percentage for license fees on fixed line services and cellular services was 10% of the Adjusted Gross Revenue (“AGR”) for each of the 2008, 2009 and 2010 fiscal years.
We do not expect to have any difficulty repaying such amounts of contractual obligations, and may do so entirely from cash flow generated from operations. As of March 31, 2010, we had no debt outstanding and no credit facilities.
5G. | Safe Harbor |
See statement on page i of this Report.
64
Item 6. | Directors, Senior Management and Employees |
6A. | Directors and Senior Management |
The government of India controls MTNL and has the power to elect all of our directors and to determine the outcome of almost all actions requiring approval of our board of directors or shareholders. The Department of Telecommunications, as the representative of our majority shareholder, the government of India, also has the authority to exercise the special powers granted to the President of India under our articles of association. These include the right to appoint our Chairman-and-Managing Director and to issue directives with respect to our business. See Item 10B. “Memorandum and Articles of Association-Powers of the President of India” in this report.
Directors
The Board of Directors has ultimate responsibility for the administration and management of our affairs, except for certain matters that are reserved by our articles of association for the approval of the President of India. Our articles of association provide for a board of not less than four and not more than 18 directors. The President of India is empowered by Article 66A of our articles of association to appoint one-third of the total number of our directors sitting at any time for an indefinite term and to designate our Chairman-and-Managing Director. Our remaining directors are also appointed by the government of India and non-official part time directors serve for three-year terms. One-third of these set term directors retire each year at our annual general meeti ng, and are eligible to stand for re-election.
We currently have ten directors. Three of our directors also are our most senior officers, who we refer to as “full-time directors”. One director is an officer of the DOT. The remaining six directors are neither our employees nor employees of the DOT, who we refer to as “part-time” directors”. All of our directors were appointed by the DOT. Our Executive Director, Mumbai, Executive Director, Delhi and Executive director (Technical) are normally ex-officio members of the Board. Two full time director board seats are currently vacant.
The business address of each of the directors is our registered office. The names of our current directors, their ages and their positions are:
Name | Age | Position | Term Expires |
Kuldip Singh | 56 | Director(1) / Chairman-and-Managing Director/ Director (Technical) | December 2014 |
Anita Soni (Ms.) | 57 | Director(1) / Director (Finance) | May 2013 |
S.P. Pachauri | 57 | Director(1) / Director (HR) | December 2012 |
Usha Sahajpal | 67 | Director (3)(4) | April 2011 |
Adit Jain | 50 | Director (3)(4) | July 2012 |
V.S. Iyer | 50 | Director (3)(4) | July 2012 |
Dr. Rajan Saxena | 61 | Director (3) | March 2013 |
N.K Joshi | 51 | Director(2)/DDG (SU) DOT | Unlimited term |
T.S.Narayanasami | 60 | Director (3) | March 2013 |
Vijay Aggarwal | 62 | Director (3) | March 2013 |
(1) Full-time director
(2) Government director
(3) Part-time director
(4) Audit Committee member
Mr. Kuldip Singh has been our Chairman and Managing Director since January 15, 2010, and has been Director (Technical) and a member of our Board since December 9, 2004. Mr. Singh joined the Indian telecom services in 1979. He has more than 32 years experience in the field of computers and telecommunications. Before being appointed as Director (T) on our Board, he worked as GM in MTNL for more than four years. Prior to this, he worked in the DOT, Overseas Communication Services and National Informatic Centre in various responsible positions. He holds an engineering degree in electronics and telecommunications from the Institute of Electronics and Telecom Engineering, New Delhi, and an MBA with finance specialization from IGNOU (Indira Gandhi National Open University).
65
Ms. Anita Soni has been our Director (Finance) since April 2005. Ms. Soni joined Indian P & T (Accounts & Finance) Service in 1977. She has more than 30 years experience as a senior finance executive in Indian P & T (Accounts & Finance) Service. Before joining MTNL as Director (Finance), she held positions in the DOT, TRAI and BSNL and has experience in all aspects of telecom finance. She is on the panel of experts of the International Telecom Union (ITU), and has participated in various ITU projects. She holds a Master of Arts (Economics Honours) from Punjab University.
Mr. S.P. Pachauri has been our Director (HR) since December 2007. Prior thereto, he had held various positions as GM (Mobile Services) in MTNL, and various positions in different parts of India, including Director, telecom project at Lucknow Circle, GMT Kashmir at Jammu and Kashmir circle, and Project Manager (OFC) TSCL. He holds a B.E. and a M.E. in electronics and communications from Roorkee University.
Mrs. Usha Sahajpal has been a member of our Board since April 2008. From 1966 to 1976, she was employed by Indian Audit and Accounts Service, and from 1976 to 2003 (till retirement) at Indian Civil Accounts Service serving as Controller General of Accounts. During her tenure, she has held various positions in the Indian Audit and Accounts Department as Controller of Accounts in various ministries of the government of India, Finance Advisor to the Employees Provident Fund Organization, Ministry of Labour, Chief Controller of Accounts, Ministry of Industry, Jt. Secretary and Finance Advisor, Ministry of Agriculture, Principal Chief Controller of Accounts, Central Board of Excise and Customs, Department of Revenue, Ministry of Finance and Controller General of Accounts, Ministry of Finance. Presently she is non-official, part-time Director on the Board of South Eastern Coal Field Ltd. (a subsidiary of Coal India, Ltd.), Member, Finance Committee, Jawahar Lal Nehru University, Delhi and Member of other institutes/societies and NGOs. She holds a Master of Arts (Political Science) degree from Delhi University.
Mr. Adit Jain has been a member of our Board since July 31, 2009. Since 2007, he has been Chairman of IMA India, a business information company. Previously, he was employed at Lazard India, an investment bank, serving as Vice President and Head, Corporate Advisory Services, and was responsible for the mergers and acquisition business. He also is non-executive Director on the corporate board of Sanmar Group, Shrirman Transport Finance Company Ltd., Indosolar Ltd., PR Pundit Public Relations Ltd. and BMR Associates. He is a member of the Board of Trustees of the Centre for Civil Society, an independent free market think-tank and the Adit Jain Foundation. He holds a bachelor’s degree in Mechanical Engineering from the Firia Institute of Technology and an MBA from the Henley Man agement College, UK.
Mr. V. S. Iyer has been a member of our Board since July 31, 2009. He is a Chartered Accountant having more than 26 years of experience in managerial positions in the areas of corporate finance and internal audits at major corporations, including Mukta Arts Limited, Cox & Kings Ltd. and Tata Oil Mills Ltd. From 1993 to 2006, he worked with Prebon Yamane Group of companies. He is a director of Ruttonsha International Rectifiers Limited. He holds a post-graduate degree in Commerce from Bombay University.
Dr. Rajan Saxena has been a member of the Board since March 29, 2010. Earlier he was a Director of IIM, Indore, S.P. Jain Institute of Management and Research and Dean of Narsee Monjee Institute of Management Studies, Mumbai, having more than 35 years of professional experience in management education, research, consulting and institution building. Mr. Saxena currently serves on or has been on the advisory and corporate board of several institutions and companies including Centre for Management Education, AIMA, Army Management Board, State Advisory Board of Education of Government of Madhya Pradesh, Indore Management Association, ABV-IITM and Gwalior. He was a member of All India Board of Management Studies of AICTE (2000-2003), on the Executive Board of Association of Indian Management Schools, and As sociation of Management Development Institutions in South Asia. Dr. Saxena is also an Independent Director on the Board of Lodha Developers Ltd. and Anuyi Chemicals Limited. He holds bachelor and master degrees in Commerce from Shri Ram College of Commerce, Delhi and a Ph.D. in Marketing from Delhi School of Economics.
Mr. N. K. Joshi has been a member of our Board since August 2010. He has been employed by the DOT since 1985 in various positions, and since September 2008 he has been Dy. Director General (Service Unit) responsible as Nodal Officer. He holds a B.E. in Electronics and Communication Engineering with Distinction from the Indian Institute of Science.
66
Mr. T. S. Narayanasami has been a member of our Board since March 29, 2010. He has been a Director of Asset Management Company of Axis Mutual Fund (Axis Bank) and Managing Director and CEO of United Stock Exchange of India Ltd. From June 2007 through May 2009, he was Chairman and Managing Director of the Bank of India. Prior thereto, Mr. Narayanasami had served as Chairman and Managing Director, Indian Overseas Bank (June 2005-May 2007), Chairman and Managing Director, Andhra Bank (April 2004-May 2005), and Executive Director, Punjab National Bank (Dec. 2000-April 2004). He also acted as Chairman of the Managing Committee of Indian Bank’s Association in 2008 and 2009, and President of the Governing Council of the Indian Institute of Banking and Finance.
Dr. Vijay Aggarwal has been a member of our Board since March 29, 2010. He is a Professor and Chairperson of Operations Management at the Management Development Institute, Gurgaon. He had been Director General of Consultancy Development Center (an enterprise of the DSIR, Government of India), S. P. Jain Chair Professor at the FMS (University of Delhi), Dean of National Management Program (NMP) at MDI (Gurgaon) and Professor at the Indian Institute of Management Lucknow) and the Indian Institute of Science (IISc, Bangalore). Dr. Aggarwal also created the Center for International Management. He holds a degree in Mechanical and Industrial Engineering from the Indian Institute of Technology, Bombay, and an M.S. and Ph.D. in Operations Research and Computer Science from Case Western Reserve Unive rsity (USA).
On January 9, 2010, Mr. R. S. P. Sinha resigned from his position as Chairman and Managing Director.
Other Principal Executive Officers
The business address of each of our principal executive officers is our registered office. In addition to the four officers who also are members of the Board of Directors, our other principal executive officers and their ages and positions are:
Name | Age | Position | |
S.R. Sayal | 47 | Company Secretary | |
Manjit Singh | 57 | Executive Director (Delhi) | |
J. Gopal | 59 | Executive Director (Mumbai) | |
A.K. Pathak | 56 | Executive Director (Technical) |
Mr. S.R. Sayal has been our Company Secretary since October 2006, having previously served as Dy. Company Secretary since August 1997. Prior to joining MTNL as Dy. Company Secretary in 1997, he worked for National Fertilizers Ltd. (a Government of India enterprise) and other private sector companies in legal, secretarial and accounting departments. Mr. Sayal is a Fellow Member of the Institute of Company Secretaries of India. Mr. Sayal holds a Bachelor of Commerce (Hons.) Master of Arts (English) degree from Delhi University and a Bachelor of Laws degree from Agra University.
Mr. Manjit Singh has been our Executive Director (Delhi) since August 2009, previously serving MTNL in various positions since 2003, including as Principal General Manager (Operations). From 1977 to 2003, he held various positions managing large telecom networks. He holds a B.E. in Electronics and Communications from the Indian Institute of Technology.
Mr. J. Gopal has been our Executive Director (Mumbai) since July 2007, previously serving MTNL as PGM (Development) from 2003, and in various other positions at MTNL since 1994. From 1974 to 1994, he was employed by the DOT. He holds a bachelors and masters degree in Electrical Engineering from the Indian Institute of Technology and an MBA in Operations Management from IGNOU.
Mr. A. K. Pathak has been our Executive Director (Technical) since January 2010. He is responsible for planning, procurement and operations of all the our telecom services, and also for managing technological changes. From 1993 to 1998, he served at the DOT in various positions covering all fields of telecommunications, including operations, development, licensing and management of telecom networks. He holds a B.E. in Electronics and Communications Engineering and a Masters degree in Communications and Radar Engineering from the Indian Institute of Technology.
67
6B. | Compensation |
Compensation of Directors and Officers
The total remuneration and benefits in kind paid by us to our executive officers, including those who also are directors, as a group in the fiscal year 2010 was approximately Rs.8.53 million.
The full-time directors, including the Chairman-cum-Managing Director, are appointed by the Government and receive compensation pursuant to the terms of their appointment. The other directors receive a fee of Rs.10,000 for every meeting of the Board or Committee attended by them. For the 2010 fiscal year, the aggregate fees paid to directors who were not also executive officers of MTNL was Rs.0.57 million.
There are no outstanding loans, advances or guarantees of any amounts to our directors or principal officers, nor any equity based compensation plans covering such persons. There have been no transactions effected by us during the current or immediately preceding fiscal year, and there were no transactions effected during an earlier financial year that remain in any respect outstanding or unperformed, between us and any of our directors or principal officers which were unusual in their nature or conditions or significant to our business.
6C. | Board Practices |
We have the following committees of our Board of Directors: Audit Committee and Shareholders’/Investors’ Grievances Committee. By reason of the Government’s ownership position, we do not have a Compensation Committee or a Nominating Committee. See Item 16G. “Corporate Governance” in this report.
Audit Committee
The Audit Committee of the Board of Directors reviews, acts on and reports to the Board of Directors with respect to the various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, the performance of our independent auditors, our accounting practices and our financial and risk management policies. The current members of the Audit Committee are Smt. Usha Sahajpal, Chairperson, V.S. Iyer and Adit Jain. All members of the Audit Committee including the Chairperson are “financial experts” in accordance with NYSE and SEC rules. See Item 16G “Corporate Governance” in this report. Clause 49 of the Indian Listing Agreement address the duties, role and responsibil ities of the Audit Committee.
Shareholders’ Investors’ Grievance Committee
The Shareholders’ Investors’ Grievance Committee oversees reports received from the registrar and transfer agent, as well as overseeing their performance, and facilitates the prompt and effective resolution of complaints from our shareholders and investors. This Committee consists of Mrs. Usha Sahajpal, as Chairperson and Mrs. Anita Soni as members, and S.R. Sayal, as Secretary.
6D. | Employees |
EMPLOYEES
At March 31, 2010, we had approximately 45,000 employees, of whom approximately 6,600 were executive and 38,400 were non-executive employees. We seek to improve employee productivity through continuing education and training and by emphasizing the importance of quality of service and subscriber satisfaction. We have placed a special emphasis on retraining our workforce to meet the demands of modernizing our network and improving customer satisfaction.
68
In general, employees receive a base salary and salary-related housing and other allowances, productivity based incentive payments and certain benefits, including a pension/gratuity plan, medical benefits for themselves and certain members of their immediate families and post-retirement medical benefits for retired employees. The decrease in our staff costs was primarily due to a Voluntary Retirement Scheme (VRS) in previous years and a decrease in retirement benefit charges on account of an increase in the discount rate used to value our post retirement obligations to employees. This is in line with the general increase in interest rates in the economy over the same period.
The Pay and Allowance arrangement expired on December 31, 2006, and the compensation arrangements have continued at the prior levels. The government of India, by Memorandum, dated November 26, 2008, and by supplementary/clarification memoranda, dated February 9, 2009 and April 2, 2009, issued orders for revision of the pay structure of the executives and non-unionized supervisors in the Central Public Sector Undertakings (CPSEs). These orders generally give directions to merge the old basic pay with the new prescribed pay scale. As of May 2010, management decided to revise the pay structure as ordered with 30% maximum stipulated by the Government with effect of January 1, 2007. We included a reserve of Rs.690 million in our financial statements for the 2009 fiscal year as the estimated per a nnum financial impact that may result on account of a possible 20% pay adjustment together with consequential increase in the actuarial provisions to meet future related pension benefits.
In the 2000 fiscal year, substantially all of our non-executive employees originally employed by the DOT decided to terminate their services with the DOT and accept employment with us effective November 1998. Under the option given to them for pension benefits, most of our absorbed employees have opted for retaining pension benefits in accordance with the Central government pension rules and some other employees have opted for retirement rules which as applicable to our directly recruited employees, and opt to draw pro rata until their absorption. Accordingly, with effect from November 1, 1998 we started accruing for pension and gratuity for these employees. In August/September 2002, the DOT indicated that the government would pay for the pension benefits of the government employees absorbed by us who opted for either the Central government scheme of pension or for the pro rata pension scheme for the period served with the DOT. However, the terms of such payments are in the process of finalization. Once these terms are finalized and the payments are made to DOT for the period of employment of these employees with us, we expect that our liability for post retirement obligations would be limited to monthly contributions on the basis of the rules to be prescribed by the government of India. Presently, in the absence of any further movement from the Government, we are discharging all such liabilities.
Approximately 98% of our executive employees have accepted absorption by us, and are now our direct employees. These employees are entitled to certain pension and gratuity benefits from the government of India.
In 2004, we finalized a new compensation structure for our senior executive employees. The new structure provided for higher salaries and benefits for our senior executive employees upon exercise of their option for our absorption.
As a public sector enterprise, we abide by general DOT and Department of Public Sector Enterprises personnel policies, which, among other things, limit our ability to reduce employment levels and control the amount of salaries and other remuneration that we may pay to our employees. Our employee productivity measured by access lines in service per employee has been increasing steadily but remains significantly lower than the Asian and global averages.
The mandatory retirement age for all employees is 60 years of age. Upon retirement, employees (who have opted for government pension) and their dependents are entitled to a pension under a defined benefit plan. The pension amount is based on the employee’s years of service and salary level upon retirement and, in a reduced amount, is transferable to dependents upon the employee’s death. We also provide post-retirement health care benefits to retired employees and their dependents. Effective October 2008, we implemented a Retired Employee Contribution Group Health Insurance scheme for a one year period.
Almost all of our non-executive employees are members of local unions organized in each of Delhi and Mumbai. Over the last three years we have not experienced any material work stoppage and we consider our relationship with our employees and the labor unions to be good. Our executive employees seconded from the DOT are members of national officers’ associations, which act as an informal consultative mechanism for conveying management staff’s views regarding personnel policies to our senior executives.
69
TRAINING
In order to deal with the new realities of competitive marketplace, we have launched a massive training effort to train our workforce. Training design has been so modified to tilt the balance of training from knowledge to skill and attitude, which are key to succeed in a customer-driven marketplace. During the 2010 fiscal year, approximately 8,000 employees were trained as against the MoU target of 7,000 employees, and 39 officers received highly specialized training abroad.
In addition to already existing District Telecom Training Centers (DTTC), our Center for Excellence in Telecom Technology and Management (CETTM) has been established as a state of the art facility to impart technical, managerial and corporate training to telecom and management personnel of Mumbai and Delhi units. CETTM caters to our training needs as well as other organizations like railways, National Thermal Power Corporation, State Bank of India and other corporate clients. CETTM has been empanelled by the Ministry of External Affairs, Govt. of India, to provide customized training to participants from countries under ITEC-SCAAP Indian Technical Education Cooperation-Special Commonwealth African assistance program. This centre is an ISO 9001: 2000 Certified institution. The CETT M complex has 17 lecture halls, 22 technology labs, conference rooms with board room integration, RFID based modern library and an ultra modern auditorium. CETTM is equipped with a hostel complex for residential programmes having 408 AC and non-AC rooms and 27 executives suites to house the trainees. CETTM has signed MOUs with Novell and others for conducting IT training leading to certification courses like NCLP.
6E. | Share Ownership |
None of our directors or connected persons or our principal executive officers owned any of our equity shares as of the date of this report.
On January 7, 2000, the Indian government offered to sell up to 14 million equity shares, representing approximately 2.2% of our outstanding equity shares, to our employees at a discount as compensation in connection with the restructuring of DOT. Because the terms were not viewed as favorable, none of our employees accepted this offer before it expired on December 31, 2000. Our employees have demanded that the shares allocated to them, at Rs.46 per share, but the DOT has not yet responded.
Item 7. | Major Shareholders and Related Party Transactions |
7A. | Major Shareholders |
The following table sets forth information about the shareholders that beneficially own 5% or more of our outstanding equity shares as of June 30, 2010, according to our register of shareholders:
Name of Owner | Number of Shares (3) | Percentage (3) | |
Government of India (1) | 354,372,740 | 56.25% | |
Life Insurance Corporation of India (2) | 118,517,913 | 18.81% |
(1) | The equity shares owned by the government of India are registered in the name of the President of India or his nominees in our register of shareholders |
(2) | Held directly and indirectly by Life Insurance Corporation of India, which is also controlled by the government of India. |
(3) | On June 30, 2010, 630,000,000 common shares were outstanding. |
70
During the past three years there has not been any change in the share ownership by the government of India, and the share ownership changes by the Life Insurance Corporation of India have not been significant. As of June 30, 2010, approximately 89.65% of the outstanding Common Shares were held by approximately 148,000 record holders with addresses in India, and approximately 10.35% of our equity shares were held of record by persons with addresses outside of India (including Foreign Institutional Investors). All holders have the right of one vote for each equity share held. See Item 10B. “Memorandum and Articles of Association-Voting Rights” in this report. We are not aware of any arrangement, the operation of which may at a subsequent date result in a change in control.
Our American Depository Shares are listed on the New York Stock Exchange. Each ADS currently represents two equity shares. Our ADSs are registered with the SEC pursuant to Section 12(b) of the U.S. Securities Exchange Act of 1934. As of June 30, 2010, 29,079,262 equity shares were held of record in the United States, including 27,623,706 equity shares held of record by the Bank of New York Mellon as custodian for the holders of our ADSs.
Our equity shares can be held by Foreign Institutional Investors or FIIs, and Non Resident Indians or NRIs, who are registered with the Securities and Exchange Board of India, or SEBI, and the Reserve Bank of India, or RBI. Approximately 5.81% of our equity shares are held by these FIIs and NRIs, of which some of them may be residents or bodies corporate registered in the United States and elsewhere. We are not aware of which FIIs and NRIs hold our equity shares as residents or as corporate entities registered in the United States.
7B. | Related party transactions |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have a number of distinct relationships with the government of India as outlined below:
The Government of India as Shareholder
The government of India currently owns 56.25% of our outstanding equity shares and has the right to designate members of our Board of Directors. The government of India also controls the Life Insurance Corporation of India, a holder of our equity shares. Accordingly, the government of India will continue to have the ability to control us, elect all of our directors and determine the outcome of substantially all actions requiring the approval of our board of directors or shareholders.
The government of India had announced its intention to divest its shareholdings in a number of government companies by offering significant equity stakes in those companies to strategic partners through a competitive bidding process. To date, there have been no announcements that the government of India plans to reduce its shareholding in MTNL through this process.
The DOT acts as representative of our majority shareholder, the government of India. The DOT also has the authority to exercise the special powers granted to the President of India under our articles of association. These include the right to appoint our Chairman and Managing Director and to issue directives with respect to our business. See Item 10B. “Memorandum and Articles of Association—Powers of the President of India” in this report.
Government of India as Regulator
Our business is subject to comprehensive regulation by the Ministry of Communications through the Telecom Commission and the DOT pursuant to the provisions of the Telegraph Act and the terms of the licenses under which we operate. While the Telegraph Act sets the legal framework for regulation of the telecommunications sector, much of our supervision and regulation is implemented more informally through the general administrative powers of the DOT, including those reserved to the DOT under our license, and of other government of India agencies. In March 1997, an autonomous body, the TRAI, was established with quasi-judicial powers to regulate telecommunications services in India. See Item 4. “Information on the Company— Telecommunications Regulation in India—The Telecom Regulatory Aut hority of India” in this report.
71
We operate all of our services under licenses granted by the DOT. The licenses identify the services that we are permitted to provide, which we believe covers all of the services that we currently do provide. A license for any additional service requires the approval of the DOT. The DOT retains the right, however, after giving MTNL appropriate notice, to modify the terms and conditions of our license at any time if, in its opinion, it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunications sector. The DOT may also terminate our license before its scheduled expiration upon our breach of any of its terms. Under the Telecom Regulatory Authority of India Act, the Telecom TRAI has been granted the authority to deter mine tariffs.
So long as the government of India’s shareholding in MTNL equals or exceeds 51%, we are deemed to be an Indian government company under the Companies Act and are subject to regulations applicable to public sector enterprises in India. These regulations concern personnel matters, including appointment of key management personnel and the hiring, dismissal and compensation of employees, as well as procurement, capital expenditures and the generation of funds through the issuance of securities. For example, all appointments to our board of directors must first be recommended by the Public Enterprises Selection Board, a government agency, and its recommendations are reviewed by the government of India, although until recently all appointments to our board have been recommended only by the government of India. 60; All appointments to our board of directors are also approved by our shareholders. Disputes between government of India enterprises (such as us) and government of India departments generally must be referred to the Committee on Disputes of the government of India for mediation before either party may bring a claim in a court of law. A single government of India ministry or department is designated as the primary supervisor of each public sector enterprise and the DOT has been designated as our primary supervisor. Our activities are also subject to review by India’s Parliament, and the DOT must submit an annual report to Parliament regarding our business activities.
The government of India plays an important role in the preparation of our financial statements. Under Indian regulations, as a government of India company, our annual accounts are audited by statutory auditors and branch auditors which are independent chartered accountants appointed each year by the government of India at the direction of the Comptroller and Auditor General of India. See Item 10B. “Additional Information—Memorandum and Articles of Association—Audit and Annual Report” in this report. In accordance with the government of India’s practice with respect to government of India companies, auditors have generally not been permitted to serve as our branch or statutory auditors for more than three consecutive years. In addition, the Comptroller and A uditor General conducts an independent review of our financial statements that are audited by the statutory and branch auditors. The annual report submitted to the Parliament includes a copy of our audit report and any comments upon or supplements to the audit report made by the Comptroller and Auditor General.
The Government of India as Customer
The government of India purchases our services on a commercial basis, and government entities, in the aggregate, constitute the single largest user of our services. The DOT sets the tariffs for these services, which are the same as our tariffs to our other customers. However, certain limited categories of high-level government of India officials may not have their telephone connections disconnected for non-payment of bills.
Our Financing of the Department of Telecommunications
As a department of the government of India, the DOT cannot raise funds through external borrowings from non-government of India entities, and has historically depended on us to raise funds on its behalf for use in its telecommunications business. By restructuring MTNL as a corporation, the DOT was able to create a company, which could raise debt in the capital markets to be used to fund its telecommunications operations. The Indian government guaranteed these borrowings and we on-lent the proceeds of the borrowings on terms substantially similar to the terms of the original loan. As a result of the corporatization of the Department of Telecom Services into BSNL in October 2000, we no longer borrow funds on behalf of the DOT. We have repaid all external borrowings that had made on behalf of t he DOT/BSNL.
72
Other
In addition to the transactions and circumstances described above in this Item 7, we enter into numerous business relationships with entities that have varying degrees of government control, as well as with the government itself and subdivisions of the Government. For example, as discussed elsewhere in this report, our principal interconnect arrangements are with BSNL and we have certain disputes with BSNL. For more information on our relationships and transactions with the government of India and its subdivisions and entities controlled by the government, see Note 4 and Note 20 to our consolidated financial statements, which appear elsewhere in this report.
7C. | Interest of experts and counsel |
None.
Item 8. | Financial Information |
8A. | Consolidated Statements and Other Financial Information |
The following financial statements and auditors report appear under Item 18 on this report and are incorporated by reference:
· | Report of Independent Registered Public Accounting Firm |
· | Consolidated balance sheets as of March 31, 2009 and 2010 |
· | Consolidated statements of operations for the years ended March 31, 2008, 2009 and 2010 |
· | Consolidated statements of shareholders’ equity for the years ended March 31, 2008, 2009 and 2010 |
· | Consolidated statements of cash flow for the years ended March 31, 2008, 2009 and 2010 |
· | Notes to the consolidated financial statements |
8B. | Significant Changes |
Recent Developments
Dividends. Under Indian law, a company pays dividends upon a recommendation by its board of directors and approval of a majority of the shareholders at the annual general meeting of shareholders held within six months of the end of each fiscal year. Shareholders have the right to decrease but not increase the dividend amount recommended by the board of directors. Dividends may be paid out of company profits for the fiscal year in which the dividend is declared after transfer to the reserves of a percentage of our profits for that year of not less than 2.5%. The Companies Act further provides that, in the event of inadequacy or absence of profits in any year, a dividend may be declared for that year out of our accumulated profit s, subject to certain limitations.
Our Board of Directors recommended against payment of any dividend for the 2010 fiscal year.
Loans. As part of our payment of part of the one-time 3G Spectrum fees for the Delhi and Mumbai circles, we obtained two short term loans, one for Rs.30,300 million, including Rs.5,300 million against FDR, and the other for Rs.45,339.7 million. The funds for payment of the balance of the fees came from our own resources.
73
Item 9. | The Offer and Listing |
9A. | Offer and listing details |
MARKET PRICE INFORMATION
The following table sets forth the high and low closing prices on The Stock Exchange, Mumbai for our equity shares for the periods indicated:
Share price (Rs.) | ||||||||
Calendar period | High | Low | ||||||
2006 Fiscal Year | 170.05 | 108.00 | ||||||
2007 Fiscal Year | 221.80 | 144.85 | ||||||
2008 Fiscal Year | 219.45 | 112.60 | ||||||
2009 Fiscal Year | 116.00 | 51.75 | ||||||
2010 Fiscal Year | 123.70 | 65.80 | ||||||
2009 Fiscal Year | ||||||||
First Quarter | 116.00 | 89.65 | ||||||
Second Quarter | 113.20 | 80.55 | ||||||
Third Quarter | 86.25 | 51.75 | ||||||
Fourth Quarter | 83.80 | 59.25 | ||||||
2010 Fiscal Year | ||||||||
First Quarter | 123.70 | 68.50 | ||||||
Second Quarter | 109.25 | 86.20 | ||||||
Third Quarter | 92.00 | 65.80 | ||||||
Fourth Quarter | 92.80 | 69.00 | ||||||
Last Six Months | ||||||||
April 2010 | 78.20 | 70.85 | ||||||
May 2010 | 72.10 | 54.15 | ||||||
June 2010 | 66.85 | 51.80 | ||||||
July 2010 | 69.90 | 64.05 | ||||||
August 2010 | 70.35 | 60.80 | ||||||
September 2010 (through September 24) | 67.90 | 55.00 |
On September 24, 2010, the closing price of our equity shares on The Bombay Stock Exchange was Rs.63.95.
The table below shows the high and low closing prices on the New York Stock Exchange for our ADSs for the period indicated.
ADS price | ||||||||
Calendar Period | High US$ | Low US$ | ||||||
2006 Fiscal Year | 8.44 | 5.41 | ||||||
2007 Fiscal Year | 9.75 | 5.61 | ||||||
2008 Fiscal Year | 10.75 | 4.62 | ||||||
2009 Fiscal Year | 5.80 | 2.25 | ||||||
2010 Fiscal Year | 5.15 | 2.60 | ||||||
2009 Fiscal Year | ||||||||
First Quarter | 5.80 | 4.05 | ||||||
Second Quarter | 5.34 | 3.71 | ||||||
Third Quarter | 4.39 | 2.60 | ||||||
Fourth Quarter | 3.68 | 2.25 |
74
ADS price | ||||||||
Calendar Period | High US$ | Low US$ | ||||||
2010 Fiscal Year | ||||||||
First Quarter | 5.02 | 2.69 | ||||||
Second Quarter | 4.64 | 3.60 | ||||||
Third Quarter | 3.66 | 2.86 | ||||||
Fourth Quarter | 3.82 | 2.98 | ||||||
Last Six Months | ||||||||
April | 3.21 | 2.32 | ||||||
May | 3.49 | 3.20 | ||||||
June | 2.85 | 2.22 | ||||||
July | 2.99 | 2.66 | ||||||
August | 3.06 | 2.60 | ||||||
September (through September 24, 2010) | 2.93 | 2.73 |
9B. | Plan of Distribution |
Not applicable
9C. | Markets |
Our outstanding equity shares are listed on several Indian stock exchanges and were first quoted on The Stock Exchange, Mumbai on May 13, 1993. Our equity shares are also traded on the National Stock Exchange in India. Our ADSs are listed on the New York Stock Exchange.
On September 24, 2010, the closing price of our ADSs on the New York Stock Exchange was US$2.92 per ADS. Our NYSE symbol is MTE. Each ADS represents two equity shares. The Bank of New York Mellon serves as a depositary with respect to our ADSs traded on the market. See Item 12D. “American Depositary Shares” in this report.
THE INDIAN SECURITIES MARKET |
The information in this section has been extracted from publicly available documents from various sources, including officially prepared materials from the Securities and Exchange Board of India, The Bombay Stock Exchange, and the National Stock Exchange, and has not been prepared or independently verified by us or any of our affiliates or advisers.
The Indian Securities Market
India has a long history of organized securities trading. In 1875, the first stock exchange was established in Mumbai.
The Securities and Exchange Board of India
India’s stock exchanges are regulated by the Securities and Exchange Board of India under the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Securities Contracts (Regulation) Rules, 1957. The Securities Contracts (Regulation) Rules regulate the recognition of stock exchanges, the qualifications for membership and the manner in which contracts are entered into and enforced between members.
The main objective of the Securities and Exchange Board of India, which was established by the government of India in February 1992, is to promote the development of and regulate the Indian securities markets and protect the interests of investors. The Securities and Exchange Board of India may make or amend an exchange’s by-laws and rules, overrule an exchange’s governing body and withdraw recognition of an exchange. In the past, the Securities and Exchange Board of India’s regulation of market practices was limited. The Securities and Exchange Board of India Act, 1992 granted the Securities and Exchange Board of India powers to regulate the business of Indian securities markets, including stock exchanges and other financial intermediaries, promote and monitor self-regulatory organiz ations, prohibit fraudulent and unfair trade practices and insider trading, and regulate substantial acquisitions of shares and takeovers of companies. The Securities and Exchange Board of India has also issued:
75
· | guidelines concerning minimum disclosure requirements by public companies; |
· | rules and regulations concerning: |
· | investor protection, insider trading, substantial acquisitions of shares and takeovers of companies, buybacks of securities, employee stock option schemes, foreign capital market issues, derivative instruments and sweat equity; and |
· | debenture trustees, depositaries, development financial institutions, venture capital funds, foreign institutional investors, stockbrokers, underwriters, merchant bankers, portfolio managers, mutual funds, credit rating agencies and other capital market participants; and |
· | rules and regulations regarding the prohibition of fraudulent and unfair trade practices relating to the securities market. |
The Securities Contracts (Regulation) Act has been amended to include derivatives of securities and instruments of collective investment in the definition of “securities.” This has been done with a view to develop and regulate the markets for derivatives. Trading in index-linked futures currently takes place on the National Stock Exchange and The Stock Exchange, Mumbai. Trading in individual stock futures that have been notified by Securities and Exchange Board of India is now permitted. The Securities and Exchange Board of India also set up a committee for the review of Indian securities laws, which has proposed a draft Securities Bill. The draft Securities Bill, if accepted, will result in a substantial revision in the laws relating to securities in India.
Public Company Regulation
Under the Companies Act, a public offering of securities in India must generally be made by means of a prospectus, which must contain information specified in the Companies Act and be filed with the Registrar of Companies having jurisdiction over the place where a company’s registered office is situated. A company’s directors and promoters may be subject to civil and criminal liability for misstatements in a prospectus. The Companies Act also sets forth procedures for the acceptance of subscriptions and the allotment of securities among subscribers and establishes maximum commission rates for the sale of securities.
The Securities and Exchange Board of India has issued detailed guidelines concerning disclosures by public companies and investor protection. Prior to the repeal of certain rules in mid-1992, the Controller of Capital Issues of the government of India regulated the prices at which companies could issue securities. The Securities and Exchange Board of India guidelines now permit existing listed companies to price freely their issues of securities, though the pricing of initial public offerings is subject to certain restrictions. All new issues governed by the Securities and Exchange Board of India guidelines are conditional upon a minimum subscription requirement of 90.0% of the securities being issued. Promoters of companies are required to retain a certain minimum certified holding of equit y share capital, which is subject to a lock-in for three years. Further, existing shareholders of the company, who are not promoters, are subject to a lock-in of one year from the date of the initial public offering. No issuance of bonus shares is permitted within 12 months of any public issue or rights issue.
Public limited companies are required under the Companies Act to prepare, file with the Registrar of Companies and circulate to their shareholders audited annual accounts, which comply with the Companies Act’s disclosure requirements and regulations governing their manner of presentation. In addition, a listed company is subject to continuing disclosure requirements pursuant to the terms of its listing agreement with the relevant stock exchange. Listed companies are now required to publish quarterly unaudited financial results that are reviewed by an outside auditor in accordance with a prescribed standard for non-audit reviews. The Securities and Exchange Board of India has recently notified amendments to the listing agreement tightening the continual disclosure standards by corporations and cor porate governance measures to be adopted by listed companies.
76
Listing
The listing of securities on a recognized Indian stock exchange is regulated by the Securities Contract Rules.
Under the standard terms of stock exchange listing agreements, the governing body of each stock exchange is empowered to suspend trading of or dealing in a listed security for breach of the company’s obligations under such agreement, subject to the company receiving prior notice of the intent of the exchange. In the event that a suspension of a company’s securities continues for a period in excess of three months, the company may appeal to the Securities and Exchange Board of India to set aside the suspension. The Securities and Exchange Board of India has the power to veto stock exchange decisions in this regard.
The Securities and Exchange Board of India has issued the Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003, which sets forth the procedure for delisting of securities in the following circumstances:
· | voluntary delisting sought by the promoters of a company; |
· | any acquisition of shares of the company or a scheme or arrangement, by whatever name referred to, consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement that may result in delisting of securities; |
· | promoters of the company who voluntary seek to delist their securities from all or some of the stock exchanges; |
· | cases where a person in control of management is seeking to consolidate his holdings in a company, in a manner which would result in the public shareholding in the company falling below the limit specified in the listing conditions or in a listing agreement that may have the effect of the company being delisted; and |
· | compulsory delisting by stock exchanges (e.g., upon failure by a company to pay required listing fees). |
Indian Stock Exchanges
There are 24 stock exchanges in India. Most of the stock exchanges have their own governing board for self-regulation.
It is estimated that the two major exchanges, The Bombay Stock Exchange and the National Stock Exchange, account for more than 90.0% of the market capitalization of listed Indian companies. The Bombay Stock Exchange and the National Stock Exchange account for a majority of trading volumes of securities in India. The Bombay Stock Exchange and National Stock Exchange together hold a dominant position among the stock exchanges in terms of number of listed companies, market capitalization and trading activity.
There are generally no restrictions on price movements of any security on any given day. However, to restrict abnormal price volatility, the Securities and Exchange Board of India has instructed stock exchanges to apply daily circuit breakers, which do not allow transactions at prices different by more than 8.0% of the previous closing price for shares quoted at Rs.20 or more. The Securities and Exchange Board of India has instructed stock exchanges to relax the circuit breakers by a further 8.0% after half an hour from the time prices reach the limit of 8.0%. It has allowed stock exchanges to fix circuit breakers for shares quoted at prices up to Rs.20. There is no circuit filter applicable for trading in shares on rolling settlement and for which derivative instruments are available. There is, however, a dummy circuit filter applicable in case of a 20% movement on share prices in order to prevent accidental trades. There is a 20% circuit filter applicable for trading in shares on rolling settlement and for which derivative instruments are not available. There is also an index based circuit filter based on the BSE SENSEX and NSE S&P CNX Fifty indices wherein trading in the entire market is halted for a specific period depending upon whether the index fluctuates in excess of 10%, 15% or 20%. Further, margin requirements are also imposed by stock exchanges that are required to be paid at rates fixed by the stock exchanges. The Indian stock exchanges can also exercise the power to suspend trading during periods of market volatility.
77
A settlement cycle is an account period for the securities traded on a stock exchange. At the end of the period, obligations are settled, i.e., buyers of securities pay for and receive securities while sellers give securities and receive payment for them. The obligations are settled on a net basis, i.e., if some security is both purchased and sold in the same settlement cycle then only the net quantity of securities is delivered or received and the net amount of funds paid or received. Typically, the length of the settlement period is two business days. The Securities and Exchange Board of India has specified certain shares to be settled by rolling settlement. Under rolling settlement, the length of the settlement period is one day. All stocks trading under the rolling settlement system are settled on a T+2-day basis; trades executed on a Monday are typically settled on the following Monday. Stocks that are not under the rolling settlement system follow the account period settlement system.
In December 1993, the Securities and Exchange Board of India announced a ban on forward trading on the Ahmedabad, Calcutta and Delhi stock exchanges and The Stock Exchange, Mumbai in order to contain excessive speculation, protect the interests of investors and regulate the stock market. All transactions thereafter were required to be for payment and delivery.
In October 1995, the Securities and Exchange Board of India announced the introduction of a modified forward trading system to enable buyers and sellers to defer the settlement of their obligations to the following settlement cycle. This system began on The Stock Exchange, Mumbai in January 1996 for select shares. The new system segregates trades into different categories, namely, carry-forward, delivery and jobbing, with different identification numbers of the various trades. The Securities and Exchange Board of India has appointed a committee to recommend modalities for a carry forward mechanism under the rolling settlement. Once the revised carry forward mechanism is approved, rolling settlement will be applicable also for shares in the carry forward list.
In May 2001, the Securities and Exchange Board of India announced that all shares included in the new system will trade only in the compulsory rolling settlement system from July 2, 2001. All outstanding deferred positions under the earlier system would have to be compulsorily liquidated by September 3, 2001.
In 1992, the Securities and Exchange Board of India promulgated rules and regulations that prescribe conditions for registration of stockbrokers. A stockbroker may not buy, sell or deal in securities except pursuant to a certificate granted by the Securities and Exchange Board of India. The regulations also prescribe a broker code of conduct and rules for the fair treatment of investors by brokers, the procedures for registration, the payment of registration fees, maintenance of appropriate books and records and the right of inspection of the books of the stockbrokers by the Securities and Exchange Board of India. Broker liability in cases of default extends to suspension or cancellation of the broker’s registration. The Securities and Exchange Board of India has issued registration ce rtificates to over 9,000 stockbrokers who are members of various stock exchanges in India. Before these regulations, stockbrokers were required to be registered only with the stock exchanges of which they were members. The Securities and Exchange Board of India regulations introduced the concept of dual registration of stockbrokers with the Securities and Exchange Board of India and the stock exchanges, and brought the brokers under regulation for the first time.
The Securities and Exchange Board of India has enforcement powers over secondary market participants for violation of any provisions of the Securities and Exchange Board of India Act, 1992, the rules and regulations of the Securities and Exchange Board of India, the Securities Contracts (Regulation) Act, 1956, or the rules and regulations made thereunder. The Securities and Exchange Board of India may also take enforcement actions for violations of the Securities Contract Act or rules made thereunder and rules, regulations and by-laws of the stock exchanges.
78
The Securities and Exchange Board of India has also announced SEBI Regularization Scheme, 2002, under which parties who are guilty of violating the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, will be granted general amnesty on the payment of a fine for each default during the prescribed period of time.
Internet-Based Securities Trading and Services
The Securities and Exchange Board of India has allowed securities trading over the Internet under the existing legal framework. The regulations seek to allow the Internet to be used as an order routing system through stock brokers registered with the Securities and Exchange Board of India on behalf of clients for executing trades on a recognized stock exchange in India. Stock brokers interested in providing this service are required to apply for permission to the respective stock exchange and also have to comply with certain minimum conditions stipulated by the Securities and Exchange Board of India. Given the limited life of these new regulations to date, it is possible that these regulations will continue to evolve in the future.
Takeover Code
Disclosure and mandatory bid obligations under Indian law are governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code) which prescribes certain thresholds or trigger points that give rise to these obligations. The Takeover Code is under constant review by the Securities and Exchange Board of India and was most recently amended in December 2002.
The most important features of the Takeover Code, as amended, are as follows:
· | Any acquirer (meaning a person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in a company, either by himself or with any person acting in concert) who acquires shares or voting rights that would entitle him to more than 5.0% of the shares or voting rights in a company is required to disclose the aggregate of his shareholding or voting rights in that company to the company (which in turn is required to disclose the same to each of the stock exchanges on which the company’s shares are listed) within two working days of (a) the receipt of allotment information; or (b) the acquisition of shares or voting rights, as the case may be. |
· | A person has to make a three-stage disclosure when he acquires 5%, 10% and 14% of the shares and/or voting rights in a company, of his holdings to that company (which in turn is required to disclose the same to each of the stock exchanges on which the company’s shares are listed). |
· | Promoters or persons in control of a company are also required to make annual disclosure of their holdings in the same manner. |
· | An acquirer cannot acquire shares or voting rights which (taken together with existing shares or voting rights, if any, held by him or by persons acting in concert with him) would entitle such acquirer to exercise 15.0% or more of the voting rights in a company, unless such acquirer makes a public announcement offering to acquire a further 20.0% of the shares of the company. |
· | An acquirer who, together with persons acting in concert with him, holds between 15.0% and 75.0% of the shares cannot acquire additional shares or voting rights that would entitle him to exercise a further 5.0% of the voting rights in the period of a financial year unless such acquirer makes a public announcement offering to acquire a further 20.0% of the shares of the company. |
· | Any further acquisition of shares or voting rights by an acquirer who holds 75.0% of the shares or voting rights in a company triggers the same public announcement requirements. |
79
· | In addition, regardless of whether there has been any acquisition of shares or voting rights in a company, an acquirer acting in concert cannot directly or indirectly acquire control over a company (for example, by way of acquiring the right to appoint a majority of the directors or to control the management or the policy decisions of the company) unless such acquirer makes a public announcement offering to acquire a minimum of 20.0% of the shares of the company. |
The Takeover Code sets out the contents of the required public announcements as well as the minimum offer price.
The Takeover Code permits conditional offers and provides specific guidelines for the gradual acquisition of shares or voting rights. Specific obligations of the acquirer and the board of directors of the target company in the offer process have also been set out. Acquirers making a public offer are also required to deposit in an escrow account a percentage of the total consideration which amount will be forfeited in the event that the acquirer does not fulfill his obligations. In addition, the Takeover Code introduces the “chain principle” by which the acquisition of a company will obligate the acquirer to make a public offer to the shareholders of each subsidiary company which is listed.
The general requirements to make such a public announcement do not, however, apply entirely to bailout takeovers when a promoter (i.e., a person or persons in control of the company, persons named in any offer document as promoters and certain specified corporate bodies and individuals) is taking over a financially weak company but not a “sick industrial company” pursuant to a rehabilitation scheme approved by a public financial institution or a scheduled bank. A “financially weak company” is a company which has at the end of the previous financial year accumulated losses, which have resulted in erosion of more than 50.0% but less than 100.0% of the total sum of its paid up capital and free reserves at the end of the previous financial year. A “sick industrial company” is a com pany registered for more than five years which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.
The Takeover Code does not apply to certain specified acquisitions including the acquisition of shares (1) by allotment in a public and rights issue, (2) pursuant to an underwriting agreement, (3) by registered stockbrokers in the ordinary course of business on behalf of clients, (4) in unlisted companies, (5) pursuant to a scheme of reconstruction or amalgamation or (6) pursuant to a scheme under Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985. Certain exemptions have also been provided for acquisition of shares pursuant to exercise of a put option or call option in the subsequent stage of a disinvestment, subject to the prior existence of such put option or call option having been disclosed in the open offer document. The Takeover Code does not apply to acquisitions in the ordinary co urse of business by public financial institutions either on their own account or as a pledge. In addition, the Takeover Code does not apply to the acquisition of ADSs so long as they are not converted into equity shares.
In case of creeping acquisitions/consolidations of holdings, the ceiling has been reduced from 10% to 5% of equity shareholding of the target company with effect from October 1, 2002. No exemptions are available to inter se transfers among promoters, in the event that the transfers take place at 25% premium to the market price of equity shares of the company. Change in control is, however, allowed in the event a special resolution is passed (in addition to the filing of the postal ballots).
Insider Trading
In 1992, the Securities and Exchange Board of India the new Insider Trading Regulations which require significantly greater disclosure by the company with regard to the trading of the company’s shares.
Under the Insider Trading Regulations, an insider is as a person who is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information.
80
Further, under the Regulations, no insider may, either on his own behalf or on behalf of any other person, deal in securities of a company listed on a stock exchange on the basis of any unpublished price sensitive information, or communicate any unpublished price sensitive information to any person, with or without his request for such information, except as required in the ordinary course of business or under any law, or counsel or procure any other person to deal in securities of any company on the basis of unpublished price sensitive information.
In accordance with Regulations, the company has promulgated an internal code of conduct which is applicable to the directors and designated employees of the company for dealings in shares of the company by the directors and designated employees of the company, and with regard to access to unpublished price sensitive information that the directors or the designated employees might have. The Regulations also require the company to follow strict information disclosure requirements on a need to know basis.
Depositories
In August 1996, the Indian Parliament enacted the Depositaries Act, 1996 which provides a legal framework for the establishment of depositaries to record ownership details and effectuate transfers in book entry form. The Securities and Exchange Board of India passed the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 which provides for the formation of such depositaries, the registration of participants as well as the rights and obligations of the depositaries, participants and the issuers. Every depositary has to register with the Securities and Exchange Board of India. Pursuant to the Depositories Act, the National Securities Depository Limited was established by the Unit Trust of India, the Industrial Development Bank of India and the National Stock Exchange in 1996 to provide electronic depositary facilities for trading in equity and debt securities. The National Securities Depository Limited, which commenced operations in November 1996, was the first depositary in India. Another depositary, the Central Depository Services (India) Limited, established by The Stock Exchange, Mumbai has commenced operations since July 15, 1999. The depositary system has significantly improved the operations of the Indian securities markets.
9D. | Selling Shareholders |
Not applicable.
9E. | Dilution. |
Not applicable.
9F. | Expenses of the Issuer |
Not applicable.
Item 10. | Additional Information |
10A. | Share Capital |
Not applicable.
81
10B. | Memorandum and Articles of Association |
Set forth below is certain information relating to our share capital, including certain provisions of our articles of association and the Companies Act. The information is not complete and is qualified in its entirety by reference to our articles of association.
General
Our authorized share capital is Rs.8,000,000,000, divided into 800,000,000 equity shares with a par value of Rs.10 each. At the date of this report, 630,000,000 shares were issued and fully paid.
Our equity shares are in registered form. The shares are the only class of share capital currently outstanding. There are no convertible debentures or warrants currently in existence. In the United States, our shares are listed on the NYSE as American Depositary Shares (ADS). Each ADS represents two equity shares. See Item 12D. “American Depositary Shares” in this report.
Dividends
Our shareholders, acting at the annual general meeting, may declare a dividend upon the recommendation of the board of directors. The amount of the dividend declared may not exceed the amount recommended by the board of directors, although a lesser amount may be declared. Dividends are distributed and paid within 30 days of the declaration by the shareholders. Our board of directors also is authorized under our articles of association to declare and pay interim dividends to shareholders.
If any dividend remains unclaimed at the end of 30 days, the amount of the dividend will be transferred to a separate account belonging to us. If it still remains unclaimed at the end of seven years, this amount will be transferred to government of India and cannot be claimed by the relevant shareholder. Dividends are payable only in cash to registered holders on a record date fixed prior to the relevant annual general meeting.
Dividends may be paid only out of our profits for the relevant year, after transfer to our reserves of a percentage of our profits for that year of not less than 2.5%. The Companies Act further provides that, in the event of inadequacy or absence of profits in any year, a dividend may be declared for that year out of our accumulated profits, subject to certain limitations. A dividend tax of approximately 16.995% (inclusive of Education surcharge) of distributed profit for a relevant period is payable by us.
The following table sets forth, for the periods indicated, the dividend per equity share and per global depositary receipt and the total amount of dividends paid on the equity shares, both exclusive of dividend tax.
For fiscal year | Dividend per equity share | Dividend per ADS/GDR | Total amount of dividends paid | |
(Rs.) | (Rs.) | (millions of Rupees) | ||
2010 | 0 | 0 | 0 | |
2009 | 1.0 | 2.0 | 630 | |
2008 | 4.0 | 8.0 | 2,520 | |
2007 | 4.0 | 8.0 | 2,520 | |
2006 | 4.0 | 8.0 | 2,520 |
The Ministry of Finance has adopted non-binding guidelines regarding the payment of dividends by “public sector undertakings (PSUs)” which apply to us. According to the guidelines, profit-making public sector undertakings which are commercial enterprises should generally declare a minimum dividend each fiscal year of 20% of the higher of paid-up share capital as of year-end or profit after tax for the year. In the case of telecommunications, oil, petroleum, chemical and other infrastructure industries, profit making PSUs should declare a minimum dividend for each fiscal year of 30% of profit after tax for the year or 30% on equity, whichever is higher.
82
Future dividends will depend upon our revenues, cash flow, financial condition and other factors. As an owner of ADSs, holders will be entitled to receive dividends payable in respect of the equity shares represented by our ADSs. The equity shares represented by our ADSs rank equally with our existing shares. ADS holders will bear all of the currency exchange risk of the conversion of any dividends from Indian rupees to dollars, and a decline in the value of the Indian rupee as compared to the dollar would reduce the dollar value of any dividends we may pay that are received by ADS holders. At present, we have equity shares issued in India.
Free Distribution of Equity Shares
In addition to permitting dividends to be paid out of current or retained earnings, the Companies Act permits us to distribute bonus shares to shareholders. Upon any distribution of bonus shares, an amount equal to the face value of the bonus shares to be distributed is transferred from the general reserve or share premium account to share capital. The bonus shares must be distributed to shareholders in proportion to the number of equity shares owned by them.
Preemptive Rights and Issue of Additional Shares
Subject to the approval of the President of India, we may by ordinary resolution increase our share capital by the issue of new shares or create a new class of shares. In addition, the rights attached to the shares of any class may be varied with the consent of not less than three-fourths of the issued shares of that class. The Companies Act gives shareholders the right to subscribe for new shares in proportion to their existing shareholdings unless otherwise determined by a special resolution to that effect adopted at a general meeting of shareholders. On November 19, 1997, at an extraordinary general meeting, we adopted a resolution with respect to the equity shares offered by us in the global depositary receipt offering. We must offer shares to existing shareholders by notice specifying t he number of shares offered and the date, within 30 days from the date of offer, by which the offer must be accepted. The board of directors is entitled to distribute the shares in respect of which preemptive rights have not been exercised in the manner that it deems most beneficial to us.
General Meetings of Shareholders
We are required to convene an annual general meeting of our shareholders within six months after the end of each financial year (subject to extensions which may be granted by the competent authorities) and may convene an extraordinary general meeting of shareholders when necessary or at the request of a shareholder or shareholders holding not less than 10% of our paid-up capital on the date of the request. The annual general meeting of the shareholders is generally convened by the Company Secretary in accordance with a resolution of the board of directors. Written notice setting out the agenda of the meeting must be given at least 21 days (excluding the day of service) prior to the date of the general meeting to the shareholders whose names are on the register at the record date. Those shareholders who are registered as shareholders on the date of the general meeting are entitled to attend or vote at such meeting.
The annual general meeting of shareholders must be held at our registered office or at such other place within the city in which the registered office is located; meetings other than the annual general meeting may be held at any other place determined by the board of directors.
Our articles of association provide that a quorum for a general meeting is the presence of at least five shareholders, including a representative of the President of India.
This year’s annual general meeting is scheduled to be held on October 13, 2010.
Voting Rights
At any general meeting, voting is by show of hands (where each shareholder has one vote) unless a poll is demanded by at least 10% of those entitled to vote on the resolution or those holding shares with a paid-up value of at least Rs.50,000. Upon a poll, every shareholder entitled to vote and present in person or by proxy has one vote for every share held by the shareholder. The Chairman has a deciding vote in the case of any tie. Our articles of association do not allow shareholders to cumulate their votes.
83
Any shareholder may appoint a proxy. The instrument appointing a proxy must be lodged with us at least 48 hours before the time of the meeting. A corporate shareholder may appoint an authorized representative who may vote in all respects as if a shareholder, both on a show of hands and upon a poll.
Ordinary resolutions may be passed by simple majority of those present and voting at any general meeting for which the required period of notice has been given. However, certain resolutions such as those relating to the alteration of our articles of association, the commencement of a new line of business, the issue of further shares without preemptive rights and a reduction of share capital require a three-fourth majority of the votes cast in favor of the resolution (whether by show of hands or upon a poll). The Companies Act has been amended to require that certain shareholder resolutions only be passed through postal ballot.
Register of Shareholders, Record Dates and Transfer of Shares
Our share transfer agents maintain registers of our shareholders and beneficial owners of shares held through depositaries. For the purpose of determining equity shares entitled to annual dividends, the register is closed for a specified period prior to the annual general meeting. The Companies Act and our listing agreement with The Stock Exchange, Mumbai (and the other Indian Stock Exchanges) permit us, according to a resolution of the Board and upon at least seven working days’ advance notice to The Stock Exchange, Mumbai (and such other stock exchanges), to set the record date and upon seven days’ public notice to close the register of shareholders for not more than 30 days at a time, and not more than 45 days in a year, in order for us to determine which shareholders are entitled to certain rights relating to the shares. Trading of shares may, however, continue while the register of shareholders is closed.
Following introduction of the Depositories Act, 1996, and the repeal of Section 22A of the Securities Contracts (Regulation) Act, 1956, which enabled companies to refuse to register transfers of shares in certain circumstances, the shares of a company are freely transferable, subject only to the provisions of Section 111A of the Companies Act. Pursuant to Section 111A, if the transfer of shares is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 or the regulations issued thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985, the Company Law Board (a statutory body which administers the Companies Act) may, on application made by an investor, the Securities and Exchange Board of India or certain other parties, direct the rectification of the register of mem bers. The Company Law Board may, in its discretion, issue an interim order suspending the voting rights attached to the relevant shares, before making or completing its inquiry into the alleged contravention. Pending the inquiry, the rights of a holder to transfer the shares would not be restricted, although the voting rights attached to the shares may remain suspended by an order of the Company Law Board.
The Indian Companies Act, 1956, has been recently amended to provide for the constitution of a National Company Law Tribunal and dissolution of the Company Law Board. The National Company Law Tribunal shall exercise all powers that had been conferred on the Company Law Board or the High Courts by the Indian Companies Act, 1956. This amendment has not yet been brought into force.
Shares held through depositories are transferred in the form of book entries or in electronic form in accordance with the rules and procedures laid down by Securities and Exchange Board of India. These regulations provide the regime for the functioning of the depositaries and the participants and set out the manner in which the records are to be kept and maintained and the safeguards to be followed in this system. Transfers of beneficial ownership of shares held through a depositary are exempt from stamp duty.
The Securities and Exchange Board of India has notified our equity shares for trading and settlement only in book-entry form for all investors, except for transactions made outside and which are not required to be reported to the stock exchange. Transfers of equity shares in book-entry form require both the seller and the purchaser of the equity shares to establish accounts with depositary participants appointed by depositaries established under the Depositaries Act, 1996. Charges for opening an account with a depositary participant, transaction charges for each trade and custodian charges for securities held in each account vary depending upon the practice of each depositary participant. Upon delivery, the equity shares shall be registered in the name of the relevant depositary on our books in book-en try form and this depositary shall enter the name of the investor in its records as the beneficial owner. The transfer of beneficial ownership shall be effected through the records of the depositary. The beneficial owner shall be entitled to all rights and benefits and subject to all liabilities in respect of his securities held by a depositary.
84
The requirement to hold our equity shares in book-entry form will apply to the ADS holders when the equity shares are withdrawn from the depositary facility upon surrender of the global depositary receipts. In order to trade our equity shares in the Indian market, the withdrawing ADS holder will be required to comply with the procedures described above.
We have entered into a listing agreement with each of the other Indian stock exchanges on which the shares are listed. Clause 40A of the listing agreements provides that if an acquisition of a listed company’s equity shares results in the acquirer and its associates holding 5% or more of the company’s outstanding equity shares, the acquirer must report its holding to the relevant stock exchanges. If an acquisition would result in the acquirer and its associates holding equity shares which carry 10% or more of the voting rights, then the acquirer must notify the relevant stock exchanges. If an acquisition is deemed a takeover, the acquirer must, before acquiring shares, offer (in accordance with Clause 40B of the listing agreements) on a uniform basis to all remaining shareholders of the com pany to acquire a minimum of a further 20% of the total shares of the company at a prescribed price. The acquisition of shares of a company listed on an Indian stock exchange beyond certain threshold amounts is subject to regulations governing takeovers of Indian companies. See Item 9C. “The Offer and Listing—The Indian Securities Market—Takeover Code” in this report. Clauses 40A and 40B and such regulations will not apply to shares so long as they are represented by ADSs.
Shareholder Access to Corporate Records
Under the Companies Act, the shareholder register and index, the register and index of debenture holders and copies of all annual returns together with copies of certificates and documents required to be annexed thereto, must be kept at our registered office for inspection by any share or debenture holder free of charge and by any other person on payment of a fee. The minute books of the general meetings of our shareholders must be kept at our registered office and be made available for inspection by our shareholders regardless of the size of their shareholding.
Disclosure of Ownership Interest
Section 187C of the Companies Act generally requires beneficial owners of shares of Indian companies who are not holders of record to declare to the company details of the holder of record and holders of record to declare details of the beneficial owner. While it is unclear whether Section 187C applies to holders of ADSs of a company, investors who exchange ADSs for shares are subject to this Section. Failure to comply with Section 187C would not affect the obligation of a company to register a transfer of shares or to pay any dividends to the registered holder of any shares in respect of which such declaration has not been made, but any person who fails to make the required declaration may be liable for a fine of up to Rs.1,000 for each day the failure continues. Furthermore, any charge, promissory no te or any other collateral agreement created, executed or entered into by the registered owner of any share in respect of which a declaration required under Section 187C has not been made is not enforceable by the beneficial owner or any person claiming through him.
So long as the government of India’s shareholding equals or exceeds 51%, Section 187C will not apply to holders of our equity securities, including holders of our ADSs or equity shares.
Audit and Annual Report
At least 21 days before the annual general meeting of shareholders, we must circulate either a detailed or an abridged version of our audited balance sheet and profit and loss account and the related reports of our board of directors and our auditors. We are also required under the Companies Act to make available upon request of any shareholder a complete balance sheet and profit and loss account in the case of circulation of abridged accounts.
The Comptroller and Auditor General of India, has the power to direct the manner in which our accounts are audited by the auditors appointed pursuant to Section 619(2) of the Companies Act, to give the auditors instructions in regard to any matter relating to the performance of their functions and to conduct a supplementary or test audit of our accounts by such auditors. The Comptroller and Auditor General also has the right to comment on or supplement the audit report to the Comptroller and Auditor General which must be placed before our annual general meeting at the same time and in the same manner as the audit report.
85
Powers of the President of India
Under Articles 66A and 66B of our articles of association, the President of India is entitled to appoint one third of our total number of directors including our Chairman-cum-Managing Director as well as our whole time directors. Article 69(i) requires the Chairman to reserve for the decision of the President of India all proposals, decisions or matters which raise in the opinion of the Chairman any important issue and which are, on that account, fit to be reserved for the decision of the President of India. No decision on these important issues may be taken in the absence of the Chairman appointed by the President of India. Article 69(ii) lists the matters in respect of which prior approval of the President of India must be obtained, which include issuance of debentures and the sale, lease or disposal of any land or building with an original book value in excess of Rs.1 million. Under Article 71, we may not take action in respect of any proposal or decision of the board of directors reserved for approval of the President until his approval is obtained. The President may modify the board of directors’ proposals or decisions.
Article 70 grants the President of India the power to issue directives in regard to the conduct of our business and affairs, which are binding on our board of directors. These powers include the power to give directives to us as to the exercise and performance of our functions in matters involving national security or substantial public interest, power to call for returns, accounts and other information with respect to our properties and activities and to determine in consultation with the board of directors our financial and economic objectives.
Acquisition by MTNL of Our Own Shares
Until 1998, the Companies Act did not permit a company to acquire its own equity shares because of the resulting reduction in the company’s capital. However, the government of India amended the Companies Act to allow a repurchase of shares in certain circumstances. A buy-back requires compliance with specific buy-back guidelines specified in the Companies Act and by the Securities and Exchange Board of India.
Holders of ADSs will be eligible to participate in a buy-back in certain cases. An ADS holder may acquire shares by withdrawing from the depositary facility and then selling those shares back to us.
There can be no assurance that the shares offered by an ADS holder in any buy-back of shares by us will be accepted by us. Investors are advised to consult Indian legal advisers prior to participating in any buyback by us, including in relation to any tax issues relating to such buy-back.
Liquidation Rights
Subject to the rights of employees, creditors and of the holders of any other shares entitled by their terms to preferential repayment over the shares, in the event of our winding up, the holders of our shares are entitled to be repaid the amount of capital paid up or credited as paid up on their shares. All surplus assets after payments due to the holders of any preference shares belong to the holders of the shares in proportion to the amount paid up or credited as paid up on such shares, respectively, at the commencement of the winding up.
American Depositary Shares
Our ADSs were originally issued in an exchange offer during October 2001 in which we offered ADSs for our global depositary receipts on a one-for-one basis. Our global depositary receipt program was cancelled and the receipts delisted from the London Stock Exchange in December 2001. In October 2001, our ADSs were listed and began trading on the New York Stock Exchange. There have been no changes to the depositary agreement governing our ADSs since the exchange offer. See Item 12D. “American Depositary Shares” in this report.
86
10C. | Material Contracts |
Since April 1, 2006, we have not entered into any material contracts that were not in the ordinary course of business.
10D. | Exchange Controls |
INDIAN FOREIGN EXCHANGE CONTROLS AND SECURITIES REGULATIONS
Restrictions on Conversion of Indian Rupees
There are restrictions on the conversion of Indian rupees into dollars. Before February 29, 1992, the Reserve Bank of India determined the official value of the rupee in relation to a weighted basket of currencies of India’s major trading partners. In the February 1992 budget, a new dual exchange rate mechanism was introduced by allowing conversion of 60.0% of the foreign exchange received on trade or current account at a market-determined rate and the remaining 40.0% at the official rate. All importers were, however, required to buy foreign exchange at the market rate except for certain specified priority imports. In March 1993, the exchange rate was unified and allowed to float. In February 1994 and again in August 1994, the Reserve Bank of India announced relaxations in p ayment restrictions in the case of a number of transactions. Since August 1994, the government of India has substantially complied with its obligations owed to the International Monetary Fund, under which India is committed to refrain from using exchange restrictions on current international transactions as an instrument in managing the balance of payments. Effective July 1995, the process of current account convertibility was advanced by relaxing restrictions on foreign exchange for various purposes, such as foreign business travel, travel for education, travel for pilgrimage, medical treatment and others.
Restrictions on Sale of the Equity Shares Underlying the ADSs and for Repatriation of Sale Proceeds
ADSs issued by Indian companies to non-residents have free transferability outside India. However, under Indian regulations and practice, the approval of the Reserve Bank of India is required for the sale of equity shares underlying the ADSs (other than a sale on a stock exchange or in connection with an offer made under the takeover regulations) by a non-resident of India to a resident of India as well as for renunciation of rights to a resident of India. Investors who seek to sell in India any equity shares (other than a sale on a stock exchange or in connection with an offer made under the takeover regulations) withdrawn from the depositary facility and to convert the rupee proceeds from such sale into foreign currency and repatriate such foreign currency from India will, subject to the foregoing, have to obta in Reserve Bank of India approval for each such transaction.
Limitations on Deposits of Equity Shares into the ADS Program
Under procedures adopted by the Reserve Bank of India in 1997, the depositary is permitted to accept deposits of our outstanding equity shares and deliver ADSs representing the deposited equity shares to the extent, and limited to the number, of ADSs that have previously been converted into underlying equity shares. Under these procedures, if you elect to surrender your ADSs and receive equity shares, you may be unable to re-deposit those outstanding equity shares with our depositary and receive ADSs because the number of new ADSs that can be issued cannot, at any time, exceed the number of ADSs converted into underlying equity shares or result in foreign equity in MTNL exceeding 49%.
Specifically, in February 2002, the Reserve Bank of India issued operative guidelines for “limited two-way fungibility.” Under the guidelines, a registered broker in India is now permitted to purchase equity shares of an Indian company on behalf of persons resident outside India for the purpose of converting the equity shares so purchased into ADRs or GDRs, provided that (i) the equity shares are purchased on a recognized stock exchange, (ii) the Indian company has issued ADRs or GDRs, (iii) the equity shares are purchased with the permission of the custodian of the ADRs or GDRs of the Indian company, and are deposited with such custodian, (iv) the number of equity shares so purchased to be converted into ADRs or GDRs do not exceed the ADRs or GDRs previously convert ed into underlying equity shares (the number of equity shares available for conversion into ADRs or GDRs is dependent upon the number of equity shares arrived at after conversion of ADRs into equity shares will have to be checked with the custodian) and (v) the number of equity shares so purchased to be converted shall be subject to sectoral caps as applicable and all the concerned parties shall comply with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued thereunder.
87
Further, paragraph (v) of the guidelines states that the company should not be involved in the process and the process should be demand driven upon the request for ADRs or GDRs emanating from overseas investors, and expenses involved in the overseas transaction would be borne by the investors themselves.
Restrictions on Foreign Ownership of Indian Securities
The government of India regulates ownership of Indian companies by foreigners. Foreign investment in Indian securities, including the equity shares represented by the ADSs, is generally regulated by the Foreign Exchange Management Act, 1999, which permits transactions including the inflow or outflow of foreign exchange and empowers the Reserve Bank of India to prohibit or regulate such transactions.
The Foreign Exchange Management Act permits most transactions involving foreign exchange except those prohibited or restricted by the Reserve Bank of India. The extent of control exercised over transactions involving foreign exchange depends upon the type of transaction involved. Transactions that alter the assets or liabilities, including contingent liabilities, outside India of persons resident in India or the assets and liabilities in India of persons resident outside India are known as capital account transactions. Transactions other than capital account transactions are known as current account transactions.
The Foreign Exchange Management Act has eased restrictions on current account transactions. However, the Reserve Bank of India continues to exercise control over capital account transactions. The Reserve Bank of India has issued regulations under the Foreign Exchange Management Act to regulate various capital account transactions, including certain aspects of the purchase and issuance of shares by Indian companies.
The Reserve Bank of India has issued a notification under the provisions of the Foreign Exchange Management Act relaxing the requirement of prior approval for an Indian company making an ADS issue provided that the issuer is eligible to issue ADSs pursuant to guidelines issued by the Ministry of Finance and has the necessary approval from the Foreign Investment Promotion Board.
Under the foreign investment rules, the following restrictions are applicable on foreign ownership:
· | under the “foreign direct investment” scheme, foreign individuals may own more than 49% of the equity shares of an Indian telecommunications company only with the approval of the Foreign Investment Promotion Board; this approval is granted on a case-by-case basis. However, ISPs with gateways, radio paging, and end to end bandwidth permitted up to 74% with FDI beyond 49% requiring government approval. |
· | under the “depositary” scheme, foreign investors may purchase ADSs or global depositary receipts, subject to the receipt of all necessary government approvals at the time the depositary receipt program is set up; |
· | under the “portfolio investment” scheme, foreign institutional investors, subject to registration with the Securities and Exchange Board of India and the Reserve Bank of India, may be permitted to own, in the aggregate, up to an additional 24.0% of our equity shares that are not represented by ADSs or global depositary receipts (and up to 49.0% with the approval of our shareholders); no single foreign institutional investor may own more than 10.0% of our equity shares; and |
· | under the “portfolio investment” scheme, non resident Indians may own up to an aggregate or 10.0% of our equity shares; no single non-resident Indian may own more than 5.0% of our total equity shares. |
88
We had obtained approvals from the Ministry of Finance, the Foreign Investment Promotion Board, the DOT and special permission from the Reserve Bank of India for the offering of our global depositary receipts. Various tax concessions were also made available with respect to the existing global depositary receipt offering in accordance with the provisions of Section 115AC of the Indian Income-tax Act, 1961. Since no new shares were issued or offered in our exchange offer and the exchange offer was related to a change in the form of depository receipts, the original approvals needed merely to be taken on file, noted and recorded for modification. We obtained from the Ministry of Finance, Reserve Bank of India, the Foreign Investment Promotion Board and the DOT, modifications to the original approvals/spe cial permission given by them, for our exchange offer.
Since December 2005, the total composite foreign holding of our common shares including but not limited to investments by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs), convertible preference shares, proportionate foreign investment in Indian promoters/investment companies including their holding companies, etc., herein after referred as FDI, has been subject to a Ceiling of 74%. The 74% foreign investment can be made directly or indirectly in the operating company or through a holding company and the remaining 26% will be owned by resident Indian citizens or an Indian Company (i.e. foreign direct investment does not exceed 49% percent and the management is with the Indian owners). It is clarified that proportionate foreign component of such an Indian Company will also be counted towards the ceiling of 74%. However, the foreign component in the total holding of Indian public sector banks and Indian public sector financial institutions will be treated as ‘Indian’ holding. Each licensee is required to disclose the status of such foreign holding and certify that the foreign investment is within the ceiling of 74% on a half yearly basis.
As of June 30, 2010, approximately 10.35% of our equity shares were held of record by persons with addresses outside of India (including Foreign Institutional Investors who held approximately 5.81% of our equity shares).
An investor in ADSs does not need to seek the specific approval from the government of India to purchase, hold or dispose of its ADSs. However, foreign investment in our ADSs may not exceed 49% of our total equity shares without prior government approval.
Our outstanding equity shares, including the equity shares underlying the ADSs, are listed and traded on the Bombay, Calcutta, Delhi and Chennai Stock Exchanges, and the National Stock Exchange. The prices for equity shares as quoted in the official list of each of the Indian stock exchanges are in Indian rupees. The ADS are listed on the New York Stock Exchange in U.S. dollars.
Equity shares which have been withdrawn from the depositary facility and transferred on our register of shareholders to a person other than the depositary or its nominee may be voted by that person. However, an ADS holder may not receive sufficient advance notice of shareholder meetings to enable you to withdraw the underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor, non-resident Indian or non-Indian corporation were to withdraw its equity shares from the ADS program, its investment in the equity shares would be subject to the general restrictions on foreign ownership noted above and may be subject to the portfolio investment restrictions, including the 10-24% portfolio investment limitations, and the 5-10% non-resident Indian limitation. The application of these limitations, however, is not clear. Secondary purchases of securities of Indian companies in India by foreign direct investors or investments by non-resident Indians, persons of Indian origin and foreign institutional investors above the ownership levels set forth above, require government of India approval on a case-by-case basis. It is u nclear whether similar case-by-case approvals of ownership of equity shares withdrawn from the depositary facility by foreign institutional investors and non-resident Indians would be required.
Further, if an ADS holder withdraws equity shares from the ADS program and its direct or indirect holding in MTNL exceeds 15.0% of our total equity (under the Takeover Code), such holder would be required to make a public offer to the remaining shareholders. If one withdraws equity shares from the depositary facility, one will not be able to redeposit them with the depositary.
89
If one wishes to sell the equity shares withdrawn from the depositary facility, they will be required to receive the prior approval of the Reserve Bank of India.
Under procedures approved by the Reserve Bank of India, the custodian will be permitted to accept deposits of our outstanding equity shares purchased on a recognized stock exchange by registered brokers in India on behalf of a foreign investor. The depositary may issue ADRs evidencing ADSs representing the deposited equity shares to the extent, and limited to the number, of ADSs that have previously been converted into underlying equity shares, subject to applicable foreign ownership restrictions. See “— Limitations on Deposits of Equity Shares into the ADS Program” above for more details on these procedures.
Other Regulations
For more information on relevant securities and related regulations, please see Item 9C. “The Offer and Listing—The Indian Securities Market” in this report.
10E. | Taxation |
Indian Taxation
The following is a summary of the material Indian tax consequences for holders of ADSs and equity shares received upon withdrawal of such equity shares who are not resident in India, whether of Indian origin or not. This discussion is based on the provisions of the Indian Income-Tax Act, 1961, including the special tax regime for ADSs contained in Section 115AC, which has been extended to cover additional ADSs that an investor may acquire in an amalgamation or restructuring of the company, and certain regulations implementing the Section 115AC regime. The Indian Income Tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of the Section 115AC regime may be amended or modified by future amendments to the Indian Income Tax Act. Amendments to Section 115AC extend the special tax regime of Section 115AC to ADSs re-issued, in accordance with procedures established by the Indian government (operative guidelines issued under the Foreign Exchange Management notification dated February 13, 2002), against existing shares of an Indian company purchased by a non-resident investor in foreign currency through an approved intermediary. Under these guidelines re-issuance of ADSs would be permitted to the extent of ADSs which have been converted into underlying shares.
The summary is not intended to constitute a complete analysis of the tax consequences under Indian law of the acquisition, ownership and sale of ADSs and equity shares by non-resident investors. Potential investors should, therefore, consult their own tax advisers on the tax consequences of such acquisition, ownership and sale, including specifically the tax consequences under Indian law, the law of the jurisdiction of their residence, any tax treaty between India and their country of residence, and in particular the application of the regulations implementing the section 115AC regime.
Residence
For the purpose of the Income Tax Act, an individual is a resident of India during any fiscal year, if he (1) is in India in that year for 182 days or more or (2) having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India for period or periods amounting in all to 60 days or more in that year. The period of 60 days is substituted by 182 days in case of an Indian citizen or a person of Indian origin who being resident outside India visits India during the financial year or an Indian citizen who leaves India for the purposes of his employment during the financial year. A company is resident in India in any fiscal year if it is registered in India or the control and management of its affairs is situated wholly in India in that year. 160;A firm or other association of persons is resident in India except where the control and the management of its affairs are situated wholly outside India. Individuals, companies, firms or other associations of persons that are not residents of India would be treated as non-residents for purposes of the Income Tax Act.
Taxation of Distributions
Dividends distributed by an Indian company after April 1, 2003 are not subject to tax in the hands of shareholders. During the 2009 fiscal year we declared a final dividend of Rs1.00 per share, although we do not anticipate paying any dividend for the 2010 fiscal year. We must pay a “dividend distribution tax” on the final dividend at the rate of 15% (plus a surcharge of 10% and an add-on tax at the rate of 3%).
90
Taxation on Redemption of ADSs
The acquisition of equity shares upon a redemption of ADSs by a non-resident investor will not give rise to a taxable event for Indian tax purposes.
Taxation on Sale of Equity Shares or ADSs
Any transfer of ADSs or equity shares outside India by a non-resident investor to another non-resident investor does not give rise to Indian capital gains tax.
Subject to any relief under any relevant double taxation treaty, a gain arising on the sale of an equity share to a resident of India or where the sale is made inside India will generally give rise to a liability for Indian capital gains tax. Such tax is required to be withheld at source. Where the equity share has been held for more than 12 months (measured from the date of advice of redemption of the ADSs by the Depositary), the rate of tax is 10.46% (inclusive of surcharge). Where the equity share has been held for 12 months or less, the rate of tax varies and will be subject to tax at normal rates of income-tax applicable to non-residents under the provisions of the Indian Income Tax Act, subject to a maximum of 42.23% (inclusive of surcharge) in the case of foreign companies. The actual rate depends on a number of factors, including without limitation the nature of the non-resident investor. During the period the underlying equity shares are held by non-resident investors on a transfer from the Depositary upon redemption of ADRs, the provisions of the Avoidance of Double Taxation Agreement entered into by the government of India with the country of residence of the non-resident investors will be applicable in the matter of taxation of any capital gain arising on a transfer of the equity shares. The double taxation treaty between the United States and India does not provide U.S. residents with any relief from Indian tax on capital gains.
For purposes of determining the amount of capital gains arising on a sale of an equity share for Indian tax purposes, the cost of acquisition of an equity share received upon redemption of an ADS will be the price of the share prevailing on The Stock Exchange, Mumbai or the National Stock Exchange on the date on which the depositary advises the custodian of such redemption, not the acquisition cost of the ADS being redeemed. The holding period of an equity share received upon redemption of an ADS will commence from the date of advice of redemption by the depositary. The exact procedures for the computation and collection of Indian capital gains tax are not settled.
Rights
A distribution to non-resident holders of additional ADSs or equity shares or rights to subscribe for equity shares made with respect to ADSs or equity shares is not subject to tax in the hands of the non-resident holder.
It is unclear as to whether capital gain derived from the sale of rights by a non-resident holder not entitled to exemption under a tax treaty to another non-resident holder outside India will be subject to Indian capital gains tax. If rights are deemed by the Indian tax authorities to be situated within India, as our situs is in India, the gains realized on the sale of rights will be subject to customary Indian taxation as discussed above.
Stamp Duty
A transfer of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of equity shares from the depositary in exchange for ADSs representing such equity shares in physical form, an investor would be liable for Indian stamp duty at the rate of 0.5% of the market value of the equity shares at the date of registration. Similarly, a sale of equity shares by an investor would be also subject to Indian stamp duty at the rate of 0.5% of the market value of the equity shares on the trade date, although customarily such tax is borne by the transferee, that is, the purchaser. However, our equity shares are manditorily deliverable in uncertificated form and under Indian stamp law, no stamp duty is payable on the acquisition or transfer of equity shares in uncertificated/dematerialized form.
91
Other Taxes
At present, there are no taxes on wealth, gifts and inheritance which may apply to the ADSs and underlying equity shares.
Service Tax
Brokerage or commission paid to stockbrokers in connection with the sale or purchase of shares was subject to a service tax 12.24%, however the rate was changed to 12.36% effective May 13, 2007, and then changed to 10.30% effective February 24, 2009. The stockbroker is responsible for collecting the service tax and paying it to the relevant authority.
United States Federal Income Taxation
The following is a summary of certain United States federal income tax considerations for U.S. Holders (as defined below) of ADSs or equity shares who hold ADSs or equity shares as of the date hereof. This summary is based upon existing United States federal income tax law which is subject to change, possibly on a retroactive basis. This summary does not discuss all aspects of United States federal income taxation which may be important to particular holders in light of their individual investment circumstances, such as ADSs or equity shares held by holders subject to special tax rules ( e.g., financial institutions, insurance companies, broker-dealers, tax-exempt organizations, and non-U.S. Holders) or to persons that will hold ADSs or equity shares as part of a straddle, hedge, conversion, or other i ntegrated transactions for United States federal income tax purposes or that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any state, local, or foreign tax considerations. This summary assumes that investors hold, and will continue to hold, their ADSs or equity shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (Code). Holders are urged to consult their tax advisers regarding the United States federal, state, local, and foreign income tax considerations, including the “passive foreign investment company” rules described below, of the ownership and disposition of ADSs or equity shares.
For purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or equity shares that is for United States federal income tax purposes (i) an individual who is a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in or under the law of the United States or any State or political subdivision thereof, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust, or (B) that was in existence on August 20, 1996, was treated as a United State s person under the Code on the previous day, and properly elected to continue to be so treated. The tax treatment of persons who hold their ADSs or equity shares through a partnership (including an entity treated as a partnership for United States federal income tax purposes) will generally depend on the status of the partner and the activities of the partnership.
General
For purposes of United States federal income taxation, a holder of ADSs will be treated as the owner of his proportionate interest in the underlying equity shares held by the depositary. Accordingly, no gain or loss will be recognized upon the exchange of ADSs for the holder’s proportionate interest in equity shares, a holder’s tax basis in the withdrawn equity shares will be the same as his tax basis in the ADSs surrendered in exchange therefor, and such holder’s holding period in the withdrawn equity shares will include the period during which the holder held the surrendered ADSs. The following discussion assumes that we will not be classified as a PFIC for United States federal income tax purposes. For further PFIC considerations, see “—PFIC Considerations” below.
92
U.S. Holders
Taxation of Dividends. Any cash distributions paid by U.S. out of our earnings and profits, as determined under United States federal income tax principles, will be subject to tax as ordinary dividend income and will be includible in the gross income of a U.S. Holder upon receipt. Cash distributions paid by U.S. in excess of our earnings and profits will be treated as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in his ADSs or equity shares, and thereafter as gain from the sale or exchange of a capital asset. Dividends paid in Indian rupees will be includible in income in a United States dollar amount based on the United States dollar-Indian rupee exchange rate prevailing at the time of receipt of such dividends by the U.S. Holder (in the case of equity shares) or the depositary (in the case of ADSs). A U.S. Holder who receives payment in Indian rupees and converts those Indian rupees to U.S. dollars at an exchange rate other than the rate in effect on such date would have a foreign currency exchange gain or loss, which would be treated as ordinary gain or loss. Dividends received on the ADSs or equity shares will not be eligible for the dividends received deduction allowed to corporations.
Dividends paid on ADSs or equity shares will be treated, for United States federal income tax purposes, as foreign source income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any Indian income tax imposed on dividends received on the ADSs or equity shares. U.S. Holders who do not elect to claim a foreign tax credit for Indian income tax withheld may instead claim the Indian income tax withheld as a deduction for United States federal income tax purposes, but only for a year in which the U.S. Holder elects to do so for all creditable foreign taxes.
Subject to certain limitations, “qualified dividend income” received by a noncorporate U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on ADSs or equity shares should qualify for the 15 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and India (the “Treaty”) or (ii) the ADSs or equity shares are readily tradeable on an established securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that our ADSs currently are readily tradable on an established securities market in the United States. However, n o assurance can be given that they will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied. The rate reduction also does not apply to dividends received from a passive foreign investment company, see discussion below, or in respect of certain hedged positions or in certain other situations. There are complex rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ADSs or equity shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
A distribution of additional shares issued by us to U.S. Holders with respect to their ADSs or equity shares that is pro rata to all of our shareholders should generally not be subject to United States federal income tax. The tax basis of such additional shares will be determined by allocating the U.S. Holder’s tax basis in the ADSs or equity shares between the ADSs or equity shares and the additional shares, based on their relative fair market values on the date of distribution.
Sale or Other Disposition of ADSs or Ordinary Shares. A U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or equity shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted tax basis in such ADSs or equity shares. Any capital gain or loss will be long-term if the ADSs or equity shares have been held for more than one year and will generally be United States source gain or loss. The claim for a deduction in respect of a capital loss is subject to limitations.
Under certain circumstances described under “Indian Taxation—Taxation on Sale of Equity Shares or ADSs” in this report, a U.S. Holder may be subject to Indian tax upon the disposition of equity shares or ADSs. In such circumstances and subject to applicable limitations, such US Holder may elect to treat the gain as foreign source income and to credit the Indian tax against its United States federal income tax liability with respect to the gain. U.S. Holders should consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
In the case of a cash basis U.S. Holder who receives Indian rupees in connection with the sale or disposition of ADSs or equity shares, the amount realized will be based on the U.S. dollar value of the Indian rupees received with respect to the ADSs or equity shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in Indian Rupees and converts them into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency gain or loss, which would be treated as ordinary income or loss.
93
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers, provided that the election is applied consistently from year to year and meets certain other requirements. An accrual basis taxpayer not making such an election may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of the ADSs or equity shares.
Information Reporting and Backup Withholding. In general, information reporting requirements will apply to dividends in respect of equity shares or ADSs or the proceeds received on the sale, exchange, or redemption of equity shares or ADSs paid within the United States (and in certain cases, outside of the United States) to U.S. Holders other than certain exempt recipients (such as corporations), and a 28% backup withholding rate may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number to us or our payment agent or to report interest and dividends required to be shown on its United States federal income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will generally be allowed as a c redit against the U.S. Holder’s United States federal income tax liability, provided that the required information is furnished to the IRS.
PFIC Considerations. A foreign corporation will be classified as a “passive foreign investment company” (PFIC), for United States federal income tax purposes, if 75% or more of its gross income or 50% or more of its assets are “passive” as determined under the PFIC rules. The determination of whether a foreign corporation is a PFIC is a factual determination and may entail the resolution of certain legal issues such as the tax treatment of on-lending transactions involving related parties under the PFIC rules. In addition, such determination is made on an annual basis and, accordingly, is subject to change from year to year.
If we were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign corporation that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of ADSs or equity shares may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of the ADSs or equity shares and (ii) any “excess distribution” paid on the ADSs or equity shares (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution. Particular U.S. Holders may be eligible to make certain elections which would change their tax treatment.
10F. | Dividend and Paying Agents |
Not applicable.
10G. | Statements by Experts |
Not applicable.
10H. | Documents on Display |
We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. One may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street N.E., Room 1580, Washington, D.C. 20459, telephone this 1-800-SEC-0330. We file our periodic reports electronically through the SEC’s EDGAR system. Any filings we make electronically are available to the public over the Internet at the SEC’s web site at http://www.sec.gov.
In addition, documents referred to in this Form 20-F may be inspected at our corporate offices at 12th Floor, Jeevan Bharati, Tower-1, 124 Connaught Circus, New Delhi, India. Information about us is also available on our web site http://www.mtnl.net.in., but it does not constitute any part of this report.
94
10I. | Subsidiary Information |
Not applicable.
Item 11. | Quantitative and Qualitative Disclosures about Market Risk |
Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of periodic temporary investments of excess cash, trade receivables, and investments in ITI Limited preference shares and MKVDC bonds. We place our temporary excess cash in short term deposits. By their nature, all such financial instruments involve risk including the credit risk of non-performance by counter parties. In management’s opinion, as of March 31, 2009 and 2010, there was no significant risk of loss in the event of non-performance of the counterparties to these financial instruments, other than the amounts already provided for in the financial statements. To reduce credit risk, we perform ongoing credit evaluation of our customers. As of March 31, 2009 and 2010, BSNL and the DOT accounted for m ore than 10% of total receivables.
The risk in relation to investment in ITI Limited is offset by clause relating to our entitlement to set off the amounts receivable in respect of principal outstanding from the dues payable to ITI Limited. The clause is built into the share purchase agreement. As of March 31, 2008, Rs.800 million of the investment of Rs.1,000 million investment in ITI was charged as an impairment. The balance of Rs.200 million was impaired as of March 31, 2009. The DOT, by letter dated July 31, 2009, deferred the repayment schedule of the preference shares to beginning 2012-13 and payable in five equal annual installments. See Item 5A “Operating Results - Critical Accounting Policies and Estimates - Impairment of Held to Maturity Securities” in this report.
The credit risk for the investment in bonds issued by MKVDC is minimized due to the payment mechanism envisaged in the prospectus, which states that any shortfall is to be met by the Maharashtra State Government that has undertaken to earmark an amount equal to interest and principal repayments out of its annual budget for the respective corporation. In the event of such amount not being transferred the trustees would be entitled to invoke the guarantee given by the state government.
Exchange Rate and Interest Rate Risk
We are not exposed to any material foreign currency exchange risk since our revenues and expenses are primarily in Indian rupees. We are not exposed to any material interest rate risk since we do not rely on borrowings to meet our working capital and capital expenditure requirements. As of March 31, 2010, we had no debt.
Fair Value
The fair value of our current assets and current liabilities approximate their carrying values because of their short-term maturity. Such financial instruments are classified as current and are expected to be settled within the next twelve months.
The approximate fair value of investments in held to maturity securities, as determined by using current interest as of March 31, 2010 is Rs.2,485 million as compared to their carrying amount of Rs.2,500 million.
The approximate fair value of loans to employees, as determined by using current interest as of March 31, 2010 is Rs.1,325 million as compared to their carrying amount of Rs.1,528 million.
Due to the uncertainties attached to the timing of ultimate realization of restricted assets, it is not practicable to determine their fair values. The fair value of amounts due to and from related parties cannot be determined given that the amounts are with related parties. The terms of settlement are not normal commercial terms.
95
Item 12. | Description of Securities Other than Equity Securities |
12D. | American Depository Shares |
The Bank of New York Mellon (the “Depositary”) serves as the depositary for our ADSs. It collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The Depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: | For: |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property • Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
$.02 (or less) per ADS | • Any cash distribution to ADS registered holders |
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | • Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADS registered holders |
$.02 (or less) per ADSs per calendar year | • Depositary services |
Registration or transfer fees | • Transfer and registration of shares on our share register to or from the name of the Depositary or its agent when you deposit or withdraw shares |
Expenses of the Depositary | • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) • Converting foreign currency to U.S. dollars |
Taxes and other governmental charges the Depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | • As necessary |
Any charges incurred by the Depositary or its agents for servicing the deposited securities | • As necessary |
The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses it incurs that are related to the establishment and maintenance expenses of our ADS program. The Depositary has agreed to reimburse us for its continuing annual stock exchange listing fees, including $38,000 for the 2009 listing fee and $38,000 for the 2010 listing fee. The Depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor re lations promotional activities. In certain instances, the Depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADSs facility. There are limits on the amount of expenses for which the Depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the Depositary collects from investors.
96
From April 1, 2009 to August 31, 2010, we received from the Depositary $286.75 for fees to third parties and $148,750 for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADSs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADS facility, underwriting fees and legal fees.
97
PART II
Item 13. | Defaults, Dividend Arrearage and Delinquencies. |
None.
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
None.
Item 15. | Controls and Procedures |
(a) | Disclosure Controls and Procedures |
Our management, under the supervision of and with the participation of our Chairman and Managing Director, as Chief Executive Officer (CEO), and our Director-Finance, as Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) on March 31, 2010, the end of the period covered by this report. Based on such evaluations, our CEO and CFO have concluded that as of March 31, 2010, some of our disclosure controls and procedures were not effective for the reasons explained below.
In connection with the audit of our consolidated financial statements for the 2010 fiscal year, ended March 31, 2010, our auditors identified an error in our consolidated financial statements that required us to restate our financial statements prepared in accordance with US GAAP for the prior year. As a result of this error, we have restated the consolidated financial statements for the year ended March 31, 2009 that are presented as comparisons in our consolidated financial statements for the year ended March 31, 2010 included in this report.
The restatements relate to our accounting on account of 3G and BWA spectrum as license fees on the base reserve price subject to finalization of auction process by the DOT, and therefore the accounting policy in this regard was not made on that date. On finalization of the auction process by the DOT, during the 2011 fiscal year, in accordance with DOT guidelines, the liability for Rs.110,979.7 million has been accounted for by creating intangible assets as one time charges payable to the DOT for 3G and BWA spectrum. This is to be amortized for the period of 20 years and 15 years for 3G and BWA spectrum, respectively, on straight line basis. Accordingly, the amortized amount for the period from August 8, 2008, the date of allotment of spectrum, to March 31, 2009 is Rs.4,082.30 million.
The change in the method of calculation of ISP license fee implemented for the 2010 fiscal year is also extended for the previous fiscal year. This was approved in the ECM held on June 12, 2010 and accordingly the license fees were reduced by Rs.70.42 million in the 2009 fiscal year.
There are inherent limitations in the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, any such system can only provide reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(b) | Management’s Annual Report on Internal Control over Financial Reporting |
As required by Section 404 of the Sarbanes-Oxley Act of 2002, our Board of Directors and senior management team are responsible for establishing and maintaining adequate internal controls. The internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair representation of our financial statements in accordance with generally accepted accounting principles in the United States of America and includes those policies and procedures that:
· | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
· | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
· | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition our assets that could have a material effect on the financial statements. |
No system of internal control over financial reporting, including one determined to be effective, may prevent or detect all misstatements. It can only provide reasonable assurance regarding financial statement preparation and presentation.
98
Management, under the oversight of the Audit Committee, has conducted an assessment of the effectiveness of internal controls over financial reporting as of March 31, 2010 based on the criteria established in Internal Controls – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The assessment of internal controls was designed to include the Entity Level Controls, Process Application and Transaction Controls and Information Technology General Controls. The scope of the controls testing included the significant accounting balances mapped on materiality parameters as adopted by a core team and approved by our Board of Directors. Management has not evaluated the internal controls of Millennium Telecom Limited, India (MTL) and Mahanagar Telephone (Mauritius) Limited, Mauritius (MTML), our wholly-owned subsidiaries, and United Telecommunications Limited, Nepal (UTL) and MTNLSTPI IT Services Limited, India (MISL), joint ventures entities, which are accounted for using proportionate consolidation. The conclusion regarding the effectiveness of internal control over financial reporting does not e xtend to the internal controls of these subsidiaries and joint venture entities. These subsidiaries and joint venture entities were found insignificant compared to size and business of the Company. Our proportionate interest in total assets, net assets, revenue and profit/ loss for the year in case of subsidiaries and proportionate interest in total profit/ loss for the year in case of UTL and MISL is reflected in the financial statements in this report.
The internal controls were in operation during the reporting period from April 1, 2009 to March 31, 2010. The internal controls identified by the management were comprehensively tested by the core team assisted by an independent firm of accountants and supported by the internal auditors, who are independent firms of accountants. The nature of controls assessed were:
1. Entity Level Controls, which includes aspects like control environment, information and communication, monitoring, risk assessment, control activities, addressing the various important COSO attributes;
2. Process Application and Transactions, which includes various revenue processes, and other processes like operating expenditures, fixed assets, inventory, cash disbursement, treasury, taxation and financial statement consolidation procedures at both Mumbai and Delhi units, Basic and Mobile Units, as well as at corporate office; and
3. Information Technology General Controls, which includes IT processes like logical security, end user computing, computer operations, change management, physical security and service level agreement, tested at both Mumbai and Delhi units.
Based on its assessment, management has concluded under the supervision of and with the participation of Chairman-and-Managing Director, as Chief Executive Officer (CEO), and Director-Finance, acting as Chief Financial Officer (CFO), that as at March 31, 2010, the end of the period covered by the report, the internal controls over periodical reporting were not effective. There were material weaknesses related to accounting and reconciliation of customer (subscriber) deposits, balance confirmation of related party transactions with the Department of Telecommunication (DOT) and Bharat Sanchar Nigam Limited (BSNL) and Information Technology General Controls. These deficiencies may cause a misstatement in the annual financial statements which may not be prevented or detected. Management’s conclusions on the significant deficiencies are stated below:
I. | Subscriber Deposits |
The accounting of subscriber deposits was identified by management as one of the key deficit areas in the 2008 and 2009 fiscal years, and it also continued to be deficient in the 2010 fiscal year. Specifically, the reconciliation of subscriber-wise listing and the balances of deposits as per CSMS system and the books of accounts were not adequate. Management and the units have identified that this deficiency is largely due to the legacy inherited at the time of migration from manual accounts to CSMS in the earlier years and subsequent manual adjustments of refunds out of the system. The transactions for the 2010 fiscal year in both Delhi and Mumbai units have not been tallied with the books of accounts, though the transactions for the 2010 fiscal year in respect of Mobile Services both in Delhi and Mumbai have been tallied with the bo oks of accounts. However, in case of Basic (landline) Services, they have not been tallied with the books of accounts. Accordingly, management has concluded that, as of March 31, 2010, we did not maintain effective control over the accounting of deposits received from subscribers. Management has however taken reasonable measures during the 2010 fiscal year to ensure that this deficiency was adequately considered while preparing the financial statements for the year ended March 31, 2010 The Delhi and Mumbai units are in the process of reconciliation of current period as well as earlier period of deposits. This control deficiency could result in a misstatement to the current and non-current portion of subscriber deposits.
99
II. | Related Party Transactions |
The accounting of transactions with our related parties consists of transactions with the DOT and BSNL is being done on the basis of the existing instructions issued from time to time by the controlling department of the government of India and other related guidelines as well as existing regulations. These guidelines require identification of transactions and/or issues under dispute and also lay down the methodology to resolve the same. There is no practice of obtaining balance confirmation for the outstanding balance at the year end, in our books and records, from such related parties and also to reconcile the said balance as per our books of accounts. The overall balances pertaining to these related parties are not reconciled with the balances as per the books of account of such related parties.. Management to ok appropriate measures during the 2010 fiscal year to ensure that this deficiency was adequately considered while preparing the financial statements. Accordingly, management has concluded that, as of March 31, 2010, we did not maintain adequate control over the accounting for dues to and from related parties. Specifically, our controls were ineffective as to process of obtaining period end account balance confirmations and reconciliation thereof. This control deficiency could result in a misstatement to the balances of dues to/from related parties and the corresponding revenue and cost of revenue.
III. | Information Technology General Controls |
During the review of our Information Technology General Controls (ITGC), management has identified and concluded that, as of March 31, 2010, there were certain ineffective controls in the area of Information Technology General Controls. The IT security policy and procedures require further strengthening and implementation with reference to controls related to (i) assigning IT Security officer/s to monitor IT processing activities and submit periodic reports to management and the Board of Directors and/or Audit Committee, (ii) back up practices, and (iii) appointment of independent auditors for audit of IT areas and controls.
The policy of using password has been prepared and adopted during the current year. However, the password controls have not yet been implemented for application ability at both Delhi and Mumbai Units and IMS application at the Delhi unit. During the year under review, audit trails have been enabled in WFMS application, but were not enabled in CSMS, IMS, Ability and UNICORN applications. Overall audit trails generation, review and control processes require further strengthening.
Though management has determined that there were no instances of unauthorized access/events, this control deficiency could result in unauthorized access to key applications and databases. These control deficiencies lead to risk of breaches of security or errors remaining unnoticed and not rectified. These deficiencies could also lead to risk of misstatement of financial statements.
Management has initiated preparation of the Business Continuity Management (BCM) Plan to address business interruptions on their occurrences. However, there has been only initial progress on preparation of the Plan while the implementation, identification of teams, assigning of roles and responsibilities, training, mock drills, business impact assessment, recovery procedures, are pending completion of the BCM strategy.
However, the review of financial statements at the unit and corporate level in the FMS system pre-empted any such possible errors in preparation of financial statements in the 2010 fiscal year.
P. Parikh & Associates, the independent registered public accounting firm, has audited our consolidated financial statements in this annual report on Form 20-F, and has also issued their report, included herein, on management’s assessment of the effectiveness of our internal control over financial reporting and the effectiveness of our internal control over financial reporting as of March 31, 2010.
100
(c) | Attestation report of the registered accounting firm |
See Item 18. “Financial Statements” for the attestation report of P. Parikh & Associates, the independent registered public accounting firm that audited our financial statements included in this Form 20-F.
(d) | Changes in internal control over financial reporting |
We had undertaken certain initiatives and remedial action during the 2009 and 2010 fiscal years on the material weaknesses disclosed above and as disclosed in prior reports. Additional remedial action is being undertaken and expected to be completed in fiscal year 2011. The remedial actions taken among other areas include: (i) physical verification of fixed assets being done on a rotation basis under a three year plan; (ii) the fixed assets register being updated giving full particulars of quantitative details, locations of the assets etc. and excess/deficit found during the physical verification being duly accounted for; (iii) subscriber deposits being reconciled for the Mobile Services (MS) units both in Delhi and Mumbai, and, in case of basic units both at Delhi and Mumbai, the reconciliation process is ongoin g; (iv) password controls being implemented for most of the applications as per IT security policy; (v) initial Business Continuity Management Plan being prepared and (v) audit trails generation being enabled for certain IT applications.
Subscriber Deposits
In respect of reconciliation of the subscriber deposits, management has directed both the Delhi and Mumbai units to complete the reconciliation on high priority basis, including linking of the debtor accounts to deposits. It was decided that only the reconciled data will be migrated to the new convergent billing system, which is likely to be operational by March 2011. In case of both Mumbai and Delhi units, MS-CDMA services have completed the subscriber deposit reconciliation
Related Party Transactions
The accounting of transactions of related parties consists of transactions with the DOT and BSNL. While the DOT is the parent organization of the Company, BSNL is fully owned by the government of India.
In respect of transactions and balances with the DOT, the following steps have been undertaken as part of the ongoing process since last year:
1. | Both the Mumbai and Delhi units, under continued direction by the management, have submitted their net claims and related details on claims receivables and payables to the DOT to get the issues resolved. Deliberations are continuing on high levels at the DOT with the officers of CCA (Control and Communication Accounts) of the DOT at both places on a regular basis. |
2. | A joint committee of senior officers of the DOT and our Company is monitoring the progress. |
In respect of transactions and balances with BSNL, the following steps have been undertaken as part of the ongoing process since last year:
1. | Both the Mumbai and Delhi units have been directed to reconcile claims payable and receivable with BSNL. |
2. | At both Mumbai and Delhi units, senior level officers have exchanged various correspondence and organized meetings with BSNL for obtaining balance confirmation and to resolve the same. |
3. | At the corporate level, a formal committee of senior officers of our Company, BSNL and the DOT is monitoring the progress. |
It may be noted that there is a periodic monitoring on these matters by the government of India. In a recent development, we have furnished all necessary details and data to the DOT as part of the issue resolution process.
101
Information Technology General Controls
In the 2010 fiscal year, we adopted a detailed and formal IT Security policy. Certain areas in the IT security policy and procedures require further strengthening and implementation with reference to controls related to (i) assigning IT Security officer/s to monitor IT processing activities and submit periodic reports to management and the Board of Directors and/or Audit Committee, (ii) back up practices, and (iii) appointment of independent auditors for audit of IT areas and controls. Though delayed, these areas are to be strengthened and implemented by December 2010. The initial Business Continuity Management Plan was prepared, and efforts are being made on a continuous basis to expedite the complete implementation of BCM strategy.
Some of these remedial actions could not be undertaken earlier due to delay in implementation of comprehensive convergent billing system, which had been scheduled to be functional by March 31, 2010, and is now expected to be functional by March 31, 2011.
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Smt. Usha Sahajpal, Chairperson of the Audit Committee, Adit Jain and VS Iyer are members of the Audit Committee. Each of them is considered a “financial expert”, as defined by applicable rules of the SEC and the NYSE.
Item 16B. Code of Ethics
We have a Code of Conduct for Board of Directors and Sr. Management Personnel. This Code of Conduct was drafted to comply with the provisions of Clause 49 of the Listing Agreement of the Indian Stock Exchanges. A copy of the Code of Conduct may be obtained upon request addressed to the Company Secretary at our principal executive office, indicated on the cover of this report, and also is posted on our web site http://www.mtnl.net.in.
Item 16C. Principal Accountant Fees and Services
M/S P. Parikh & Associates, Chartered Accountants, has served as our independent registered public accounting firm since the 2008 fiscal year. M/S Chandabhoy & Jassoobhoy, Chartered Accountants, had served as our independent registered public accounting firm for the 2007 fiscal year. Price Waterhouse Bangalore (New Delhi office) had served as our independent registered public accounting firm for the 2006 fiscal year.
Audit Fees
The following table sets forth the remuneration that we paid to M/S P. Parikh & Associates in 2009 and 2010 in million Rs.:
2009 | 2010 | |
Audit Fees (1) | 4.18 | 5.00 |
All Other Fees | - | - |
Total | 4.18 | 5.00 |
(1) includes audit opinion for 2009 and 2010. |
Audit fees represent fees for professional services rendered for the audit of the consolidated financial statements prepared in accordance with US GAAP. Audit fees are fees agreed upon with M/S P. Parikh & Associates for the 2009 and 2010 fiscal years, (including related expenses) for the audit of our annual consolidated financial statements. We did not pay any amounts to M/S P. Parikh & Associates for the 2009 and 2010 fiscal years for audit-related fees, tax fees or other fees.
102
Audit committee pre-approval policies and procedures
Our Board of Directors requires management to obtain the Board’s approval before engaging independent outside auditors to provide any audit or permitted non-audit services to us, in addition to Audit Committee approval. Pursuant to this policy, our Board of Directors pre-approves all audit and non-audit services provided by M/S P. Parikh & Associates, our principal auditor. Pursuant to the Board’s pre-approval process, M/S P. Parikh & Associates prepares a detailed list of services that it proposes to perform during the coming year. These proposed services are presented to the Board of Directors, which considers and approves the services. Management is not permitted to engage our outside auditors for any audit or non-audit service that is not on the list of services appro ved by the Board of Directors without first returning to the Board of Directors for approval of such additional services.
Item 16D. Exemptions from the Listing Standards for Audit Committees
None of the members of our Audit Committee is an employee of the government of India, our majority shareholder. As a result, we meet the independence requirements of Rule 10A-3(b)(1)(ii)(B) promulgated under the Securities Exchange Act of 1934 and comply with the listing requirements of the New York Stock Exchange.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Neither we, nor any affiliated purchaser, made any purchase of our equity securities in the 2010 fiscal year.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Governance Standards for Listed Companies
Many of the corporate governance standards set out in the NYSE Listed Company Manual do not apply to us as a “foreign private issuer.” Under the NYSE corporate governance standards, we need only (i) establish an independent audit committee that satisfies the requirements of Rule 303A.06 of the NYSE Listed Company Manual described in the following table; (ii) provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules of the NYSE, as required by Rule 303A.12(b) of the NYSE Listed Company Manual; (iii) provide annual written affirmations to the NYSE with respect to our corporate governance practices (and provide interim written affirmations each time a change occurs to the board or any of our committees); and (iv) provide a brief description of sig nificant differences between our corporate governance practices and those followed by U.S. companies listed on the NYSE, as required by Rule 303A.11 of the NYSE Listed Company Manual.
Indian corporate governance requirements for listed companies are contained in Clause 49 of the listing agreement that companies enter into with Indian stock exchanges. See Item 9C. “Markets-The Indian Securities Market” in this report.
The following table sets out a brief, general summary of the significant differences between the corporate governance standards applicable to us under our listing agreements with the Indian Stock Exchanges and the requirements of standards relating to U.S. domestic companies listed on the NYSE.
Standard NYSE Practices | Our Practice | ||
Director Independence | |||
· | A majority of the board must consist of independent directors. Independence is defined by various criteria including the absence of a material relationship between the director and the listed company or its affiliates. | Six of our ten directors are deemed “independent directors.” Of the remaining directors, three are senior officers, including the Chairman and Managing Director and one is an officer of the Department of Telecommunications. See Item 6A. “Directors and Senior Management” in this report. |
103
Standard NYSE Practices | Our Practice | ||
· | The non-management directors must meet at regularly scheduled executive sessions without management. | We do not have a procedure for our non-management directors to meet periodically without management. Under Indian law, there is no such requirement. | |
Audit Committee | |||
· | The audit committee must consist of at least three members and each member must be independent within the meaning established by the NYSE and Rule 10A-3 under the U. S. Securities Exchange Act of 1934, and must have a written charter. | Our Audit Committee is comprised of three members, all of whom may be deemed “independent” within the meaning established by the NYSE. Our Audit Committee functions in accordance with Indian regulations. See Item 16D. “Exemptions from the Listing Standards for Audit Committees” in this report. | |
· | The audit committee members must be financially literate or become financially literate within a reasonable period of their appointment to the audit committee. | All the Audit Committee members are financially literate. | |
· | Each listed company must have disclosed whether their Board of Directors has identified an audit committee financial expert (as defined under applicable rules of the SEC), and if not the reasons why the board has not done so. | The Audit Committee has identified all of its member as “financial experts” (as defined under applicable rules of the SEC). | |
· | The audit committee must have a written charter that addresses the committee’s purpose and responsibilities. | Clause 49 of the Indian Listing Agreement address the duties, role and responsibilities of the Audit Committee. |
104
Standard NYSE Practices | Our Practice | ||
· | The audit committee’s purpose must be to assist the board in the oversight of the integrity of the company’s financial statements, the company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the company’s internal audit function and independent auditors. The committee must report regularly to the board. | The Audit Committee recommends the retention and the removal of the statutory auditors and determines the audit fees and expenses. The Audit Committee reports regularly to the Board of Directors. | |
· | The duties and responsibilities of the audit committee include conducting a review of the independent auditing firm’s annual report describing the firm’s internal quality control procedures, any material issues raised by the most recent internal quality control review or peer review of the firm and any steps taken to address such issues. | The Audit Committee also meets separately, quarterly, with management, with internal auditors and with independent auditors and reviews with the independent auditors any audit problems or difficulties and management’s response, if any. | |
· | The committee must also discuss the company’s annual audited financial statements and quarterly financial statements with management and the independent auditors, the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies, and policies with respect to risk assessment and risk management. | The Audit Committee reviews our financial reporting processes and systems, and also reviews our financial and risk management policies. The Audit Committee gets involved with the review of financial press releases and meetings with analysts and rating services. |
105
Standard NYSE Practices | Our Practice | ||
· | The committee must also meet separately, periodically, with management, with internal auditors (or other personnel responsible for the internal audit function) and with independent auditors and review with the independent auditor any audit problems or difficulties and management’s response. | We comply with this standard as we have an internal audit function. | |
· | Other Committees | ||
· | Listed companies must have a compensation committee composed entirely of independent board members as defined by the NYSE listing standards. | As a “foreign private issuer,” we follow home country practice in lieu of NYSE Corporate Governance Standards as permitted with regard to other Board committees. We do not have a Compensation Committee as the Government of India sets the compensation of our executive officers. Also, we do not have any equity based compensation plans for our executive officers, employees or directors. | |
· | Listed companies must have a nominating/corporate governance committee composed entirely of independent board members. | We do not have a Nominating and Corporate Governance Committee. Under Indian law, this committee is not required. Our articles of association provides that the President of India is empowered to appoint one third of our directors. The government of India appoints the balance of the directors. | |
We have a Shareholders’/Investors’ Grievance Committee which looks into any investor complaints, reviews all matters connected with transfers of our equity shares and recommends improvements to our investor services practices | |||
· | Business Codes | ||
· | Corporate Governance Guidelines | We have established a “Code of Conduct” for directors and senior management personnel. |
106
Standard NYSE Practices | Our Practice | ||
· | Listed companies must adopt and disclose corporate governance guidelines. | We have adopted corporate governance guidelines as prescribed in Clause 49 of the Indian Listing Agreements. Every year we issue a Corporate Governance Report. That Report is part of our Annual Report and is publicly available. | |
· | Code of Business Conduct and Ethics | ||
· | Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. | We have adopted a Code of Business Conduct and Ethics for our directors, officers and employees. This Code is posted on our website. |
107
PART III
Item 17. | Financial Statements |
Not applicable.
Item 18. | Financial Statements |
See pages F-1 through F-51, which include the following:
· | Report of Independent Registered Public Accounting Firm |
· | Consolidated balance sheets as of March 31, 2009 and 2010 |
· | Consolidated statements of operations for the years ended March 31, 2008, 2009 and 2010 |
· | Consolidated statements of shareholders’ equity for the years ended March 31, 2008, 2009 and 2010 |
· | Consolidated statements of cash flow for the years ended March 31, 2008, 2009 and 2010 |
· | Notes to the consolidated financial statements |
Item 19. | Exhibits |
Number | Description of Exhibit | |
1.1 | Memorandum and Articles of Association of the Registrant, as amended on January 31, 2002. * | |
2.1 | Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and the holders from time to time to American Depositary Shares issued thereunder, including as an exhibit, the form of American Depositary Receipt.** | |
4.1 | Lease Agreement dated January 16, 1996 between Life Insurance Corporation of India and the Registrant.** | |
4.2 | License Agreement for provision of Internet Services in Delhi dated November 6, 1998 between President of India acting through Assistant Director General, Ministry of Communications and the Registrant.** | |
4.3 | License Agreement for provision of Internet Services in Mumbai dated November 6, 1998 between President of India acting through Assistant Director General, Ministry of Communications and the Registrant.** | |
4.4 | License Agreement for provision of Internet Services dated October 6, 2000 between President of India acting through Assistant Director General, Ministry of Communications and Millennium Telecom Limited.** | |
12.1 | Certification of Chief Executive Officer*** | |
12.2 | Certification of Principal Financial Officer*** | |
13.1 | Certification of Chief Executive Officer*** | |
13.2 | Certification of Principal Financial Officer*** |
* Previously filed on September 30, 2002, as exhibits to Annual Report on Form 20-F for fiscal year 2002.
** Previously filed on September 27, 2001, as exhibits to Registration Statement on Form F-4 (file number 333-13944).
*** Filed herewith
108
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
MAHANAGAR TELEPHONE NIGAM LIMITED | |||
By: | /s/ Anita Soni | ||
Name: | Anita Soni | ||
Title: | Director – Finance | ||
Date: September 28, 2010
109
EXHIBIT INDEX
Number | Description of Exhibit | |||||||
1.1 | Memorandum and Articles of Association of the Registrant, as amended on January 31, 2002.* | |||||||
2.1 | Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and the holders from time to time to American Depositary Shares issued thereunder, including as an exhibit, the form of American Depositary Receipt.** | |||||||
4.1 | Lease Agreement dated January 16, 1996 between Life Insurance Corporation of India and the Registrant.** | |||||||
4.2 | License Agreement for provision of Internet Services in Delhi dated November 6, 1998 between President of India acting through Assistant Director General, Ministry of Communications and the Registrant.** | |||||||
4.3 | License Agreement for provision of Internet Services in Mumbai dated November 6, 1998 between President of India acting through Assistant Director General, Ministry of Communications and the Registrant.** | |||||||
4.4 | License Agreement for provision of Internet Services dated October 6, 2000 between President of India acting through Assistant Director General, Ministry of Communications and Millennium Telecom Limited.** | |||||||
12.1 | Certification of Chief Executive Officer*** | |||||||
12.2 | Certification of Principal Financial Officer*** | |||||||
13.1 | Certification of Chief Executive Officer*** | |||||||
13.2 | Certification of Principal Financial Officer*** | |||||||
* | Previously filed on September 30, 2002, as exhibits to Annual Report on Form 20-F for fiscal year 2002. | |||||||
** | Previously filed on September 27, 2001, as exhibits to Registration Statement on Form F-4 (file number 333-13944). | |||||||
*** | Filed herewith. |
110
Mahanagar Telephone Nigam Limited
Page | |
Report of Independent Registered Public Accounting Firm | F-2 |
Consolidated Balance Sheets as of March 31, 2009 and 2010 | F-4 |
Consolidated Statements of Operations for the years ended March 31, 2008, 2009 and 2010 | F-6 |
Consolidated Statements of Shareholders’ Equity for the years ended March 31, 2008, 2009 and 2010 | F-7 |
Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2009 and 2010 | F-8 |
Notes to the Consolidated Financial Statements | F-10 |
F-1
Report of Independent Registered Public Accounting Firm.
To,
The Board of Directors and Shareholders of,
Mahanagar Telephone Nigam Limited.
We have audited the accompanying consolidated Balance Sheet of Mahanagar Telephone Nigam Limited and its Subsidiaries (the “Company”) as of March 31, 2010 and March 31, 2009 and the related consolidated Statements of Operations, Shareholders’ Equity and Cash Flow Statement for the year ended March 31, 2010, March 31, 2009 and March 31, 2008 respectively. We also have audited Company’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission (“COSO”). These financial statements are the responsibility of the Company’s Management. The Management of the Company is also responsibl e for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report on assessment of effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting, based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) – United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial repo rting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that:
(a) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
(b) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and |
(c) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that control may become ineffective because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency or a combination of control deficiencies that may result in the material misstatement of the financial statements. The following material weaknesses have been identified as of March 31, 2010 and have been included in management’s assessment:
1. | The Company did not maintain enough effective control over the accounting of deposits received from subscribers and on the process of reconciliation of subscriber-wise listing of deposits with the control account balance in respect of Basic (Land Line Services). There is no reconciliation of the balance of deposits as per CSMS system and the books of accounts. This control deficiency could result in a mis-statement of the current and non-current portion of Land Line customer deposits. |
F-2
2. | The Company did not maintain effective control over the accounting of dues from and to related parties, i.e. Department of Telecommunication (DoT) and Bharat Sanchar Nigam Limited (BSNL). There is no practice of obtaining balance confirmation for the outstanding balance at the year end in the books of accounts of the Company from such related parties and also to reconcile the said balance as per the books of accounts of the Company. This control deficiency could result in a misstatement to the balances of dues from/to related parties and the corresponding revenue and cost of revenue. |
3. | There were ineffective controls in the area of Information Technology General Controls (“ITGC”), which includes |
(i) | Password Controls – Though the policy of using password has been prepared and adopted during the current year, the same has not been implemented for application ability at both Delhi and Mumbai units and Inventory Management System (“IMS” ) application at the Delhi Unit; |
(ii) | Audit trails have not been enabled for CSMS, IMS, Ability and Unicorn applications. |
(iii) | There is a deficiency in Implementation of Business Continuity Plan (BCP), as there is no back-up plan in case of any disaster/emergency. |
Overall audit trails generation, review and control processes require further strengthening. The above deficiencies could result in unauthorized access to key applications and databases and could lead to risk of breaches of security or errors remaining unnoticed and not rectified and risk of mis-statement in financial statements.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of consolidated financial statements as of March 31, 2010, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In respect of above deficiencies, in our opinion, management’s assessment on not maintaining effective internal control over financial reporting as of March 31, 2010, is fairly stated, in all material respects, based on the criteria established in Internal Control – Integrated Framework issued by the COSO.
As described in Note 3 to the consolidated financial statements, the accompanying consolidated financial statements of Mahanagar Telephone Nigam Limited as of March 31, 2009 and for the year ended March 31, 2009 have been restated.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mahanagar Telephone Nigam Limited as of March 31, 2010 and March 31, 2009, and the results of its operations and its cash flows for each of the years in the three year period ended March 31, 2010 are in conformity with accounting principles generally accepted in the United States of America.
P. PARIKH & ASSOCIATES
CHARTERED ACCOUNTANTS
Mumbai, India.
Date: September 30, 2010
F-3
CONSOLIDATED BALANCE SHEETS | ||||||||||||
As of March 31, | ||||||||||||
2009 Restated (Note 3) | 2010 | 2010 | ||||||||||
(Indian Rupees in million, except per share data and as stated otherwise) | Convenience translation into million of US $ (Unaudited) | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | Rs. | 1,419 | Rs. | 1,056 | $ | 24 | ||||||
Short term investments in bank deposits | 46,725 | 47,835 | 1,064 | |||||||||
Trading security | - | 350 | 8 | |||||||||
Accounts receivable, net | 4,132 | 3,432 | 76 | |||||||||
Due from related parties | 12,705 | 15,536 | 346 | |||||||||
Inventories | 1,809 | 1,491 | 33 | |||||||||
Unbilled Revenues | 1,424 | 1,110 | 25 | |||||||||
Deferred income taxes | 45,275 | 6,072 | 135 | |||||||||
Other receivables | 13,487 | 17,531 | 390 | |||||||||
Total current assets | 126,975 | 94,414 | 2,100 | |||||||||
Deferred Income Tax | 4,037 | 8,586 | 191 | |||||||||
Investments in held to maturity securities | 2,453 | 2,423 | 54 | |||||||||
Investments in affiliates | 112 | 213 | 5 | |||||||||
Property and equipment, net | 78,618 | 82,182 | 1,828 | |||||||||
Intangible Assets | 107,206 | 100,982 | 2,247 | |||||||||
Due from related parties | 22,730 | 23,517 | 523 | |||||||||
Restricted assets | 15 | 14 | 0 | |||||||||
Other assets | 1,585 | 1,377 | 31 | |||||||||
Total assets | Rs. | 343,732 | Rs. | 313,707 | $ | 6,979 |
F-4
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | Rs. | 12,487 | Rs. | 16,296 | $ | 363 | ||||||
Dues to related parties | 122,301 | 124,861 | 2,778 | |||||||||
Accrued expenses and other current liabilities | 30,836 | 33,114 | 737 | |||||||||
Total current liabilities | 165,624 | 174,271 | 3,877 | |||||||||
Accrued employee cost | 36,190 | 62,654 | 1,394 | |||||||||
Deferred income taxes | 48,275 | 9,236 | 205 | |||||||||
Dues to related parties | - | - | - | |||||||||
Non current portion of customer deposits | 7,423 | 6,879 | 153 | |||||||||
Total liabilities | 257,512 | 253,040 | 5,629 | |||||||||
Contingencies and commitments (refer note 23) | ||||||||||||
Shareholders’ equity | ||||||||||||
Equity shares, 800,000,000 shares authorized, par value Rs.10 per share | ||||||||||||
Issued and outstanding – 630,000,000 and 630,000,000 shares as of March 31, 2009 and 2010 respectively | 6,300 | 6,300 | 140 | |||||||||
Additional paid-in capital | 6,649 | 6,649 | 148 | |||||||||
Retained earnings | 72,963 | 47,410 | 1,055 | |||||||||
Research and development reserve | 308 | 308 | 7 | |||||||||
Total shareholders' equity | 86,220 | 60,667 | 1,350 | |||||||||
Total liabilities and shareholders' equity | Rs. | 343,732 | Rs. | 313,707 | $ | 6,979 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MAHANAGAR TELEPHONE NIGAM LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31, | ||||||||||||||||
2008 | 2009 Restated | 2010 | 2010 | |||||||||||||
(Note 3) | ||||||||||||||||
Convenience | ||||||||||||||||
translation | ||||||||||||||||
into million | ||||||||||||||||
(Indian Rupees in million, except per share data and as stated otherwise) | of US$ (Unaudited) | |||||||||||||||
Revenues, net | Rs. | 44,705 | Rs. | 41,837 | Rs. | 35,513 | $ | 790 | ||||||||
Cost of revenues (excluding | ||||||||||||||||
depreciation and amortisation shown | ||||||||||||||||
separately below) | (30,522 | ) | (31,172 | ) | (47,938 | ) | (1,066 | ) | ||||||||
Selling, general and administrative | ||||||||||||||||
expenses | (8,517 | ) | (9,028 | ) | (17,854 | ) | (397 | ) | ||||||||
Depreciation and amortisation | (8,309 | ) | (12,291 | ) | (14,759 | ) | (328 | ) | ||||||||
Excess liabilities written back | 320 | 510 | 568 | 13 | ||||||||||||
Income from Operations | (2,323 | ) | (10,144 | ) | (44,471 | ) | (989 | ) | ||||||||
Interest from short term bank deposit | 2,618 | 4,751 | 3,986 | 89 | ||||||||||||
Interest and other income net | 2,043 | 5,211 | 3,119 | 69 | ||||||||||||
Income before unusual items, income | ||||||||||||||||
taxes, and share of profit/(losses) of | ||||||||||||||||
affiliates | 2,338 | (181 | ) | (37,365 | ) | (831 | ) | |||||||||
Income taxes (Refer note 18) | 121 | (1,241 | ) | 11,806 | 263 | |||||||||||
Equity in profit/(losses) of affiliates | (1 | ) | (8 | ) | 5 | 0 | ||||||||||
Net income | Rs. | 2,458 | Rs. | (1,430 | ) | Rs. | (25,553 | ) | $ | (568 | ) | |||||
Earnings per equity share | ||||||||||||||||
Basic and diluted | Rs. | 3.90 | Rs. | (2.27 | ) | Rs. | (40.56 | ) | $ | (0.90 | ) | |||||
Weighted average number of equity | ||||||||||||||||
shares used in computing earnings | ||||||||||||||||
per equity share | 630 | 630 | 630 | 630 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MAHANAGAR TELEPHONE NIGAM LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Total | ||||||||||||||||||||||||
Common stock | Retained | Research | Stockholders' | |||||||||||||||||||||
Equity shares | Additional | earnings | and | Equity | ||||||||||||||||||||
paid-in | Restated | development | Restated | |||||||||||||||||||||
No. of shares | Amount | capital | (Note 3) | Reserve | (Note 3) | |||||||||||||||||||
(Indian Rupees in millions, except per share data and as stated otherwise) | ||||||||||||||||||||||||
Balance as on | ||||||||||||||||||||||||
March 31, 2007 | 630,000,000 | Rs. | 6,300 | Rs. | 6,649 | Rs. | 75,620 | Rs. | 308 | Rs. | 88,877 | |||||||||||||
Net income | - | - | - | 2,458 | - | 2,458 | ||||||||||||||||||
Cash dividend paid | ||||||||||||||||||||||||
at the rate of | ||||||||||||||||||||||||
Rs.4.68 per share | ||||||||||||||||||||||||
including dividend | ||||||||||||||||||||||||
tax | - | - | - | (2,948 | ) | - | (2,948 | ) | ||||||||||||||||
Balance as on | ||||||||||||||||||||||||
March 31, 2008 | 630,000,000 | Rs. | 6,300 | Rs. | 6,649 | 75,130 | Rs. | 308 | Rs. | 88,387 | ||||||||||||||
Net income | - | - | - | 1,141 | - | 1,141 | ||||||||||||||||||
Cash dividend paid | ||||||||||||||||||||||||
at the rate of | ||||||||||||||||||||||||
Rs.1.17 per share | ||||||||||||||||||||||||
including dividend | ||||||||||||||||||||||||
tax | - | - | - | (737 | ) | - | (737 | ) | ||||||||||||||||
Balance as on | ||||||||||||||||||||||||
March 31, 2009 (as | ||||||||||||||||||||||||
previously | ||||||||||||||||||||||||
reported) | 630,000,000 | Rs. | 6,300 | Rs. | 6,649 | 75,534 | Rs. | 308 | Rs. | 88,791 | ||||||||||||||
Restatement | ||||||||||||||||||||||||
adjustments (Refer - | ||||||||||||||||||||||||
Note 3) | - | - | - | (2,571 | ) | - | (2,571 | ) | ||||||||||||||||
Balance as on | ||||||||||||||||||||||||
March 31, 2009 | ||||||||||||||||||||||||
(Restated - Note 3) | 630,000,000 | 6,300 | 6,649 | 72,963 | 308 | 86,220 | ||||||||||||||||||
Net income | - | - | - | (25,553 | ) | - | (25,553 | ) | ||||||||||||||||
Balance as on | ||||||||||||||||||||||||
March 31, 2010 | 630,000,000 | Rs. | 6,300 | Rs. | 6,649 | 47,410 | Rs. | 308 | Rs. | 60,667 | ||||||||||||||
Convenience | ||||||||||||||||||||||||
translation into | ||||||||||||||||||||||||
Million of US $ | ||||||||||||||||||||||||
(unaudited) | $ | 140 | $ | 148 | $ | 1,055 | $ | 7 | $ | 1,350 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
MAHANAGAR TELEPHONE NIGAM LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
2008 | 2009 Restated | 2010 | 2010 | |||||||||||||
(Note 3) | ||||||||||||||||
Convenience | ||||||||||||||||
translation | ||||||||||||||||
(Indian Rupees in millions, except per share data and as stated otherwise) | into US$ (Unaudited) | |||||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | Rs. | 2,458 | Rs. | (1,430 | ) | Rs. | (25,553 | ) | $ | (568 | ) | |||||
Adjustments to reconcile net income to net | ||||||||||||||||
cash provided by operating activities: | ||||||||||||||||
Depreciation and Amortization | 8,309 | 12,291 | 14,759 | 328 | ||||||||||||
(Profit)/loss on sale of fixed assets | 415 | 667 | (8 | ) | (0 | ) | ||||||||||
Deferred taxes | (2,023 | ) | 1,041 | (4,384 | ) | (98 | ) | |||||||||
Provision for bad and doubtful debts | 352 | 19 | 959 | 21 | ||||||||||||
Excess liabilities written back | (320 | ) | (510 | ) | (568 | ) | (13 | ) | ||||||||
Equity in Profit/ (losses) of affiliates, net of | ||||||||||||||||
taxes | (2 | ) | 5 | (101 | ) | (2 | ) | |||||||||
Changes in assets and liabilities, net | ||||||||||||||||
(Increase) / decrease in accounts receivables | ||||||||||||||||
and unbilled revenue | 1,900 | 819 | 55 | 1 | ||||||||||||
(Increase) / decrease in inventory | 1,076 | (646 | ) | 318 | 7 | |||||||||||
(Increase)/ decrease in dues from related | ||||||||||||||||
parties | (2,054 | ) | (9,721 | ) | (3,618 | ) | (80 | ) | ||||||||
(Increase)/ decrease in other receivables | 6,179 | 8,695 | (3,836 | ) | (85 | ) | ||||||||||
(Increase) / decrease in restricted assets | 283 | 3,374 | 1 | 0 | ||||||||||||
Increase/ (decrease) in trade payables | 369 | 3 | 3,809 | 85 | ||||||||||||
Increase/ (decrease) in dues to related parties | 2,390 | 114,183 | 2,560 | 57 | ||||||||||||
Increase/ (decrease) in accrued employee cost | 4,535 | 2,928 | 26,464 | 589 | ||||||||||||
Increase / (decrease) in accrued expenses and | ||||||||||||||||
other payables | 3,776 | (869 | ) | 2,302 | 51 | |||||||||||
Net cash provided by the operating | ||||||||||||||||
activities | 27,640 | 130,849 | 13,158 | 293 | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchase of property and equipment, | ||||||||||||||||
Intangible Assets | (9,567 | ) | (117,934 | ) | (12,146 | ) | (270 | ) | ||||||||
Proceeds from property and equipment | 73 | 961 | 55 | 1 | ||||||||||||
Investment in affiliates and in held to maturity | ||||||||||||||||
securities | (171 | ) | 1,217 | (320 | ) | (7 | ) | |||||||||
Investments in short term bank deposits | (15,342 | ) | (14,281 | ) | (1,110 | ) | (25 | ) | ||||||||
Net cash used in investing activities | (25,006 | ) | (130,037 | ) | (13,521 | ) | (301 | ) |
F-8
Cash flows from financing activities | ||||||||||||||||
Dividends paid ( including tax) | (2,948 | ) | (737 | ) | - | - | ||||||||||
Net cash from financing activities | (2,948 | ) | (737 | ) | - | - | ||||||||||
Net increase/(decrease) in cash and cash | ||||||||||||||||
equivalents | (314 | ) | 73 | (363 | ) | (8 | ) | |||||||||
Cash and cash equivalents at the beginning of | ||||||||||||||||
the period | 1,660 | 1,346 | 1,419 | 32 | ||||||||||||
Cash and cash equivalents at the end of the | ||||||||||||||||
period | Rs. | 1,346 | Rs. | 1,419 | Rs. | 1,056 | $ | 24 | ||||||||
Supplemental cash flow information | ||||||||||||||||
Cash paid for interest | Rs. | 28 | Rs. | 12 | Rs. | 13 | $ | 0 | ||||||||
Cash paid/(received) to/from income taxes | Rs. | (9,162 | ) | Rs. | 82 | Rs. | (1,406 | ) | $ | (31 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
1. | DESCRIPTION OF BUSINESS |
Mahanagar Telephone Nigam Limited (“MTNL" or “the Company”) was incorporated in New Delhi, India as a limited liability company under the Indian Companies Act, 1956. MTNL is the principal provider of basic or fixed line telecommunications services in Delhi and Mumbai. MTNL also provides internet and cellular services in both Delhi and Mumbai. MTNL’s license for fixed line services which covers the state of Delhi and the municipalities of Mumbai, Navi Mumbai and Thane (which are in the state of Maharashtra) is valid up to March 31, 2013 and MTNL’s licenses for internet and cellular services are valid up to September 7, 2017 and October 9, 2017 respectively. With effect from May 10, 2006 MTNL has obtained a National Long Distance license for Delhi and the municipalities of Mumbai, Navi Mumbai and Thane vali d up to May 9, 2026.
Millennium Telecom Limited (hereinafter referred to as “MTL”), a wholly owned India based subsidiary of MTNL, is engaged in providing capacity building in international bandwidth and web based tendering portal solutions. Government of India agreed in principle equal equity participation by MTNL and BSNL in Millennium Telecom Limited. However, as on March 31, 2010 no transaction to this effect has taken place.
Mahanagar Telephone Mauritius Limited (hereinafter referred to as “MTML”), a wholly owned subsidiary of MTNL was registered in Mauritius in November 2003. MTML was granted a license by the Government of Mauritius on January 27, 2004 to provide public switched telecom services, public land mobile services and international long distance services for a period of 15 years with service obligation within 18 months of grant of license. MTML commenced operations during the year ended March 31, 2006.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) | Principles of Consolidation and Basis of Presentation |
The consolidated financial statements include all controlled subsidiaries. In addition, we review our relationships with other entities to assess if we are the primary beneficiary of a variable interest entity. If the determination is made that we are the primary beneficiary, then that entity is consolidated. All significant inter-company balances and transactions are eliminated in consolidation.
MTNL’s investments in business entities in which it does not have control, but has the ability to exercise significant influence over operating and financial policies (generally 20-50 percent ownership), are accounted for under the equity method of accounting.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable in the United States (“U.S. GAAP”) and presented in Indian rupees, the national currency of India which is also the functional currency of the Company. Solely for the convenience of the readers, these consolidated financial statements as of and for the year ended March 31, 2010, have been translated into United States dollars at the noon buying rate in New York city on March 31, 2010, for cable transfers in Indian rupees, as certified for customs purposes by the Federal Reserve Bank of New York of $1= Rs.44.95. No representation is made that the Indian rupee amounts have been, could have been or could be converted into United States dollars at such a rate or any other rate on March 31 , 2010 or at any other date.
(b) | Use of estimates |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting periods. Actual results could differ materially from these estimates. Significant estimates and assumptions are used when accounting for certain items, such as but not limited to, allowances for uncollectible accounts receivable, future obligations under employee benefit plans, useful lives of property and equipment, valuation allowances for deferred taxes and contingencies.
F-10
(c) | Foreign currency translation |
The Indian rupee is the functional currency of MTNL and its domestic subsidiaries and equity affiliates. Transactions in foreign currency are recorded at the exchange rate prevailing on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are expressed in the functional currency at the exchange rates in effect at the balance sheet date. Revenues, costs and expenses are recorded using average exchange rates prevailing during the reporting periods. Gains or losses resulting from foreign currency transactions are included in results of operations.
(d) | Revenue recognition |
Revenues include amounts invoiced for call revenue, fixed monthly rental charges, roaming charges, activation fees, internet and broadband services, access and interconnection revenue and fees for value added services.
Revenues for fixed line are recognized based upon metered call units (“MCU”) of traffic processed and cellular telephone services are recognized based on call data records (“CDR”) of traffic processed. Rental revenues and leased circuits rentals are recognized based upon contracted fee schedules. Revenues from internet and broadband services are recognized based on usage by subscribers. Revenues associated with access and interconnection for usage of the Company’s network by other operators for local, national long distance and international long distance calls are recognized gross in accordance with the Interconnect Usage Charges Regulation released by Telecom Regulatory Authority of India (“TRAI”) and contracted fee schedules. TRAI regulation specifies the maximum per minute rates for traffi c terminated on the Company’s network. Revenues are recorded net of applicable discounts, allowances and service tax.
Amounts included in the financial statements, which relate to services provided from the last billing cycle date up to the end of the reporting period, are classified in current assets as “Unbilled revenue”. These are billed in subsequent periods as per the terms of the billing plans.
Billings in advance for services to be rendered and amounts charged for new connections are included in accrued expenses and other current liabilities’ under the caption deferred income. Amounts charged for new connections are recognized over the average life of the customer relationship.
(e) | License fee |
MTNL is required to pay license fees and spectrum charges to Department Of Telecommunications (“DOT”) in accordance with conditions governing license fees for Basic Telephone Service and Cellular Telephone Service under the Revenue Sharing Regime. The license fees and spectrum charges are expensed as incurred and computed using specified percentages as prescribed by the DOT. The specified percentage for license fees on fixed line services and cellular services were 10% of the Adjusted Gross Revenue (“AGR”) for the years ended March 31, 2008, 2009 and 2010. With effect from January 1, 2006 the Company is required to pay license fee at the rate of 6% of the AGR on the internet and broadband services (including internet telephony). License fees and spectrum charges charged to income as part of cost of revenues amo unted to Rs. 4,403 million, Rs. 5,426 million (Restated Refer Note 3) and Rs.3,461 million (including license fee on Internet services) for the years ended March 31, 2008, 2009 and 2010 respectively.
Change in method of calculation of ISP license fee implemented for the financial year 2009-10 vide MTNL CO letter No. MTNL/RA/AGR/2009/Pt dated March 29, 2010 is also extended for the previous year also. The same is approved in the ECM held on June 12, 2010 and accordingly the license fees were reduced by Rs.70.42 million in the financial year 2008-09.
(f) | Network charges |
MTNL recognizes charges associated with access to and interconnection to other operators’ network for local, national long distance and international long distance calls in accordance with the Interconnect Usage Charges Regulation released by Telecom Regulatory Authority of India (“TRAI”), where applicable, or in accordance with the terms of agreements entered into with other operators. TRAI regulation specifies per minute charges for traffic terminated on the other operators’ network.
F-11
(g) | Cash and cash equivalents |
MTNL considers all highly liquid investments, with an original maturity or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates their fair value due to the short maturity of the investments.
(h) | Investment in short term bank deposits |
Investment in bank deposits represents term deposits placed with banks earning fixed rate of interest with maturities ranging from more than three months to one year. Interest on investment in bank deposits is recognized on accrual basis.
(i) | Inventories |
Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average method for all categories of inventories. Inventories comprise of handsets, cables, exchange equipment and other stores and spares which are used in operating and maintaining networks. MTNL reviews its inventories on a periodic basis to identify and provide for inventory obsolescence and inventories with carrying values in excess of realizable values based on its assessment of the future demands and market conditions. These write-downs are included in cost of revenues.
(j) | Investment |
MTNL has evaluated its investments in debt and equity securities in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities” and determined that all of its debt securities are to be classified as held-to-maturity (“HTM”). Debt securities are classified as held-to-maturity since management has the positive intent and ability to hold the securities to maturity. Held-to-maturity investments are carried at amortized cost using the effective yield method, adjusted for the amortization or accretion of premiums or discounts, if any. Costs include transaction cost. Currently all the investments classified as HTM were acquired at face value, without paying any premium or discount or incurring any transaction cost. Realized gains and losses on sale of HTM securities are included in earnings. Dividends and interest on securities are recognized when earned and included in other income.
MTNL records an investment impairment charge on held-to-maturity securities when management believes an investment has experienced a decline in value that is judged to be other than temporary. For securities where quoted market prices are not available, fair value is determined using pricing techniques such as discounted cash flow analysis. In order to determine whether a decline in value is other than temporary, the Company evaluates, among other factors, the duration and extent to which the value has been less than the carrying value, the financial condition and business outlook of the investee including cash flow indicators, current market condition and trends in the industry or the ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in value.
(k) | Property and equipment |
Property and equipment are stated at cost less accumulated depreciation. Assets acquired under capital leases are stated at the present value of minimum lease payments less accumulated depreciation.
Cost, in the case of the network, comprises all expenditure up to and including cabling and wiring within customers’ premises, contractor’s charges, materials and direct labor. Employees’ remuneration and benefits are capitalized based on technical assessment of actual staff costs directly related to such capital expenditure. Interest cost incurred for qualifying assets during construction period is capitalized based on actual investment and average cost of funds or specific rate of borrowings. Interest capitalized is included as a part of asset cost and is depreciated over the estimated useful life of the asset. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. The cost and the accumulated depreciation for property and eq uipment sold, retired or otherwise disposed off are removed from the stated values and the resulting gains and losses are included in the statement of income.
Advances paid towards the acquisition of property and equipment outstanding at each balance sheet date and expenditures for construction of network systems and other projects (prior to the asset being ready for its intended use) are reflected as Capital Work in Progress.
F-12
3G and BWA Spectrum one time charges:
The auction price of 3G and BWA Spectrum amounting Rs.110,979.70 million payable to DOT as one time charges is accounted for as intangible assets and to be amortized for the period of 20 years and 15 years respectively on straight line basis with effect from August 8, 2008, the date of allotment of Spectrum.
Depreciation is computed using the straight-line method over the estimated useful lives. Assets under capital leases and leasehold improvements are amortized straight-line over their estimated useful life or the lease term, as appropriate. Property and equipment are being depreciated over their useful lives, which exceed the license term since the Company believes that its licenses will be extended beyond their current term.
The Company has adopted the provisions of FASB statement no. 143 “Asset Retirement Obligations”. At present the Company does not have any material asset retirement obligation.
MTNL has established the estimated useful lives of assets for depreciation purposes as follows:
Over the period of the lease | |
Buildings | 30 to 60 Years |
Cable and related equipment | 20 to 25 Years |
Exchanges and related Equipment | 10 Years |
Other fixed assets Intangible Assets (3G &BWA Spectrum) | 5 to 10 Years 20 yrs for 3G & 15 yrs for BWA w.e.f. 08.08.2008 |
(l) | Impairment of long lived assets |
MTNL has adopted the provisions of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. MTNL reviews long-lived assets, for impairment whenever events or changes in business circumstances indicate the carrying amount of assets may not be fully recoverable. Each impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset to its recorded value. If impairment is indicated, the asset is written down to its fair value. Assets to be disposed are reported at the lower of the carrying value or the fair value less cost to sell.
(m) | Operating Leases |
MTNL has certain cancelable operating leases for office premises. Rental expenses for operating leases are accounted for on a straight line method. Rental expense amounted to Rs.619 million, Rs.656 million and Rs.657 million, for the years ended March 31, 2008, 2009 and 2010 respectively.
(n) | Retirement benefits |
Company's employees |
The Company has two sets of retirement schemes for its employees based on the option exercised by them. Under one scheme, the employees are eligible for provident fund, gratuity, leave encashment and in the other scheme, the employees are eligible for pension, general provident fund, gratuity and leave encashment.
Pension |
The pension scheme is a defined benefit retirement plan (the “Pension Plan”). Under the pension plan, after retirement, employees are eligible for monthly payments including dearness allowance based on the last drawn salary. MTNL provides for the Pension Plan on the basis of an actuarial valuation. The entire Pension Plan of MTNL is unfunded subject to pending decision of DoT.
F-13
Gratuity |
MTNL has a defined benefit retirement plan (the “Gratuity Plan”) covering eligible employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee’s salary and years of employment. MTNL provides for the Gratuity Plan on the basis of actuarial valuation.
Medical |
The medical scheme is a defined benefit retirement plan (the “Medical Plan”). In accordance with the Medical Plan, retirees are entitled to receive reimbursements limited to half of the monthly salary drawn by the employee on the date of retirement and reimbursement of hospitalization charges in any year through insurance company under RECGHIS (Retirement Employee Contributory Group Health Insurance Scheme) 2008. (Effective October, 2008)
Leave encashment |
Leave encashment benefit comprises of encashment of leave balances accrued by employees. These balances can be accumulated and carried forward up to a maximum of 300 days and are encashable during the tenure of employment or on the employee leaving the Company or on retirement. Leave encashment is being provided for on the basis of actuarial valuation.
Provident fund |
Under Indian law, employees are entitled to receive benefits under the Provident Fund, which is a defined contribution plan. Both, the employee and the employer make monthly contributions to the plan at a predetermined rate (presently 12.0%) of the employees’ salary (basic and dearness allowance). The contributions are paid to the Provident Fund Trust established by MTNL. MTNL is obligated to make contributions when there are shortfalls in statutorily assured rates of return on the assets of the trust. Currently, MTNL has no further obligation under the provident fund beyond its contribution, which is expensed when accrued.
General provident fund |
The General Provident Fund scheme (the “GPF”) is a retirement scheme applicable to employees who have opted for the Government pension scheme. Under the scheme, employees contribute between 6% to 100% of their basic pay to GPF. The employer is not required to make any contributions towards the fund. The Scheme also allows participants to withdraw up to 90% of the amount contributed by them towards the GPF.
During the year ended March 31, 2005, the Company had set up an ‘MTNL GPF Trust’ (“GPF Trust”) and had applied to the Income Tax authorities for the recognition of the said Trust. During the year ended March 31, 2006, the GPF Trust has been recognized by the Income Tax authorities and the Company has funded the GPF Trust by transferring the accumulated GPF contribution till the date of formation of the GPF Trust. The Company has also provided interest at the statutorily applicable rate of 8% per annum on the employee contributions upto the date of formation of the GPF Trust. MTNL is obligated to make contributions when there are shortfalls in statutorily assured rates of return on the assets of the GPF Trust. Currently, MTNL has no further obligation under the General Provident Fund.
Pension, gratuity, and leave encashment are defined benefit retirement plans. The liability thereof is provided based on an actuarial valuation. All actuarial gains and losses are expensed off in the year, in which they arise. The gratuity plan is funded plan while pension and leave encashment are unfunded plans.
Employees on secondment from DOT |
The employees who are seconded from DOT are entitled to pension, gratuity and leave encashment from the Government. MTNL makes contributions, to fund the Government’s pension, gratuity and leave encashment liability in respect of seconded employees, in accordance with the rates prescribed by the Government. MTNL has no further liability in respect of these employees. Additionally, these employees are covered under eligible Government medical schemes.
F-14
(o) | Income taxes |
In accordance with the provisions of SFAS 109, “Accounting for Income Taxes” income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period such changes are enacted. Based on management’s judgment, a valuati on allowance against any deferred tax asset is recognized when it is more likely than not that some portion or all of such deferred tax asset will not be realized.
Advertising and business promotion costs are expensed as incurred and amounted to Rs.353 million, Rs.431 million and Rs.423 million for the years ended March 31, 2008, 2009 and 2010 respectively.
(q) | Dividends |
Dividends are recorded in the consolidated financial statements in the period in which they are approved by the shareholders.
(r) | Earnings per share |
In accordance with SFAS No. 128, Earnings Per Share (EPS), basic earnings per share is computed using the weighted average number of equity shares outstanding during the period. MTNL does not have any dilutive securities and hence the basic and diluted earnings per share are the same.
(s) | Recently issued accounting pronouncements |
i) | Effective July 2009, the FASB issued ASU No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standard Codification (ASC), or the Codification, as the official single source of authoritative U.S. generally accepted accounting principles. All existing accounting standards are superseded. The Codification also includes all relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections within the Codification. Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emering Issue Task Force Abstracts. All guidance contained in the Codification carries an equal level of authority. Instead, it will issue Accounting Standard Updates (ASUs), which will serve to update the Codification, provided b ackground information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. All other non-grandfathered non-Commission accounting literature not included in the Codification will become non-authoritative. |
ii) | In September 2006, the FASB issued ASC Topic 820 “Fair Value Measurement and Disclosures” (previously FAS-157, Fair Value Measurements). ASC 820 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Statement establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements but provides guidance on determination of fair value and lays down the fair value hierarchy to classify the source of information used in fair value measurements. Upon adoption of the Statement, any difference between the carrying amounts and the fair values of instruments would be accounted for as a cumulative-effect adjustment to the beginning balance of ret ained earnings. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2 (FSP FAS 157-2) delaying the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statement on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 for items within its scope. Implementation of ASC 820 did not have a material effect on the Company’s consolidated financial statements. |
F-15
iii) | In February 2007, the FASB issued ASC Topic 825 “Financial Instruments” (previously FAS-159, The Fair Value Option for Financial Assets and Financial Liabilities). This Statement permits entities to measure eligible financial assets and liabilities, firm commitments and other eligible items at fair value, on an instrument-by-instrument basis, that is otherwise not permitted under other generally accepted accounting principles. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. ASC 825 was effective for periods ending after June 15, 2009. The Company has not elected to use fair value measurements under ASC 825 with respect to any eligible instruments. |
iv) | In December 2007, the FASB issued ASC Topic 805 “Business Combinations” (previously FAS-141R, Business Combinations, which had replaced FAS-141). ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed including contingencies and non-controlling interest in the acquire, at the acquisition date, measured at their fair value, with limited exceptions specified in the Statement. In a business combination achieved in stages, this Statement requires the acquirer to recognize the identifiable assets and liabilities as well as the non-controlling interest in the acquire at full amounts of their fair values. This Statement also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. ASC 805 applies prospectively to business combinations consummated in fiscal years beginning after December 15, 2008. The Company adopted this Statement effective April 1, 2009. The Company believes the effect of ASC 805 will depend on the nature and significance of any acquisitions that are subject to this Statement. |
v) | In December 2007, the FASB issued ASC Topic 810 “Consolidation” (previously FAS-160, Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51). ASC 810 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement requires the recognition of a non-controlling interest as equity in the consolidated financial statements and separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. ASC 810 applies prospectively to all non-controlling interest, including any that arose before the effective date, for fiscal years beginning after December 15, 2008. The Company is currently evaluating the requirements of ASC 810 and has not y et determined the impact this Statement may have on the Company’s consolidated financial statements. |
vi) | In March 2008, the FASB issued ASC Topic 815 “Derivatives and Hedging” (previously FAS-61, Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133). ASC 815 requires enhanced disclosures on derivative and hedging activities with regard to using derivative instruments in terms of underlying risk and accounting designation. This Statement requires disclosures on the need of using derivative instruments, accounting of derivative instruments and related hedged items, and the effect of such instruments and related hedge items, if any, on the financial position, financial performance and cash flows. ASC 815 applies prospectively for fiscal years beginning after November 15, 2008. The Company is currently evaluating the requirements of this Statement and has not yet determined the impact this Statement may have on the Company' s consolidated financial statements. The Company does not expect this Statement to have a material impact on its consolidated financial statements. |
vii) | In April 2008, the FASB issued ASC Topic 350 “Intangibles- Goodwill and Other” (previously FSP FAS 142-3, Determination of the Useful Life of Intangible Assets). ASC 350 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC No. 350, Goodwill and Other Intangible Assets. This standard is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, applied prospectively, with early adoption prohibited. Refer to Note 3 for restatement based upon a one-time charge which affected the intangible assets and depreciation & amortization in the fiscal year ended March 31, 2009. |
F-16
viii) | In December 2008, the FASB issued ASC Topic 715 “Compensation-Retirement Benefits” (previously FSP FAS-132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets). This ASC requires additional disclosures about plan assets held in an employer’s defined benefit pension or other post-retirement plan, including the fair values of the various categories of plan assets held, classification of level of fair value disclosure, and changes during the period attributable to actual return on plan assets and purchase sales and settlements of assets. ASC 715 is effective for fiscal years ending after December 15, 2009. Such disclosure did not have a material impact on such financial statements. |
ix) | In April 2009, the FASB issued ASC Topic 320 (previously FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments) contemporaneously with issuing ASC Topic 820 (previously FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly). ASC 320 establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. ASC 820 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. All of these ASCs are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption by the Company did not have a material impact on its financial statements. |
x) | In May 2009, the FASB issued ASC Topic 855 “Subsequent Events” (previously FAS-165, Subsequent Events). ASC 855 establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued (i.e., all approvals necessary for issuance, such as from management and the board of directors, have been obtained). It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. ASC 855 was effective for interim and a nnual periods ending after June 15, 2009. The Company has evaluated all events or transactions that occurred after March 31, 2010 through August 20, 2010, the date the Company issued these financial statements. During that period, the Company took short-term loans to pay the 3G Spectrum one time charge of Rs.30,300 million, which includes Rs. 5,300 million paid to FDR and Rs.35,340 million paid to the DOT from the Company’s own resources in the month of May 2010. MTNL also took on a short term loan for Rs.45,339.70 million to pay the DOT for the one-time BWA spectrum charge in the month of June 2010. |
xi) | In June 2009, the FASB issued ASC Topic 810 “Consolidation” (previously SFAS 167, Consolidation of Variable Interest Entities) which revises the approach in determining when an entity is insufficiently capitalized or not controlled through voting rights should be consolidated. by assessing the power of the Company to direct the activities that impact the entity’s economic performance and its significant risks and rewards. The Company believes that this guidance did not have a material impact on its financial statements. |
(t) | Reclassifications |
Certain items previously reported in specific financials statements captions have been reclassified to conform to the current year’s presentation.
3. RESTATEMENT OF FINANCIALS FOR THE YEAR 2008-09:
MTNL has restated the results of operations for the year ended March 31, 2009 to reflect the correction of error in the prior period. The nature of adjustments is as follows:
F-17
MTNL had provided for Rs.213.20 million during the year 2008-09 on account of 3G and BWA spectrum as license fee on the base reserve price subject to finalization of auction process by DOT and therefore the accounting policy in this regard was not made on that date. On finalization of the auction process by DOT, during the current year i.e 2010-11, in accordance with DOT guidelines dated August 1, 2008 on 3G spectrum and BWA spectrum and on finalization of the price on spectrum vide DOT letter No P-11014/13/2008-PP dated May 21, 2010, for 3G and DOT letter No P-11014/13/2008-PP dated June 12, 2010, on BWA spectrum, the liability for Rs.110,979.7 million has been accounted for by creating intangible assets as one time charges payable to DOT for 3G and BWA spectrum. This is to be amortized for the period of 20 years and 15 years for 3G and BWA spectrum respectively on straight line basis. Accordingly the amortized amount for the period from August 8, 2008, the date of allotment of spectrum, to March 31, 2009 is Rs.4,082.30 million.
Change in method of calculation of ISP license fee implemented for the financial year 2009-10 vide MTNL CO letter No. MTNL/RA/AGR/2009/Pt dated March 29, 2010, is also extended for the previous year also. The same was approved in the ECM held on June 12, 2010 and accordingly the license fees were reduced by Rs.70.42 million in the financial year 2008-09.
The following table presents the impact of the restatement adjustments on net income for the year ended March 31, 2009, as well as the impact on various line items within the statement of operations under US GAAP :
(Rs. in millions except per share data) | For the year ended March 31, 2009 | |||
Statement of Income | ||||
Net Income as previously reported | 1,141.00 | |||
Adjustments: | ||||
Income Tax on License fee | (96.40 | ) | ||
Income Taxes on Property and Equipment, Intangible Assets | (36,301.66 | ) | ||
Income Taxes on due to related parties | 37,625.61 | |||
Amortization of 3G & BWA | (4,082.30 | ) | ||
License fee | 283.62 | |||
Net Income as restated | (1,430.13 | ) | ||
Cost of Revenue as previously reported | (31,456.00 | ) | ||
Adjustments: | ||||
License fee | 283.62 | |||
Cost of Revenue as restated | (31,172.38 | ) | ||
Depreciation and amortisation as previously reported | (8,209.00 | ) | ||
Adjustments: | ||||
Amortization of 3G & BWA | (4,082.30 | ) | ||
Depreciation and amortisation as restated | (12,291.30 | ) | ||
Income Tax Expense as previously reported | (2,468.47 | ) | ||
Adjustments: | ||||
Income Tax on License fee | (96.40 | ) | ||
Income Taxes on Property and Equipment, Intangible Assets | (36,301.66 | ) | ||
Income Taxes on due to related parties | 37,625.61 | |||
Income Tax Expense as restated | (1,240.92 | ) | ||
Basic and diluted Earning per share as previously reported | 1.81 | |||
Adjustments: | (4.08 | ) | ||
Basic and diluted Earning per share as restated | (2.27 | ) |
F-18
The following table presents in greater detail the impact of the restatement adjustment on MTNL's previously reported shareholders' equity as at March 31,2009 under US GAAP :
(Rs. in millions except per share data) | For the year ended March 31, 2009 | |||
Shareholder's equity as previously reported | 75,534.00 | |||
Adjustments: | ||||
Income Tax on License fee | (96.40 | ) | ||
Income Taxes on Property and Equipment, Intangible Assets | (36,301.66 | ) | ||
Income Taxes on due to related parties | 37,625.61 | |||
Amortization of 3G & BWA | (4,082.30 | ) | ||
License fee | 283.62 | |||
Shareholder's equity as restated | 72,963.00 |
The following table presents the impact of the restatement adjustments on balance sheet line items as of March 31, 2009 under US GAAP :
(Rs. in millions except per share data)
Balance Sheet data | As of March 31, 2009 | ||||
As previously reported | As restated | ||||
Deferred Income Tax Assets - current | Rs. | 7,649 | Rs. | 45,275 | |
Other receivables | 13,583 | 13,487 | |||
Intangible Assets | 309 | 107,206 | |||
Deferred Income Tax liabililty - non current | 11,973 | 48,275 | |||
Dues to related party | Rs. | 11,605 | Rs. | 122,301 |
F-19
4. | RELATIONSHIP BETWEEN DOT/BSNL/VSNL AND THE COMPANY (Also refer note 20) |
The relationships between the Department of Telecommunication (“DOT”) / Bharat Sanchar Nigam Limited (“BSNL”) / Videsh Sanchar Nigam Limited (“VSNL”) and MTNL are as follows:
a. MTNL is a subsidiary of the Government of India which owns 56.25% of MTNL through DOT. DOT is a department of the Government of India. BSNL is an affiliate among common control with MTNL as the Government, acting through the DOT, holds 100% of the issued share capital of BSNL. VSNL is an equity investee of the Government of India.
b. DOT has granted licenses to MTNL to operate fixed line, cellular and internet services. The licenses for fixed line, cellular and internet services are valid until March 31, 2013, October 9, 2017 and September 7, 2017 respectively. DOT has also granted to MTNL, with effect from May 10, 2006 a National Long Distance License for Delhi and the municipalities of Mumbai, Navi Mumbai and Thane valid up to May 9, 2026. DOT retains the right to revoke these licenses after giving one month's notice to MTNL.
c. In October 1999, the DOT which had performed the role of both licensor and policy maker for the Ministry of Communication and operated as India’s domestic long distance service provider and fixed-line service provider (except for the areas of Delhi and Mumbai), was split into two departments DOT and the Department of Telecom Services (DTS). DOT/ Telecom Commission, or DOT, now performs the role of licensor and policy maker. The Department of Telecom Services, or DTS, functioned as the Government of India's local and long distance network service provider till September 30, 2000. On October 1, 2000, DTS was incorporated as BSNL and carries out the functions of DTS including the determination of the networking charges payable for access to its network.
d. Until March 31, 2001, BSNL was the sole service provider for carriage of NLD (National Long Distance) calls. Further it was also carrying ILD calls up to the gateway provided by VSNL, India’s former government-controlled international long distance carrier. However, carriage of NLD and ILD (International Long Distance) calls has been opened to other operators with effect from April 1, 2001 and April 1, 2002 respectively. MTNL continues to use BSNL network for the carriage of NLD calls, and has entered into arrangements with other ILD operators for carriage of ILD calls with effect from April 1, 2002. However, international calls continue to be passed from MTNL’s network to international gateways operated by VSNL. MTNL pays the negotiated per minute charge to VSNL for carriage and termination of international calls which varies depending on the country of destination. Subsequent to the year ended March 31, 2006, MTNL has started using its NLD license and has entered into a contract with VSNL for a lease line to carry MTNL’s call traffic between Delhi and Mumbai.
F-20
The following table gives details in respect of the Company’s significant revenues and (expenses) related to carriage of ILD calls, NLD calls License Fees, Spectrum Charges and inter connect usage charges with the above mentioned related parties:
For the years ended March 31, | ||||||||||||||||
2008 | 2009 Restated (Note 3) | 2010 | 2010 | |||||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||||||
VSNL - Expenses for carriage of ILD calls originating on MTNL’s network | (487 | ) | (270 | ) | (175 | ) | (4 | ) | ||||||||
VSNL - Revenues for ILD/NLD calls terminating on MTNL’s network | 90 | 97 | 143 | 3 | ||||||||||||
DOT - License fees and spectrum charges (Refer note 5) | (4,127 | ) | (5,427 | ) | (3,461 | ) | (77 | ) | ||||||||
BSNL - Networking charges for NLD calls (Refer note 5) | (3,487 | ) | (1,826 | ) | (1,451 | ) | (32 | ) | ||||||||
BSNL - Revenues for interconnect usage charges as per TRAI Regulation | 2,725 | 1,186 | 342 | 8 |
5. LICENSE FEES AND NETWORK CHARGES
On April 9, 2001, the DOT communicated that the annual license fee will be revised and shall be payable at 12% (same as the rate applicable to private operators) of Adjusted Gross Revenue (“AGR”) for Basic Telephone Service effective from August 1, 1999, (as against Rs.900 per direct exchange line under the earlier arrangement). On September 5, 2001, the DOT, amended its position and informed MTNL that the date from which the revised license fees will be payable will be notified later. The DOT also informed the Company that the network charges payable to BSNL will also be revised, and the license fee and network charges would be reviewed with effect from the same date.
Accordingly, license fee and networking charges on revised basis were not to be paid till the DOT communicated the effective date for such revision. The earlier license fee and networking arrangement expired on March 31, 2000 and March 31, 2001 respectively. No agreement had been entered for payment of networking charges for the fiscal years ended March 31, 2002, 2003 and 2004. In the absence of any agreement, networking charges for these years have been accrued on the same basis as applicable to that of private operators. In the fiscal 2001, the Company paid license fee based on the earlier arrangement.
Subsequent to the March 31, 2004, a meeting was held between DOT, BSNL and MTNL to resolve the ambiguity with respect to license fee and networking charges. The parties agreed that the license fees were payable at 12% of AGR and networking charges as per TRAI regulations with effect from August 1, 1999. Also, the revenue sharing percentages earlier agreed to between MTNL and BSNL, other than those governed by TRAI regulations, were revised with retrospective effect. This had resulted in an incremental charge of Rs.3,520 million on account of license fee and a benefit of Rs.1,515 million on account of networking charges for periods up to March 31, 2003, which had been accounted for in the year ended March 31, 2004.
F-21
During the year ended March 31, 2006, the Company has accounted for a reversal of license fees amounting to Rs.3,408 million. The Company has received a confirmation from DOT stating that provisional assessment of license fees up to the financial year 2004-05 in respect of MTNL has been completed and that MTNL has fully paid all license fee dues up to March 31, 2005. Subsequent to the year ended March 31, 2006, the Company has also received an NLD license from DOT. One of the pre-requisites for obtaining an NLD license is the absence of any dues towards DOT on account of license fees. In view of the above and after obtaining an opinion from a legal counsel the Company has concluded that there is no longer any ambiguity regarding the license fees payable for the period up to March 31, 2003 (Rs.3,520 million) and for the years ended Mar ch 31, 2004 and 2005. The Company has accounted for Rs.3,408 million (net) the additional amounts accrued up to March 31, 2005 as a reduction in license fees in the statement of income as part of cost of revenues for the year ended March 31, 2006.
During the year ended March 31, 2006, the DOT had constituted a three-member committee comprising of Member (Production), Telecommunications, Member (Finance), Telecommunications and Deputy Director General (Business Solutions) to resolve the various disputes relating to networking charges. Based on the recommendations of the Committee vide their minutes dated January 2006, DOT has settled the disputes on the networking charges for the period from 2000 to 2005. Accordingly, an additional amount of Rs.3,809 million has been accounted as networking charges in the statement of income as part of cost of revenues for the year ended March 31, 2006.
During the year ended March 31, 2010, no fresh developments took place in this matter.
6. | CASH & CASH EQUIVALENTS |
2009 | 2010 | 2010 | ||||||||||
(Millions of Rupees) | (Millions of Dollars) Unaudited | |||||||||||
Cash at bank and in hand | 1,419 | 1,056 | 24 | |||||||||
Cash and cash equivalents | 1,419 | 1,056 | 24 |
Investments in bank deposits represents term deposits placed with banks earning fixed rate of interest and amounted to Rs.46,725 million and Rs.47,835 million as of March 31, 2009 and 2010 respectively with maturities from more than three months to one year. Interest on investments in bank deposits is recognized on accrual basis.
F-22
2009 Restated (Note 3) | 2010 | 2010 | ||||||||||
(Millions of Rupees) | (Millions of Dollars) Unaudited | |||||||||||
Land & buildings | 16,726 | 17,362 | 386 | |||||||||
Cable and related equipment | 75,990 | 77,405 | 1,722 | |||||||||
Exchanges and related Equipment | 72,178 | 78,674 | 1,750 | |||||||||
Other fixed assets | 6,436 | 6,648 | 148 | |||||||||
Intangible Assets | 111,410 | 111,545 | 2,482 | |||||||||
Capital work in progress | 9,166 | 11,448 | 255 | |||||||||
Total | 291,906 | 303,082 | 6,743 | |||||||||
Accumulated depreciation and amortization | (106,081 | ) | (119,918 | ) | (2,668 | ) | ||||||
Property and equipment, net | Rs. | 185,824 | Rs. | 183,164 | $ | 4,075 |
In 1987, the assets and properties of the DOT located in Delhi and Mumbai were transferred to MTNL by an order of the Government of India (the "Government") and a deed of sale was executed by the Government in favor of MTNL representing an irrevocable transfer. Indian law generally requires that to perfect the transfer or lease of real property, the transfer should be evidenced by a formal, duly stamped deed of transfer and registered with the Central Land Registrar within a specified period after the execution of the deed of transfer or lease. A formal transfer deed for real property of the DOT, transferred by the Government to MTNL has been executed but has not been registered with the appropriate municipal authorities. The formal transfer deed and physical delivery of possession of the DOT's non-real estate assets has resulted in the transfer of such non-real estate assets of the DOT to MTNL in Delhi and Mumbai.
Indian law also requires payment of stamp duty (at rates which vary among states) on instruments, which effect transfer of title to real estate or in respect of leases of real estate. MTNL has not paid stamp duty in respect of any of the acquired or leased properties. Accordingly, MTNL may be liable for stamp duty and penalties thereon if a deed is registered by MTNL in the future (other than with respect to the DOT properties acquired from the Government as at March 30, 1987). All liabilities for stamp duties in respect of the DOT properties acquired by MTNL from the Government as at March 30, 1987 are to be borne by the Government. The Company has been advised by its counsel that although the Company has valid possession including the risks and rewards of ownership and title to all of its property, to enable MTNL to perfect and ther eby acquire marketable title to real property in its possession, it would need to have relevant documents relating to transfer or lease of real property duly registered and stamped. Accordingly, MTNL cannot sell its properties without payment of stamp duties and registering the properties in its name. In preparing these consolidated financial statements, MTNL has capitalized provision for stamp duty based on its best estimate amounting to Rs.62 million and Rs.47 million as of March 31, 2009 and 2010 respectively. MTNL does not intend to sell any of these properties. In terms of its Articles of Association MTNL has to obtain prior approval of the President of India in respect of sale or disposal of any land or building costing more than Rs.1 million.
Investments of MTNL consist of held-to-maturity securities (“HTM”).
As of March 31, | ||||||||||||
2009 | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
Held-to-maturity securities | ||||||||||||
11.5% Bonds of Maharashtra Krishna Valley Development Corporation | Rs. | 2,500 | Rs. | 2,500 | $ | 56 | ||||||
Investments - Non-current | Rs. | 2,700 | Rs. | 2,500 | $ | 56 |
F-23
8.75% Redeemable Cumulative Preference Shares of ITI Limited |
On February 14, 2003, MTNL invested Rs.1,000 million in 8.75% cumulative preference shares of ITI Limited (“ITI”) on a private placement basis. ITI is a government company in the telecommunication equipment and distribution business. ITI also supplies exchanges and cables to MTNL. These preference shares are redeemable in five equal annual installments commencing from September 30, 2005.
The share purchase agreement between ITI and MTNL includes a provision for a letter of comfort from Department of Telecommunication (DOT) to MTNL endorsing the investment and also provides MTNL a right to set off principal payments owing under the terms of these Cumulative Preference Shares against amounts payable to ITI, in connection with MTNL’s purchase of exchanges and cable supplies.
As of September 30, 2005, ITI had not redeemed the first tranche amounting to Rs.200 million as per the repayment schedule and ITI had requested MTNL for an extension on the redemption dates. However MTNL had not accepted ITI’s request and has looked to the DOT’s letter of comfort and requested settlement of the first repayment tranche of Rs. 200 million.
As of September 30, 2006, ITI has not yet redeemed both the first and second tranches amounting to Rs. 200 million each as per the original repayment schedule. ITI has to redeem third tranches amounting to Rs. 200 million as on September 30, 2007.
As of September 30, 2007, ITI has not yet redeemed the first, second and third tranches amounting to Rs. 200 million each as per the original repayment schedule.
As of September 30, 2009, ITI had not redeemed the first, second, third , fourth and last tranches amounting to Rs.200 million each pursuant to the original repayment schedule.
Management has evaluated the investment in ITI for impairment, on the basis that the first, second and third tranches for repayment have not been settled by ITI. Management has evaluated the financial condition and business outlook of ITI including the new purchase orders received by ITI for supply of GSM equipment from BSNL and the Company. We currently have accounts payable to ITI of Rs.142 million as of March 31, 2010, which, pursuant to the share agreement, we can legally settle against the repayments owing under the cumulative preference shares. In addition, we have the intent and ability to retain the debt security for a period of time sufficient to allow for anticipated recovery in value.
Based on this evaluation and specifically considering that the share purchase agreement includes a provision for a letter of comfort from Department of Telecommunication (Government of India) to MTNL endorsing the investment and also provides MTNL a right to set off amounts receivable in respect of principal outstanding from the dues payable to ITI, management has concluded that Rs.800 million of this debt security due as of September 30, 2008 is impaired and as of March 31, 2009 further Rs.200 million of this debt security due has been impaired. Entire amount of investment in ITI has been impaired up to fiscal year 2009
However, DOT vides its letter no. U-59011-10/2002-FAC dated July 31, 2009, deferred the repayment schedule of the above cumulative preference shares to 2012-13 onwards in five equal annual installments.
11.5% Bonds issued by Maharashtra Krishna Valley Development Corporation |
MTNL has also invested Rs.2,500 million in bonds issued by Maharashtra Krishna Valley Development Corporation (“MKVDC”), a wholly owned subsidiary of Government of Maharashtra. MKVDC allotted these bonds to MTNL on May 31, 2002. The bonds have a coupon rate of 11.5% per annum and are redeemable at the end of the 10th year from the date of allotment. The repayment of these bonds is guaranteed by the Government of Maharashtra.
F-24
Interest income has been recognized and realized on the bonds held in MKVDC.
MTNL records an investment impairment charge when management believes an investment has experienced a decline in value that is judged to be other than temporary. MTNL monitors its investments for impairment by considering current factors including economic environment, market conditions and the operational performance and other specific factors relating to the business underlying the investment. Based on its assessment of its carrying values of the above investments, management believes that there is no impairment of investments as of March 31, 2010.
10. | INVESTMENT IN EQUITY AFFILIATE |
On July 21, 2001, MTNL, in consortium with Telecommunications Consultants India Limited, VSNL and Nepal Venture Private Limited entered into a joint venture arrangement to form United Telecom Limited (UTL). UTL was formed to provide wireless in local loop (“WLL”) services in Nepal. As at March 31, 2003, MTNL had invested Rs. 200 million in UTL in proportion to its 26.7% holding. In 2004, MTNL invested Rs. 33 million in UTL in proportion to its 26.7% holding. In the year ended March 31, 2007 MTNL has further invested Rs.56 million and During the year ended March 31, 2010 MTNL has invested Rs. 69 Million in proportion to its share. MTNL’s equity in profit of the affiliate amounted to Re.1 million for the year ended March 31,2008. MTNL’s equity in loss of the affiliate amounted to Rs.5 million for the y ear ended March 31, 2009 and MTNL’s equity in profit of the affiliate amounted to Rs.6 million for the year ended March 31, 2010. The carrying value of investment in UTL is Rs. 172 million and Rs.69 million as of March 31, 2009 and 2010, respectively.
On March 31, 2006, MTNL STPI IT Services Ltd. (hereinafter referred to as “STPI”), a joint venture of MTNL and Software Technology Parks of India, a society registered under the Ministry of Information Technology with 50% share holding. The main objective of the company is to undertake all such activities that are required to make domain “India in” popular. The project under this joint venture is under way. STPI project of data centre at Chennai (formerly Madras) will provide services like messaging, web-hosting, application hosting, web-farming application etc. The Company is on process of recruiting its own staff and will be recruiting the best professionals from software industry by providing remuneration in line with the industry. As on March 31, 2010, total investment of MTNL in share of STPI is Rs. 23 million.
2009 | 2010 | 2010 | ||||||||||
(Millions of Rupees) | (Million of US $) Unaudited | |||||||||||
Cabling | 1,083 | 849 | 19 | |||||||||
Exchange equipment | 631 | 548 | 12 | |||||||||
Telephone and Telex Equipments | 451 | 589 | 13 | |||||||||
Other | 153 | - | - | |||||||||
Less: Allowance for slow moving/obsolete stock | (508 | ) | (496 | ) | (11 | ) | ||||||
Rs. | 1,809 | Rs. | 1,491 | $ | 33 |
F-25
Activity in allowance for slow moving / obsolete stock is as follows:
For the years ended March 31, | ||||||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||||||
(Million of Rupees) | (Millions of US $) Unaudited | |||||||||||||||
Rs. | Rs. | Rs. | $ | |||||||||||||
Balance at beginning of year | 491 | 499 | 508 | 11 | ||||||||||||
Charged to expense | 127 | 20 | 41 | 1 | ||||||||||||
Less: amounts written off | (119 | ) | (10 | ) | (54 | ) | (1 | ) | ||||||||
Balance at end of year | 499 | 508 | 496 | 11 |
F-26
12. | ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL DEBTS |
Accounts receivable are stated net of allowance for doubtful debts. Accounts receivable are not collateralized. The allowance for doubtful debts is determined principally on the basis of past credit loss experience and an evaluation of potential losses on the outstanding receivable balances. The activity in allowance for uncollectible accounts is given below:
For the years ended March 31, | ||||||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||||||
(Millions of Rupees) | (Millions of US $) Unaudited | |||||||||||||||
Balance at beginning of year | 6,191 | 7,510 | 7,272 | 162 | ||||||||||||
Charged to expense | 411 | 71 | 1,142 | 25 | ||||||||||||
Less: Amounts written off | 908 | (310 | ) | (656 | ) | (15 | ) | |||||||||
Balance at end of year | Rs. | 7,510 | Rs. | 7,272 | Rs. | 7,759 | $ | 173 |
13. | RESTRICTED ASSETS |
As on March 31, 2010, restricted assets comprising of unclaimed dividend for the financial years 2002 to 2009 amounting to Rs.14 million.
Other receivables consist of the following: | ||||||||||||
Other receivables | ||||||||||||
As of March 31, | ||||||||||||
2009 Restated (Note - 3) | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
Loans to employees | 1,761 | 1,530 | 34 | |||||||||
Advance tax (refer note below) | (1,283 | ) | (2,674 | ) | (59 | ) | ||||||
Accrued interest | 3,423 | 3,109 | 69 | |||||||||
Others | 11,172 | 16,944 | 377 | |||||||||
15,072 | 18,908 | 421 | ||||||||||
Less: Other assets, non-current | (1,585 | ) | (1,377 | ) | (31 | ) | ||||||
Rs. | 13,487 | Rs. | 17,531 | $ | 390 |
F-27
15. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
As of March 31, | ||||||||||||
2009 | 2010 | 2010 | ||||||||||
(Millions of Rupees) | (Millions of US $) Unaudited | |||||||||||
Interest accrual | 2 | 1 | 0 | |||||||||
General provident fund contribution of employees | 10,878 | 11,813 | 263 | |||||||||
Deferred income | 5,291 | 5,246 | 117 | |||||||||
Advance received from customers and others | 761 | 1,706 | 38 | |||||||||
Customer deposits | 1,856 | 1,720 | 38 | |||||||||
Accrued employee cost | 1,061 | 5,118 | 114 | |||||||||
Other payables and accruals | 10,987 | 7,510 | 167 | |||||||||
Rs. | 30,836 | Rs. | 33,114 | $ | 737 |
The General Provident Fund accrual represents amounts contributed by employees (who have opted for the Government pension rules), net of advances taken. Prior to the absorption (in the year 2000), this fund was being maintained by DOT. MTNL has raised claims amounting to Rs.11,813 million on DOT up to March 31, 2010 (2009: Rs.10,878 million) in respect of employee contributions (pre absorption) together with the interest accrued. An offsetting amount has been included in the non-current portion of amounts due from related parties as disclosed in Note 20.
Subsequent to absorption, in the absence of any rules available for deposit of such employee contributions, the amounts of employee contributions have been retained by MTNL. These funds are not restricted and could be used to fund the activities of MTNL until such time that the funds must be transferred to the GPF Trust. During the year ended March 31, 2006 a GPF Trust had been created and Rs.4,340 million had been transferred to GPF Trust. The outstanding amount owing to the trust of Rs.11,813 million continues to be a part of accrued expenses and other current liabilities as of March 31, 2010 as the amount is due to be recovered by the DOT.
Interest and other income, net consist of the following: | ||||||||||||||||
For the years ended March 31, | ||||||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||||||
(Millions of Rupees) | (Millions of US $) Unaudited | |||||||||||||||
Interest from investment in MKVDC | 288 | 288 | 288 | 6 | ||||||||||||
Interest on loans to employees | 109 | 129 | 161 | 4 | ||||||||||||
Interest on advances and others, net | 310 | 357 | 292 | 6 | ||||||||||||
Interest paid on customers deposits | (16 | ) | (11 | ) | (7 | ) | (0 | ) | ||||||||
Interest on Income Tax Refunds | 1,100 | 1,426 | 1,970 | 44 | ||||||||||||
Other income | 251 | 3,022 | 415 | 9 | ||||||||||||
Interest and other income, net | Rs. | 2,043 | Rs. | 5,211 | Rs. | 3,119 | $ | 69 |
F-28
17. | EXCESS LIABILITIES WRITTEN BACK |
The excess liabilities written back includes accruals being reversed to income and relates to unmatched excess cash received in respect of debtors (which, as per The Limitation Act, after a period of three years become time barred and become property of the Company), amounting to Rs.26 million for the year ended March 31, 2010. This line item also includes other time barred liabilities outstanding for more than 3 years amounting to Rs.203 million for the year ended March 31, 2010, and other provisions no longer required which have been written back amounting to Rs.338 for the year ended March 31, 2010.
Total income tax expense is attributable to income from continuing operations and consists of the following: | ||||||||||||||||
For the years ended March 31, | ||||||||||||||||
2008 | 2009 Restated (Note 3) | 2010 | 2010 | |||||||||||||
(Million of Rupees) | (Millions of US $) Unaudited | |||||||||||||||
Current tax | 1,903 | 2,282 | (11,311 | ) | (252 | ) | ||||||||||
Deferred tax | (2,024 | ) | (1,041 | ) | 4,384 | 98 | ||||||||||
Taxes For Earlier Years Written back / Paid | - | - | (4,880 | ) | (109 | ) | ||||||||||
Rs. | (121 | ) | Rs. | 1,241 | Rs. | (11,806 | ) | $ | (263 | ) |
For the years ended March 31, | ||||||||||||||||
2008 | 2009 Restated (Note 3) | 2010 | 2010 | |||||||||||||
(Million of Rupees) | (Millions of US $) Unaudited | |||||||||||||||
Income before taxes and share from affiliates | 2,338 | (181 | ) | (37,365 | ) | (831 | ) | |||||||||
Average enacted tax rate in India | 33.99 | % | 33.99 | % | 30.90 | % | ||||||||||
Computed tax expense | 795 | (62 | ) | (11,546 | ) | (257 | ) | |||||||||
Effect of tax assessed for earlier years | (8,074 | ) | (4,482 | ) | (6,940 | ) | (154 | ) | ||||||||
Effect of change in tax rates | (1 | ) | - | - | - | |||||||||||
Permanent differences | 7,159 | 5,784 | 6,680 | 149 | ||||||||||||
Income taxes recognized in the statement of income | Rs. | (121 | ) | Rs. | 1,241 | Rs. | (11,806 | ) | $ | (263 | ) |
F-29
Permanent differences represent certain expenses, which are not allowed as deductible expenses under the Indian Income Tax Act, 1961.
As per section 80IA of the Indian Income Tax Act, 1961 a company, which starts to operate telecommunication services at any time on or after April 1, 1995, but before March 31, 2000, is entitled to a tax holiday for a period of 10 years beginning with the year in which such services are started. As per the tax holiday, 100% of the profits derived from such services are exempt from tax in the first 5 years, and 30% of such profits are exempt from tax for the next 5 years. MTNL on the basis of advice from its legal counsel has historically claimed such benefit. The Company’s claim have been rejected at the first appellate level and the case has been referred to the Committee of Disputes, which is a body formed by the Government to settle disputes between Government controlled undertakings and the Government. The Committee has refe rred the case to the Tax appellate authorities for reconsideration. During the year ended March 31, 2006, the case has been set aside by the Income Tax Appellate Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has referred the matter back to the Assessing Officer for a fresh assessment after hearing the case again. During the year 2006-07 assessing officer has made fresh assessment for calculation of deduction u/s 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to MTNL. MTNL has filed appeals against that partial allowance to the higher authority.
We have has filed appeals against that partial allowance to the higher authority. Also refer to 23iii(b)(ii) to the notes to the consolidated financial statements. During the year ended March 31, 2008, we received refunds from Income Tax Authority in respect of penalty levied for the years 1995-96, 1996-97, 2000-01 and 2001-02. These penalty refunds pertain to the claims made by us under 80IA of the Indian Income Tax Act. The penalty amount was refunded by the income tax department along with interest thereon which had duly been accounted for in the statement of operations for the year ended March 31, 2008. An excess provision amounting to Rs.6,050 million were made to the tax expenses during the year ended March 31, 2008.
During the year ended March 31, 2008, the Assessing Officer allowed partial refunds in respect of deductions under Section 80IA for assessment years 2001-02 and 2003-04. During the 2009-10 fiscal year, the Honorable ITAT allowed our claim under section 80IA for six assessment years (1998-99, 1999-00, 2000-01, 2001-02, 2002-03 and 2005-06) to exempt up to 75% of the income we earned from services. The Income Tax authorities has refunded the tax amount Rs.2,819.00 million (including Interest of Rs.1361.84) for assessment year 1998-99 and rest of the years are in progress. We have filed further appeal during the year 2010-11, in Honorable High Court of Delhi for a 100% claim under section 80IA, based upon the treatment of BSNL, which is similarly situated.
F-30
Significant components of activities that gave rise to deferred tax assets and liabilities included in the financial statements are as follows: | ||||||||||||
As of March 31, | ||||||||||||
2009 Restated (Note 3) | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Millions of US $) Unaudited | |||||||||||
Deferred tax assets: | ||||||||||||
Allowances for bad and doubtful debts | 1,461 | 1,643 | 37 | |||||||||
Deferred settlements amount not recognized in income | 44,668 | 2,794 | 62 | |||||||||
Post retirement benefits | 2,545 | 2,735 | 61 | |||||||||
Others | 638 | 7,486 | 167 | |||||||||
Total deferred tax assets | 49,312 | 14,658 | 326 | |||||||||
Deferred tax liabilities: | ||||||||||||
Excess of tax allowance over depreciation | (42,257 | ) | (3,218 | ) | (72 | ) | ||||||
Interest capitalized | (6,018 | ) | (6,018 | ) | (134 | ) | ||||||
Total deferred tax liabilities | (48,275 | ) | (9,236 | ) | (205 | ) | ||||||
Net deferred tax asset / (liability) | Rs. | 1,037 | Rs. | 5,421 | $ | 121 |
Net deferred tax assets / (liabilities) included in the consolidated balance sheets are as follows:
As of March 31, | ||||||||||||
2009 Restated (Note 3) | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Millions of US $) Unaudited | |||||||||||
Current: | ||||||||||||
Deferred tax assets | 45,275 | 6,072 | 135 | |||||||||
Non-current: | ||||||||||||
Deferred tax assets | 4,037 | 8,586 | 191 | |||||||||
Deferred tax liabilities | (48,275 | ) | (9,236 | ) | (205 | ) | ||||||
Total non current | (44,238 | ) | (650 | ) | (14 | ) | ||||||
Net deferred tax asset / (liability) | Rs. | 1,037 | Rs. | 5,421 | $ | 121 |
F-31
19. | RETIREMENT BENEFITS |
(a) | Employees seconded from DOT |
MTNL’s employees who are seconded from DOT are entitled to pension, gratuity benefits and leave encashment from the Government. MTNL makes contributions to the DOT to fund the liability in respect of these employees in accordance with the rates prescribed by the Government. MTNL’s contributions are charged to income in the period they are incurred. The amount for pension, gratuity and leave encashment recognized for such employees in the consolidated statements of income are as follows:
For the years ended March 31, | ||||||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||||||
Pension (including gratuity) | 13 | 16 | 18 | 0 | ||||||||||||
Leave encashment | 7 | 7 | 12 | 0 | ||||||||||||
Rs. | 20 | Rs. | 23 | Rs. | 30 | $ | 1 |
(b) | Employees of MTNL |
i. | Pension, Gratuity and Medical benefits |
The pension and gratuity to the non-executives employees of MTNL are defined benefit plans, the cost and liability, for which are based on an actuarial valuation. Further MTNL introduced a ‘MTNL retired employee’s medical facility scheme’ for employees with effect from January 1, 2002. The scheme was initially introduced for a period of 12 weeks and was subsequently extended every year by orders issued by the competent officials. The cost and liability of the medical benefit plan for its retired employees is based on an actuarial valuation. The Company entered into an agreement with ICICI Lombard for its medical coverage for the period from April 1, 2006. ICICI Lombard subsequently expressed their inability to continue with the scheme and finally the agreement was discontinued from September 2, 2006. The earlier sche me was reinstated thereafter. The medical scheme is a defined benefit retirement plan (the “Medical Plan”). In accordance with the Medical Plan, retirees are entitled to receive reimbursements limited to half of the monthly salary drawn by the employee on the date of retirement and reimbursement of hospitalization charges in any year through insurance company under RECGHIS (Retirement Employee Contributory Group Health Insurance Scheme) 2008. (Effective October, 2008)
ii | Absorption of Executive employees |
The Company had given an option to its executive employees (B category) for absorption with MTNL with effect from October 1, 2000, at a revised pay scale that is higher than the existing pay scale. The offer for absorption provided that in addition to getting post retirement benefits like gratuity and leave encashment, the employees would have to opt for pension based on the government rules.
During the year ended March 31, 2004, majority of employees had opted for absorption with MTNL. MTNL determined the incremental liability on account of revised pay scales and related retirement cost based on an actuarial valuation. MTNL has raised claims on DOT amounting to Rs.2,784 million for the period up to the October 1, 2000, which represent amounts recoverable towards retirement benefits calculated at the rates prescribed by DOT for its employees on secondment. These have been included in Dues from related parties as disclosed in Note 20.
During the year ended March 31, 2005, an additional 1,108 executive employees opted for absorption with MTNL. MTNL has determined the incremental liability on account of revised pay scales and related retirement cost based on an actuarial valuation. In respect of these employees, MTNL has raised claims on DOT amounting to Rs.541 million for the period upto the October 1, 2000, which represent amounts recoverable towards retirement benefits calculated at the rates prescribed by DOT for its employees on secondment. These have been included in Dues from related parties as disclosed in Note 20.
F-32
During the year ended March 31, 2006, the Company had given an option to its executive employees (Category A) for absorption with the Company with effect from October 1, 2000, at a revised pay scale that is higher than the existing pay scale. Out of approximately 1,218 Group A employees currently working in MTNL, 65 employees have exercised their option as at March 31, 2006 and have been absorbed in MTNL. The offer for absorption provided that in addition to getting the post retirement benefits like gratuity and leave encashment subsequent to absorption, the employee would have to opt for either pension based on the government rules or provident fund based on the company policy. A case has been filed by the Indian Telecom Service Association (acting on behalf of Group A officers) with the High court appealing for the stay order agains t absorption of Group A employees on the contention that terms and conditions of absorption are not clear. The High Court has subsequently passed a stay order against further absorption of Group A employees. Pending finalization of the terms of absorption, the Company, during the year ended March 31, 2006, has provisionally accrued a charge of amounting to Rs.25.39 million on account of revised pay scales for the executive employees who exercised the option upto that date. However, no claims have been raised by the Company on DOT for the related retirement costs pending finalization of terms of absorption and outcome of the court case.
The following tables sets forth the status of the pension, gratuity plan and medical benefits. The measurement date used is March 31, of the relevant fiscal year. |
The Pension Plan | ||||||||||||
As of March 31, | ||||||||||||
2009 | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
Accumulated benefit obligation | Rs. | 30,803 | Rs. | 39,881 | $ | 887 | ||||||
Changes in projected benefit obligation: | ||||||||||||
Projected Benefit obligation at the beginning of the year | 31,451 | 33,487 | 745 | |||||||||
Service cost | 1,025 | 1,100 | 24 | |||||||||
Interest cost | 2,620 | 2,860 | 64 | |||||||||
Actuarial loss | (231 | ) | 21,298 | 474 | ||||||||
Benefits paid | (1,378 | ) | (1,772 | ) | (39 | ) | ||||||
Projected Benefit obligation at the end of the year | 33,487 | 56,973 | 1,267 | |||||||||
Changes in plan asset | - | - | - | |||||||||
Unfunded status | (33,487 | ) | (56,973 | ) | (1,267 | ) | ||||||
Accrued provision for pension | Rs. | (33,487 | ) | Rs. | (56,973 | ) | $ | (1,267 | ) |
F-33
For the Years Ended March 31, | ||||||||||||
2009 | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
The components of net pension costs are reflected below: | ||||||||||||
Current service cost | Rs. | 1,025 | Rs. | 1,100 | $ | 24 | ||||||
Actuarial obligation assumed on account of absorption | - | - | - | |||||||||
Interest cost | 2,620 | 2,860 | 64 | |||||||||
Loss on curtailment | - | - | - | |||||||||
Actuarial loss | (231 | ) | 21,298 | 474 | ||||||||
Net periodic pension cost | Rs. | 3,414 | Rs. | 25,258 | $ | 562 |
Cash Flows
For the financial year ended March 31, | Expected contribution | |||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
2011 | 1,950 | 43 | ||||||||||
2012 | 2,077 | 46 | ||||||||||
2013 | 2,212 | 49 | ||||||||||
2014 | 2,356 | 52 | ||||||||||
2015 | 2,509 | 56 | ||||||||||
2016 – 2019 | 19,434 | 432 |
F-34
The Gratuity Plan
As of March 31, | ||||||||||||
2009 | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
Accumulated benefit obligation | Rs. | 6,377 | Rs. | 6,383 | $ | 142 | ||||||
Changes in projected benefit obligation: | ||||||||||||
Projected Benefit obligation at the beginning of the year | 6,335 | 8,380 | 186 | |||||||||
Service cost | 290 | 386 | 9 | |||||||||
Interest cost | 530 | 720 | 16 | |||||||||
Actuarial (gain) or loss | 1,533 | 570 | 13 | |||||||||
Past Service Cost (Vested Benefits) | - | 1,036 | 23 | |||||||||
Curtailment Loss | - | - | - | |||||||||
Actuarial obligation assumed on account of absorption | - | - | - | |||||||||
Benefits paid | (308 | ) | (648 | ) | (14 | ) | ||||||
Projected Benefit obligation at the end of the year | Rs. | 8,380 | Rs. | 10,444 | $ | 232 | ||||||
Changes in plan asset | ||||||||||||
Fair value of the plan assets at the beginning of the Year | 6,335 | 6,637 | 148 | |||||||||
Actual return on plan assets | 302 | 407 | 9 | |||||||||
Employer contributions | 308 | 2,562 | 57 | |||||||||
Benefits paid | (308 | ) | (648 | ) | (14 | ) | ||||||
Plan assets at the end of the year | Rs. | 6,637 | Rs. | 8,958 | $ | 199 | ||||||
Unfunded status | (1,742 | ) | (1,487 | ) | (33 | ) | ||||||
Accrued provision for gratuity | Rs. | (1,742 | ) | Rs. | (1,487 | ) | $ | (33 | ) |
For the years ended March 31, | ||||||||||||
2009 | 2010 | 2010 | ||||||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||||||
The components of net gratuity costs are reflected below: | ||||||||||||
290 | 386 | 9 | ||||||||||
Actuarial obligation assumed on account of absorption | _ | - | - | |||||||||
Interest cost | 530 | 720 | 16 | |||||||||
Actuarial (gain) or loss | 1,749 | 874 | 19 | |||||||||
Curtailment (Gain)/ Loss | (519 | ) | (710 | ) | (16 | ) | ||||||
Past Service Cost (Vested Benefits) | - | 1,036 | 23 | |||||||||
Net periodic gratuity cost | Rs. | 2,050 | Rs. | 2,306 | $ | 51 |
F-35
Cash Flows
For the financial year ended March 31, | Expected contribution | |||||||
(Million of Rupees) | (Million of US $) Unaudited | |||||||
2011 | 700 | 16 | ||||||
2012 | 1,230 | 27 | ||||||
2013 | 950 | 21 | ||||||
2014 | 450 | 10 | ||||||
2015 | 420 | 9 | ||||||
2016 – 2019 | 1,050 | 23 |
iv. Leave Pay Obligation
The weighted average actuarial assumptions used to determine benefit obligations and net periodic benefit cost were:
2008 | 2009 | 2010 | ||||||||||
Discount rate | 8.25 | % | 8.50 | % | 8.50 | % | ||||||
Future salary increases | 5.00 | % | 4.00 | % | 3.50 | % | ||||||
Future pension increases | 5.00 | % | 1.50 | % | 4.00 | % | ||||||
Rate of return on plan assets | 8.50 | % | 8.00 | % | 8.00 | % | ||||||
Rate of hospitality incidence (% of mortality rate) | 150.00 | % | 150.00 | % | 150.00 | % | ||||||
Average hospitalization period per year | 10 days | 10 days | 10 days | |||||||||
Average expenses per hospitalization | Rs. | 50,000 | Rs. | 50,000 | Rs. | 50,000 |
F-36
Provident fund, a defined contribution plan, is being administered through trustees and MTNL’s contributions are expensed each year. MTNL has recognized Rs.265 million, Rs.332 million and Rs.516 million for the years ended March 31, 2008, 2009 and 2010 respectively in the consolidated statements of income.
vi. | Voluntary Retirement Scheme |
During the year ended March 31, 2005, MTNL implemented a Voluntary Retirement Scheme for certain eligible employees. Under the scheme, the eligible employees were given an option to voluntarily take retirement from service and make their choice within the specified period of time (all prior to March 31, 2005). The scheme provided for ex-gratia payments to eligible employees opting for voluntary retirement based on the respective employee’s salary and term of employment. MTNL’s obligation amounted to Rs.1,381 million for the year ended March 31, 2005. In addition, the curtailment loss in the gratuity and pension plan on account of the VRS amounted to Rs.40 million and Rs.236 million respectively for the year ended March 31, 2005. The Company has made actual payments amounting to 1,428 million as against the estimates o f Rs.1381 million in respect of the VRS scheme implemented during the year and accordingly the additional charge of Rs.47 million has been accounted in the year ended March 31, 2006.
During the year ended March 31, 2006, MTNL implemented two more Voluntary Retirement Schemes for executives and non executives respectively. Under the schemes, the eligible employees were given an option to voluntarily take retirement from service and make their choice within the specified period of time. The schemes provide for ex-gratia payments to eligible employees opting for voluntary retirement based on the respective employee’s salary and term of employment. The Non executive employees were to exercise their options from March 20, 2006 to April 10, 2006. Under the scheme 312 employees exercised their options till March 31, 2006 and 1,069 employees subsequent to March 31, 2006. MTNL’s obligation amounted to Rs.227 million for those who exercised their option before March 31, 2006. In addition, the curtailment loss in the gratuity and pension plan on account of the VRS amounted to Rs. NIL and Rs. NIL for the year ended March 31, 2007 and 2008 respectively.
The Executive employees exercised their options during the year ended March 31, 2006. Under this scheme, MTNL’s obligation amounted to Rs.677 million for the year ended March 31, 2006. In addition, the curtailment loss in the gratuity and pension plan on account of the VRS amounted to Rs.48 million and Rs.136 million respectively for the year ended March 31, 2006.
20. | RELATED PARTY TRANSACTIONS |
MTNL is a Government Company under the Indian Companies Act. MTNL is listed on the major stock exchanges in India and the New York Stock Exchange. As of March 31, 2010, the Government owned 56.25% of the issued share capital of MTNL, with the remaining balance owned by private investors. Consequently, the Government, acting through the DOT, continues to control MTNL and has the power to elect all of its Directors to determine the outcome of most actions requiring approval of the Board of Directors or Shareholders, including proposed expansions of MTNL's business (including into areas in which MTNL may compete with BSNL), transactions with the DOT or the assertion of claims against the DOT/BSNL.
In addition, under MTNL's Articles of Association, the President of India, on behalf of the Government, may issue directives with respect to the conduct of the business and affairs of MTNL, and certain matters with respect to its business including the appointment and remuneration of the Company's Chairman cum Managing Director and the declaration of dividends. MTNL may not take action in respect of any matter reserved for the President of India without his approval. BSNL is a 100% owned subsidiary of the Government of India, and therefore by virtue of common control, is an affiliated sister Company of MTNL. VSNL is an equity investee of the Government of India.
As noted in Note 10, MTNL has a 26.7% holding in United Telecom Limited (UTL) and 50% holding in MTNL STPI IT Services Ltd. (STPI).
F-37
Note 4 describes in more detail the nature of the relationships between the DOT/BSNL/VSNL and the Company as well as transactions with these parties. Amounts due to and from the DOT/BSNL/VSNL are disclosed separately on the Company’s balance sheet as amounts due to/from related parties.
The balances receivable from and payable to related parties other
As of March 31, | ||||||||||||||||
2009 Restated (Note 3) | 2010 | |||||||||||||||
Receivables | Payables | Receivables | Payables | |||||||||||||
(Millions of rupees) | ||||||||||||||||
DOT (note i) | Rs. | 22,730 | Rs. | 1,13,743 | Rs. | 23,517 | Rs. | 1,13,910 | ||||||||
BSNL (note ii) | 12,705 | 7,898 | 15,536 | 10,269 | ||||||||||||
VSNL (note ii) | 0 | 660 | 0 | 683 | ||||||||||||
Due from / to Related Parties | Rs. | 35,435 | Rs. | 1,22,301 | Rs. | 39,053 | Rs. | 1,24,861 | ||||||||
Less: Current Portion | 12,705 | 7,898 | 15,536 | 10,269 | ||||||||||||
Due from / to Related Parties, non-current portion | Rs. | 22,730 | Rs. | 1,14,403 | Rs. | 23,517 | Rs. | 1,14,593 | ||||||||
Due from / to Related Parties - Current Million of US $ Unaudited | $ | 250 | $ | 155 | $ | 346 | $ | 228 | ||||||||
Due from / to Related Parties - Non Current Million of US $ Unaudited | $ | 447 | $ | 2,249 | $ | 523 | $ | 2,549 |
Note i:
The amounts due from the DOT are primarily on account of pre-absorption retirement benefits which are recoverable by MTNL. Such retirement benefits (pre absorption) were calculated at the rates prescribed by DOT (Refer Note 19). Furthermore, amounts recoverable for the General Provident Fund in respect of employee contributions (pre absorption) of Rs.11,793 million (2009: Rs.10,878 million) together with the interest accrued (Refer Note 15) is also included in this balance. Amounts due to the DOT represent license fees and spectrum charges to be paid by MTNL in accordance with conditions governing license fees for Basic Telephone Service and Cellular Telephone Service under the Revenue Sharing Regime (Refer Note 2(e) and 4).
Note ii:
Amounts due from BSNL and VSNL represent trade receivables related to interconnect usage charges as per TRAI Regulations and the payables are on account of networking charges for NLD calls. (Refer Note 4).
Management has classified the amounts due from the DOT and VSNL as non-current on the basis that there are no fixed terms for repayment from these related parties, and while management expects to negotiate settlement of the amounts within the next 12 months, there are no assurances that this will occur.
21. | EQUITY SHARES |
The Company has only one class of capital stock referred to herein as equity shares. Par value of each equity share outstanding as of March 31, 2010 is Rs.10.
F-38
Voting
Each holder of equity shares is entitled to one vote.
Dividends
Final dividends proposed by the Board of Directors are payable when formally declared by the shareholders, who have the right to decrease but not increase the amount of the dividend recommended by the Board of Directors. The Board of Directors declares interim dividends without the need for shareholders’ approval. Dividends payable to equity shareholders are based on the net income available for distribution as reported in MTNL’s unconsolidated financial statements prepared in accordance with Indian GAAP. Dividends are declared and paid in Indian rupees. Net income in accordance with US GAAP may, in certain years, either not be fully available or be additionally available for distribution to equity shareholders.
Under Indian GAAP the accumulated retained earnings available for distribution to equity shareholders, subject to certain restrictions was Rs.91,715 million, Rs.98,230 million and Rs.74,700 million as of March 31, 2008, 2009 and 2010 respectively.
Under the Indian Companies Act, dividends may be paid out of the profits of a company in the year in which the dividend is declared or out of the undistributed profits of previous fiscal years. Before declaring a dividend greater than 10.0% of the par value of its equity shares, a company is required to transfer to its reserves a minimum percentage of its profits for that year, ranging from 2.5% to 10.0% or higher, depending on the dividend percentage to be declared in such year.
In the event of liquidation of the Company, the holders of equity shares shall be entitled to receive all of the remaining assets of the Company in proportion to the number of equity shares held, after distribution of all preferential amounts, if any.
Stock options
MTNL has not granted any stock options to any of its employees or to others.
22. | FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK |
Credit risk
Financial instruments which potentially subject MTNL to concentrations of credit risk consist principally of periodic temporary investments of excess cash, trade receivables, and investments in ITI Limited preference shares and MKVDC bonds. The Company places its temporary excess cash in short term deposits. By their nature, all such financial instruments involve risk including the credit risk of non-performance by counter parties. In management’s opinion, as of March 31, 2009 and 2010, there was no significant risk of loss in the event of non-performance of the counter parties to these financial instruments, other than the amounts already provided for in the financial statements. To reduce credit risk, MTNL performs ongoing credit evaluation of customers.
The risk in relation to investment in ITI Limited is offset by clause relating to MTNL’s entitlement to set off the amounts receivable in respect of principal outstanding from the dues payable to ITI Limited. The clause is built into the share purchase agreement. As of March 31, 2009, Rs.200 million, the balance of the investment of Rs.1,000 million investment in ITI was charged as an impairment because of uncertainty involved in getting them back. DOT vides its letter no. U-59011-10/2002-FAC dated July 31, 2009, deferred the repayment schedule of the above cumulative preference shares to 2012-13 onwards in five equal annual installments.
The credit risk for the investment in bonds issued by MKVDC is minimized due to the payment mechanism envisaged in the prospectus, which states that any shortfall is to be met by the Maharashtra State Government that has undertaken to earmark an amount equal to interest and principal repayments out of its annual budget for the respective corporation. In the event of such amount not being transferred the trustees would be entitled to invoke the guarantee given by the state government.
F-39
Fair value
The fair value of MTNL’s current assets and current liabilities approximate their carrying values because of their short-term maturity. Such financial instruments are classified as current and are expected to be liquidated within the next twelve months.
The approximate fair value of investments in held to maturity securities, as determined by using current interest as of March 31, 2010 is Rs.2,485 million as compared to their carrying amount of Rs.2,500 million.
The approximate fair value of loans to employees, as determined by using current interest as of March 31, 2010 is Rs.1,325 million as compared to their carrying amount of Rs.1,528 million.
Due to the uncertainties attached to the timing of ultimate realization of restricted assets, it is not practicable to determine their fair values.
23. | CONTIGENCIES AND COMMITMENTS |
i. | CAPITAL COMMITMENTS |
Contractual commitments for capital expenditure pending execution were Rs.4,915 million and Rs.9,515 million as of March 31, 2009 and 2010 respectively. Contractual commitments for capital expenditures are related to purchase of property and equipment.
ii. | GUARANTEES |
MTNL has outstanding financial/performance bank guarantees of Rs.942 million and Rs.951 million as of March 31, 2009 and 2010 respectively. The bank guarantees are essentially provided to the Government of India for financial and performance roll out obligations as prescribed in respective license agreements.
iii. | CONTINGENT LIABILITIES |
MTNL is involved in tax and legal proceedings, claims and litigation arising in the ordinary course of business. MTNL periodically assess its liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where it is probable that MTNL could have incurred a loss and the loss or range of loss can be reasonably estimated, the Company has recorded reserves in its consolidated financial statements. In other instances, MTNL is unable to make a reasonable estimate of any liability because of the uncertainties related to both the probable outcome and amount or range of loss. As additional information becomes available, MTNL adjusts its assessment and estimates of such liabilities accordingly.
Based on review of the latest information available, management believes that the ultimate liability in connection with pending tax and legal proceedings, claims and litigation will not have a material effect on the Company’s results of operations, cash flows or financial position, with the possible exception of the matters described below.
(a) | Sales tax |
We had received a demand to pay sales tax in respect of certain historical telecommunications revenues, mainly telephone rental charges. We had received a demand from the state government of Maharashtra, of which Mumbai is a part, for payment of Rs.682 million in sales tax for fiscal 2003-04. During the year ended March 31, 2010, this demand case was settled vide order no JC/APP-II/LA250/09-10/57, dated September 14, 2009.
Further, we had also received notice from the Delhi state government seeking further information in aid of an investigation into whether a similar demand should be made upon us. The amount of issue in Delhi is significantly less. During the year ended March 31, 2007, the case relating to Delhi was settled.
F-40
The department made these demands based on a case involving the Uttar Pradesh Trade Tax Department (UPTTD) and the DOT, wherein the Supreme Court of India ruled that a telephone connection along with a telephone set provided by a company rendering basic services amounts to a "transfer of right to use the telephone system" and the rentals collected by DOT towards this right to use should suffer sales tax. Subsequent to the passing of this order, both the cellular and basic operators filed a petition before the Supreme Court under Article 32 of the Constitution in respect of the above. The Hon’ble Supreme Court admitted the Petitions, inspite of its own judgment, and vide orders dated September 25, 2003 referred the matter to a larger bench for determination of dispute on merits and further directed that in future there shall be n o coercion for recovery of any dues. The Hon’ble Supreme Court further directed that the operators should file statutory appeals against the assessment orders for assessments already completed as on September 25, 2003. Following the Supreme Court order in the UPTTD case the sales tax departments across the country, have raised demands on basic and cellular mobile operators.
MTNL has challenged the demands raised before the respective high courts and the Company has been granted interim stays against enforcement of the demands. However this stay order is subject to the outcome of the Supreme Court judgment on the issue. During the year ended March 31, 2006, the Supreme Court of India has concluded in the BSNL Vs Union of India case that rendering basic services does not amount to a "transfer of right to use the telephone system". Hence the imposition of the sales tax on any facility of the telecommunication services is untenable in law. Based on opinion received from legal counsel and drawing reference to the judgment of the Supreme Court of India in the abovementioned case, management believes that the sales tax departments would have to withdraw their demands of sales tax on basic telephony and that an adverse outcome in respect of the above is remote. The amount of demand pertaining to Mumbai outstanding is Rs.682 million. During the year ended March 31, 2010, this case relating to this was settled vide order no JC/APP-II/LA250/09-10/57, dated September 14, 2009.
(b) | Income taxes |
i. | The Central Income Tax Authority of India (“CIT”) had historically disallowed the license fee paid by the Company to DOT for the years ended March 31, 1994 till March 31, 2006 as a tax deductible expense and had raised a demand for payment of taxes on increased taxable income relating to such expenses. These demands had been contested by the Company. |
During the year ended March 31, 2005, the Company had obtained favorable decisions from the Income Tax Appellate Tribunal (“ITAT”) with respect to the license fee disallowed for the assessment years 1997-98 and 2001-2002. Further in respect of assessment years 1995-96 and 1996-97, the Committee of Disputes (“COD”), on the recommendations of the Ministry of Law, decided not to give clearance to either the Central Board of Direct Taxes or the Company to file appeals in the Hon’ able High Court, making the decision of the ITAT binding on both the parties. Subsequent to the COD’s decision, the Company has applied to ITAT to restore the appeal and decide in favor of the Company.
During the year ended March 31, 2006, based on the judgments passed in the previous years, ITAT has allowed deduction of license fees as a tax deductible item for assessment years 1998-99 to 2000-01 and 2002-03. License fees have also been allowed as a deduction by CIT (A) for assessment year 2004-05.
During the current year ended March 31, 2007, based on the judgements issued in the previous years, ITAT has allowed deduction of license fees as tax deductible item for the assessment years 1995-96 and 1996-97 also. Management believes that ITAT following its favorable judgments of earlier years will eventually decide in favor of the Company for the years in dispute and an adverse outcome in respect of the above is not probable. Based on the above stated favorable judgements, the Company has not accrued the tax charge on the license fee in the financial statements. The Company during the year 2006-07 has received interest on deposits paid under protest to the tax authorities and the refunds for the years decided in favor of the Company i.e. 1995-96, 1996-97, 1998-99,1999-00, 2000-01, 2002-03 and 2004-05. The refunds and th e interest thereon have been recognized in the statement of income for the year ended March 31, 2007.
During the year ended March 31, 2008, the Company has received refunds for the year 2002-03 and 2004-05 along with interest which has been duly accounted for in the Company’s books of accounts for the year ended March 31, 2008.
As part of the appeals process, the Company had deposited under protest, amounting to Rs.3,146 million as of March 31, 2009. These deposits have been classified as part of restricted assets on the Company’s consolidated balance sheets.
F-41
ii. | The Income Tax authorities have historically disallowed the Company’s claim for a tax holiday under section 80IA of the Indian Income Tax Act, 1961 (Also refer note 18). For assessment years 2001-02 to 2004-05, the income tax authorities have demanded Rs.10,677 million as penalties for the deduction claimed by the Company under Section 80 IA -Income Tax Act, 1961. The Company is contesting these disputes at various levels of income tax appellate authorities including the ITAT. During the year ended March 31, 2006, the Company’s appeal to determine the applicability of section 80 IA has also been admitted by the High Court. Under the Indian laws, High Courts only admit a case, pertaining to income taxes, if there is a ‘question of law’ involved in the litigation and not ‘a question of facts’. Under the Income tax laws no penalty can be levied if there is a ‘question of la w’- interpretation involved. The Company has adequately disclosed in its income tax filings its claims under section 80IA and further since its appeal has also been admitted by the High Court, management believes that it is ‘a question of law’ on which no penalty can be levied by the income tax authorities. Also, the ITAT has restored the claim of the company u/s 80IA for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 to the assessing officer. |
Subsequent to the year ended March 31, 2007, MTNL has received fresh orders from the assessing officer partially allowing the deduction u/s 80IA for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and received refunds and interest thereon. For claiming full deduction of claim u/s 80IA, the Company has filed the appeals to the higher authority. The Company is of the view that the orders in respect of the above years have reached a stage of finality and accordingly the refunds and the interest thereon have been recognized in the statement of income for the year ended March 31, 2007 under tax expense and interest income respectively. However, in respect of other years it is possible that the authorities may take a different view as the same matters are at various stages of appeals or assessment. In view of this, the Company ha s not recognized the benefit of tax deduction u/s80IA for these years until a finality is reached on the subject matter.
During the current year ended on March 31, 2008, the Company has received refunds from Income Tax Authority in respect of penalty levied for the year 1995-96, 1996-97, 2000-01 and 2001-02. These penalties pertain to the claims made by the company u/s 80IA of India Income Tax Act. The penalty amount has been refunded by the Income tax dept alongwith interest thereon which has duly been accounted for in the statement of Income for the year ended March 31, 2008.
During the year 2008-09, the Assessing Officer allowed partial refund in respect of deduction u/s 80IA for Assessment year 2001-02 and 2003-04.
During the 2009-10 fiscal year, the Honorable ITAT allowed deduction under section 80IA for six assessment years (1998-99, 1999-00, 2000-01, 2001-02, 2002-03 and 2005-06) to exempt up to 75% of the income we earned from services. The Income Tax authorities has refunded the tax amount Rs.2,819.00 million (including Interest of Rs.1,361.84) for assessment year 1998-99 and rest of the years are in progress. We have filed further appeal during the year 2010-11, in Honorable High Court of Delhi for a 100% claim under section 80IA, based upon the treatment of BSNL, which is similarly situated.
iii. | General Provident Fund is a scheme applicable to the Company’s employees who have opted for the Government Pension rules. In the absence of any rules available for deposit or such contribution the amounts had been retained by the Company pending notification from the Government. |
The CIT had considered the contributions made by the employees towards the General Provident Fund for the year ended March 31, 2001 to 2004, as taxable income of the Company. The amount of additional income tax demanded together with interest amounted to Rs.1,652 million as of March 31, 2005. As a part of the appeals process the Company had deposited Rs.1,306 million as of March 31,2005 under protest to the tax authorities. These deposits had been classified as part of restricted assets on the Company’s consolidated balance sheets.
During the year ended March 31, 2005, the Company had set up an ‘MTNL GPF Trust’ and had applied to the Income Tax authorities for the recognition of the said Trust. The Company believed that the entire GPF contribution till date will be allowed on payment of the same to the Trust. During the year ended March 31, 2006, the GPF Trust has been recognized by the Income Tax authorities and the amount deposited in the Trust has been allowed as a deduction in the relevant year.
F-42
iv. During the year 2009-10, the Income Tax department has raised a demand of Income tax for Rs.5,635.72 million treating the Customer deposits as income for the AY 2006-07 because these deposits are subject to reconciliation. The Customer deposit, per se, can not be treated as income since it is payable to customer at the time of termination of telephone services. On the above appeal is pending before CIT. The Company believes it has a valid defense against these claims and based on opinion received from legal counsel, management believes that an adverse outcome is not probable.
(c) Disputes with BSNL
In accordance with the Inter Connect Usages Regulations, the Company has accounted for interconnection charges payable to BSNL amounting to Rs.6,924 million and Rs.3,627 million for the years ended March 31, 2004 and 2005 respectively (also refer 5). However BSNL had raised a bill for the interconnection charges for the calls originating from MTNL’s network and terminating/transiting at/from BSNL amounting to Rs.12,165 million and Rs.8,030 million for the years ended March 31, 2004 and 2005 respectively. The Company’s contention was that the claim was not adequately supported by BSNL and hence not accepted by the Company.
In the absence of an interconnection agreement, MTNL had provided NLD/ILD access charges for the period ended March 31, 2002 at the rates lower than those demanded by BSNL. Subsequent to the year ended March 31, 2004, in a meeting held between DOT, BSNL and the Company the rates for NLD calls for the year ended March 31, 2002 were agreed and accordingly the Company has accounted additional liability of Rs.233 million during the year ended March 31, 2004. The Company may be required to pay ILD access charges amounting to Rs.195 million for the period April 1, 2001 to January 31, 2002 on the settlement of the dispute with BSNL in this regard.
During the year ended March 31, 2006, the DOT had constituted a three members committee comprising the Member (Production), Telecommunications, Member (Finance), Telecommunications and Deputy Director General (Business Solution) to resolve the issues relating to networking charges. Based on the recommendations of the Committee vide their minutes dated January 2006, the networking charges payable to BSNL for the years March 31, 2004 and March 31, 2005 have been settled at Rs.14,078 million as against Rs.10,551 million. Further, the Committee has also settled networking charges for the years 2000 to 2003 in the meeting held in January 2006. Accordingly, an amount of Rs.3,809 million (including the incremental charge of Rs.3,527 million for the years 2004 and 2005) has been accounted as networking charges in the statement of operations f or the year ended March 31, 2006.
Subsequent to the year end March 31, 2006, meetings have been held between BSNL and MTNL wherein BSNL has raised additional claims for the year upto March 31, 2005 aggregating Rs.2,007 million and claims amounting to Rs.5,670 million for the year ended March 31, 2006 on account of networking and others charges. As against these claim for the year ended March 31, 2006 the Company has accounted Rs.4,040 million for networking charges payable to BSNL.
The Company’s contention is that since all claims relating to networking and other charges for the period upto March 31, 2005 have already been settled in accordance with the minutes of DOT committee held on January 2006 and the claims for the year ended March 31, 2006, are not adequately supported by the BSNL and hence not accepted by the Company. Further, the Company is in the process of discussing/reconciling their claims for the year ended March 31,2006 with BSNL and may be required to pay an additional amount based on the final settlement, however such payments will not have a material adverse effect upon the Company’s results of operations, financial condition and cash flows. Management believes that an adverse outcome in respect of the above is not probable.
During the year ended March 31, 2006, MTNL has raised claims on BSNL for duct charges, TAX claims and reciprocal service claims amounting to Rs.2,116 million, Rs.2,482 million and Rs.320 million respectively. The duct charges pertain to annual usage of infrastructure (ducts) for the period October 1, 2000 to March 31, 2006, the TAX claims pertain to the Company’s Trunk Automatic Exchange (“TAX”) used by BSNL for the period from February 1, 2004 to March 31, 2006 and the reciprocal service claims are on account of Reciprocal Service Connections provided to BSNL employees. for the period October 1, 2000 to March 31, 2006. Management has not recognized these claims as income in the statement of operations considering the history of other disputed claims with BSNL the fact tha t currently there is no separate agreement for these services, and that BSNL has not accepted these claims.
F-43
During the year ended March 31, 2007, MTNL has raised claims on BSNL for duct charges, TAX claims IUC charges claims amounting to Rs.477 million, Rs.1,251 million and Rs.101 million respectively. The duct charges pertain to annual usage of infrastructure (ducts) for the period April 1, 2006 to March 31, 2007, the TAX claims pertain to the Company’s Trunk Automatic Exchange (“TAX”) used by BSNL for the period from April 1, 2006 to March 31, 2007 and the IUC charges claims pertain to incoming calls terinated at MTNL exchange to the extent of 101 millions not accepted by BSNL as income in the statement of operations considering the history of other disputed claims with BSNL the fact that currently there is no separate agreement for these services, and that BSNL has not accepted these claims.
During the year ended March 31, 2008, MTNL has raised claims against BSNL for duct charges and tax usage charges amounting to Rs.515 million and Rs.546 million respectively. MTNL has not recognized these claims as income.
During the year ended March 31, 2009, MTNL raised claims against BSNL for duct charges and tax usage Charges amounting to Rs.522.12 million and Rs.1223.55 million respectively. MTNL has not recognized these claims as income in its statement of operations as BSNL has rebutted such claims.
During the year ended March 31, 2010, MTNL raised claims against BSNL for Tax Usage Charges amounting to Rs.700.83 million. We have not recognized these claims as income in our statement of operations due to absence of any interconnect agreement with BSNL.
During the year ended March 31, 2009 the MTNL raised bills on BSNL for infrastructure charges amounting to Rs.2199.36 million and electricity and other charges amounting to Rs.364.18 million which has not been rebutted by BSNL. Management believes that this income claimed will be recoverable from BSNL. Hence, the same has been recognized as income in the statement of operations.
Further, during the year ended March 31, 2010, the MTNL raised bills on BSNL for infrastructure charges amounting to Rs.403.17 million and electricity and other charges amounting to Rs.86.12 million which has not been rebutted by BSNL. Management believes that this income claimed will be recoverable from BSNL. Hence, the same has been recognized as income in our statement of operations.
(d) | Disputes with DOT |
On the formation of the Company, employees were deputed to MTNL on deemed deputation status from DOT and the Company was required to contribute for the Leave Salary and pension Contribution (“LSPC”) as per the rates prescribed by the Government. The Company had accrued for these expenses amounting to Rs 2,884.74 million for the period 1986 to 1998 and subsequently paid them to DOT.
During the year ended March 31, 2006, a Committee was set up to examine the amount of LSPC contributions payable by MTNL to DOT. The Committee concluded that an additional amount of Rs.656 million was payable on account of short payment of the LSPC contribution and an amount of Rs.1,738 million is payable on account of interest payable on delayed payment of the LSPC contributions. The Company has accepted the claim of DOT for Rs.656 million and has expensed it in its statement of income for the year ended March 31, 2006. In respect of Rs.1,738 million, the Company has contested the claim from DOT on the contention that MTNL has abided by DOT’s decision at all stages by depositing the amounts as required. In this connection the terms & condition as laid down in Fundamental Rules & Service Rules (FRSR) to the Govt. of Indi a with regard to prior intimation of calculation of contribution of the pension amount has not been communicated to us, and management believes that an adverse outcome in respect of the above is not probable.
(e) | Others |
i. | In 1998, M&N Publication made claims for Rs.5,415 million against the Company. These claims arise out of contracts for the printing of telephone directories for Delhi and Mumbai. Each of these claims includes claims for loss of reputation and loss of business opportunities. The Company has made claims of Rs.4,169 million against M&N Publications for failure to perform the contracts. These claims are pending before a sole arbitrator. The Company believes that it has valid defenses to these claims and based on opinion received from legal counsel, management believes that an adverse outcome is not probable. The dispute with M&N Publication (renamed as GETIT Infomediary Pvt Ltd.) is pending before Justice A.M. Ahmadi, former Chief Justice of India. |
F-44
ii. | In the year 2004-2005, Alcatel brought claims aggregating to Rs.151.53 million (including interest from 1996 till date on the claims made Rs.103.89 million) (March 2009 Rs.145.18 million) against the Company. These claims arise out of contract for supply of digital local telephone exchange equipment. These claims include claims for loss of reputation and loss of business opportunity. The Company believes it has a valid defense to these claims and based on opinion received from legal counsel, management believes that an adverse outcome is not probable. |
iii. | The Company has received claims aggregating Rs.424.11 (March 2009 Rs.395.25 million) from various PRM service providers (World Phone, Voice Infotech and ITC). These claims arise from the contract for PRM services, which were started in the year 1999-2000. MTNL has not paid commission payable for these services to these providers, as the amount was subsequently not recovered from the subscribers. The claim includes Rs.119 million towards loss of profit and wasteful expenditure incurred by the parties. The Company believes it has a valid defense against these claims and based on opinion received from legal counsel, management believes that an adverse outcome is not probable. |
iv. | The Company has received claims from CMC limited aggregating to Rs.644.88 (March 2008 Rs 596.79) million. These claims arise out of usage of leased circuits for which MTNL has charged them rental for CUG services as per the revised tariff plan which is disputed by CMC Limited. These claims include claims for loss of reputation, business opportunity and undue harassment aggregating to Rs 220 million.. The Company believes it has a valid defense to these claims and based on opinion received from legal counsel, management believes that an adverse outcome is not probable. |
v. | The Company has received claims aggregating Rs.150.25 million (March 2009 Rs.141.81 million) From M/s Haryana Telecom for dispute in respect of reduction of notified rates for supply of PIJF cables to MTNL against DoT T.E. No. 14-21/94-MMT(MMS) dated November 30, 1994 opened on January 24, 1995. The claim of the claimant is of Rs.3,68,14,819/-with interest at 24% from June 1997 till date of payment. The Company believes it has a valid defense to these claims and based on opinion received from legal counsel, management believes that an adverse outcome is not probable. |
vi. | The DOT has given commitment vide GOI Ministry of Communication and IT department of Telecom vide letter no 40-29/2002-Pen(T) dated August 29, 2002, that it has been agreed in principal that payment of pensionaries benefits including the family pension to the government employees absorbed in MTNL and who have opted for government scheme of pension shall be paid by the government. The exact modalities in this regard are being worked out by the department of pension and pensioner welfare. Pending decision of modalities of liability payable to DOT towards pension contribution on MTNL, so as to have a prudent method, on conservative basis , MTNL has opted the method of valuation as per AS 15(Revised) through actuarial valuation for defined benefit plan of central government pension scheme and the provision for Rs.5,697.23 million as on March 31, 2010 is kept separately in the books under schedule M of IGA AP. Pending final decision of the issue the above liability is subject to modalities to be finalized by DOT and may vary. However, on conservative basis though the liability will not attract clause (b) of section 43B of Indian Income Tax Act, 1961 contingent liability to the extent of Rs.19,024 million is created. |
vii. | Additionally the Company is also involved in law suits and claims amounting to Rs.3,587 million pending at various authorities which arise in the ordinary course of the business. Management believes that it has a valid defense against these claims and an adverse outcome is not probable. These would not have a material adverse effect upon the Company’s results of operations, financial condition and cash flows. |
iv. | DISPUTE WITH OTHER OPERATOR |
During the year ended March 31, 2005, MTNL noticed that a very large number of calls were received from certain levels of another operator’s network. On further investigation/analysis, it came to the Company’s notice that these were actually ILD calls, which were being received on Local/NLD trunks and that the CLIs (Caller line Identification) of these calls had been tampered by the other operator. MTNL raised a demand on the other operator based on the relevant penal clauses of its agreement aggregating Rs.3,412 million for a period of six months beginning April 2004. The other operator has disputed the above claim and under repeated threats of disconnection, obtained a stay order from High Court of Delhi. In the year ended March 31, 2005 during the course of the hearings, the honorable High Court directed the other opera tor to pay Rs.2,368 million to MTNL. During the year ended March 31, 2006, the other operator under directions from the High Court has further deposited Rs.1040 million with MTNL.
F-45
During the year ended March 31, 2007 there were no further development in the matter and the management believes that the possibility that these amounts have to be refunded is remote. However, these amounts have not been recognized as income.
(f) | Summary of above litigations |
The following table summarizes the potential exposure (excluding interest and penalty) of the Company of March 31, 2010 with respect to above stated pending litigations in the event the same is settled against the Company:
As of March 31, | |||||||||
Also refer note: | 2010 | 2010 | |||||||
(Million of Rupees) | (Million of US $) Unaudited | ||||||||
Dispute relating to Customer deposits | 23 (iii) (b) (iv) | 5,636 | 125 | ||||||
Dispute relating to disallowance of 80 IA deduction | 23 (iii) (b) (ii) | 6,526 | 145 | ||||||
Disputes with BSNL | 23 (iii) (c) | 3,637 | 81 | ||||||
Disputes with DOT | 23 (iii) (d) | 1,738 | 39 | ||||||
Arbitration dispute with M & N Publications | 23 (iii) (e) (i) | 5,415 | 120 | ||||||
Arbitration dispute with Alcatel | 23 (iii) (e) (ii) | 152 | 3 | ||||||
PRM services | 23 (iii) (e) (iii) | 424 | 9 | ||||||
CMC Services | 23 (iii) (e) (iv) | 645 | 14 | ||||||
M/s Haryana Telecom | 23(iii) (e) (v) | 150 | 3 | ||||||
Pension liabilities | 23(iii) (e) (vi) | 19,024 | 423 | ||||||
Other Lawsuits and claims | 23(iii) (e) (vii) | 3,587 | 80 | ||||||
Total | Rs. | 46,934 | $ | 1042 |
24. | SEGMENTAL INFORMATION |
The Chairman and Managing Director (CMD) of the Company has been identified as the Chief Operating Decision Maker (CODM) as defined by SFAS No. 131. The CODM of the Company determines its business segments based on the nature of services, the differing risks and returns and the organizational structure. These segments are basic (including CDMA) and cellular services. Basic services segment consists of voice, data through local calls, domestic long distance and international long distance calls on fixed line services in the cities of Delhi and Mumbai in India. Further, it includes revenues from Code Division Multiple Access, or CDMA, based cellular services and internet access services. Cellular consists of providing cellular services in cities of Delhi and Mumbai using Global System for Mobile communications, or GSM, technology. These services were launched in February 2001.
F-46
During the years ended March 31, 2004 and 2005, the Company had not considered cellular services to be a reportable segment since it did not meet the thresholds of significance. However as the cellular services have met the thresholds of significance during the year ended March 31, 2006, the Company has disclosed the segment information. MTNL has also disclosed segment information for the prior years.
During the year ended March 31, 2006, the Company has started operations in Mauritius. However, as the operations are insignificant as compared to the overall business of the Company, the same have not been considered for separate segment disclosure. During the years ended March 31, 2008, March 31, 2009, and March 31, 2010, no single customer has contributed for revenue in excess of 10% of total revenue.
MTNL’s operating segment information for the years ended March 31, 2008, 2009 and 2010 are as follows. The table gives the amounts reviewed by the CODM reconciled to the consolidated US GAAP financial statements.
The amounts reviewed by the CODM are based on internal accounting policies of the Company which are different from US GAAP.
Basic | Cellular | Unallocated (Corporate) | Elimination | Total | Reconciling Adjustments | Consolidated Totals | |||||||||||||||||||||||
Millions of Rupees | |||||||||||||||||||||||||||||
For the year ended March 31, 2010 | |||||||||||||||||||||||||||||
Revenue — External customers | 29,610 | 6,951 | - | - | 36,561 | (1,048 | ) | 35,513 | |||||||||||||||||||||
Revenue — Inter-segment | 426 | 107 | - | (533 | ) | - | - | - | |||||||||||||||||||||
Total Revenues | 30,036 | 7,058 | - | (533 | ) | 36,561 | (1,048 | ) | 35,513 | ||||||||||||||||||||
Operating income / (loss) | (37,854 | ) | 172 | (9,944 | ) | - | (47,626 | ) | 3,156 | (44,471 | ) | ||||||||||||||||||
Interest income/ (expense), net | 3,917 | 11 | 8,815 | - | 12,743 | (6,341 | ) | 6,402 | |||||||||||||||||||||
Equity in earnings/(losses) of associated companies, net of taxes | - | - | - | - | - | 5 | 5 | ||||||||||||||||||||||
Non Operating income, net | 525 | 165 | 5 | - | 694 | 9 | 704 | ||||||||||||||||||||||
Net income / (loss) | (33,412 | ) | 347 | (1,124 | ) | - | (34,189 | ) | (3,176 | ) | (37,365 | ) |
F-47
Segment assets | 120,087 | 18,736 | 204,161 | - | 342,985 | (29,278 | ) | 313,707 | |||||||||||||||||||||
Depreciation and amortization | 6,308 | 1,106 | 10,182 | - | 17,595 | (2,836 | ) | 14,759 | |||||||||||||||||||||
Capital expenditures for long-lived assets | 5,095 | 5955 | 897 | - | 11,947 | - | 11,947 | ||||||||||||||||||||||
For the year ended March 31, 2009 | |||||||||||||||||||||||||||||
Revenue — External customers | 36,299 | 8,261 | - | - | 44,560 | (2,723 | ) | 41,837 | |||||||||||||||||||||
Revenue — Inter-segment | 623 | 210 | - | (834 | ) | - | - | - | |||||||||||||||||||||
Total Revenues | 36,923 | 8,471 | - | (834 | ) | 44,560 | (2,723 | ) | 41,837 | ||||||||||||||||||||
Operating income / (loss) | (6,736 | ) | 1,573 | 380 | - | (4,784 | ) | (5,360 | ) | (10,144 | ) | ||||||||||||||||||
Interest income/ (expense), net | 4,724 | 2 | 1,925 | - | 6,651 | 2,542 | 9,194 | ||||||||||||||||||||||
Equity in earnings/(losses) of associated companies, net of taxes | - | - | - | - | - | (8 | ) | (8 | ) | ||||||||||||||||||||
Non Operating income, net | 422 | 219 | 129 | - | 770 | (1 | ) | 768 | |||||||||||||||||||||
Net income / (loss) | (1,590 | ) | 1,794 | 2,434 | - | 2,638 | (2,819 | ) | (181 | ) | |||||||||||||||||||
Segment assets | 123,723 | 13,467 | 91,602 | - | 228,792 | 114,940 | 343,732 | ||||||||||||||||||||||
Depreciation and amortization | 6,191 | 793 | 5 | - | 6,988 | 5,302 | 12,291 | ||||||||||||||||||||||
Capital expenditures for long-lived assets | 7,144 | 1,472 | 5 | - | 8,621 | 110,980 | 119,601 | ||||||||||||||||||||||
For the year ended March 31, 2008 | |||||||||||||||||||||||||||||
Revenue — External customers | 38,787 | 8,438 | - | - | 47,225 | (2,520 | ) | 44,705 | |||||||||||||||||||||
Revenue — Inter-segment | 1,172 | 384 | - | (1,556 | ) | - | - | - | |||||||||||||||||||||
Total Revenues | 39,959 | 8,822 | - | (1,556 | ) | 47,225 | (2,520 | ) | 44,705 |
F-48
Operating income / (loss) | (636 | ) | 2,121 | (1,214 | ) | - | 270 | (1,794 | ) | (1,524 | ) | ||||||||||||||||||
Interest income/ (expense), net | 739 | 25 | 3,346 | - | 4,110 | 6 | 4,115 | ||||||||||||||||||||||
- | - | - | - | - | (1 | ) | (1 | ) | |||||||||||||||||||||
Equity in earnings/(losses) of associated companies, net of taxes | |||||||||||||||||||||||||||||
2,451 | 182 | (696 | ) | - | (1,391 | ) | 546 | ||||||||||||||||||||||
Non Operating income, net | |||||||||||||||||||||||||||||
Net income / (loss) | 2,554 | 2,327 | 1,435 | - | 6,316 | (3,979 | ) | 2,337 | |||||||||||||||||||||
Segment assets | 119,660 | 12,747 | 82,058 | - | 214,464 | (20,918 | ) | 193,546 | |||||||||||||||||||||
Depreciation and amortization | 6,354 | 681 | 5 | - | 7,041 | 1,268 | 8,309 | ||||||||||||||||||||||
Capital expenditures for long-lived assets | 5,912 | 3,269 | 2 | 9,182 | - | 9,182 |
There are material differences between segment information internally reviewed, by the CODM, and consolidated financial statements prepared under U.S. GAAP. The material differences that affect us are primarily attributable to U.S. GAAP requirements for:
· | Revenue recognition. |
· | Employee benefits - Accounting for gratuity and pension obligations; accounting for leave pay obligations and curtailment benefits arising from voluntary retirement scheme under US GAAP. |
· | Property, plant and equipment - Useful lives of assets, foreign exchange capitalized, interest capitalized and leases, and |
· | Deferred taxes - Accounting for deferred taxes under US GAAP. |
More specifically, the reconciling items relate to the following:
· | The reconciling items pertaining to revenues amounted to Rs.2,520 million, Rs.2,723 million and Rs.1,048 million for the years ended March 31, 2008, 2009 and 2010. These reconciling items primarily pertain to non-recognition of revenues under US GAAP (Refer notes 23(iii)(c) and 23(iv)) since the amounts are either disputed or collectibility is not reasonably possible and netting off of commissions from revenues under US GAAP. |
· | The reconciling items pertaining to operating income/(loss) amounted to Rs.(1,794) million, Rs.(5,360) million and Rs.3,156 million for the years ended March 31, 2008, 2009 and 2010. These reconciling items are mainly attributable to US GAAP adjustments for revenues, cost of revenues and selling general and administrative expenses and reclassification of excess liability written back. The cost of revenues and selling, general and administrative expenses have reconciling items on account of accounting for employee benefits, depreciation, provision for doubtful debts and other adjustments on account of BSNL/DOT (Refer notes 4 and 5) under US GAAP. |
F-49
· | The reconciling item in respect of non operating income / (loss) primarily pertain to reclassification of excess liability written back from non operating income / (loss) to operating income / (loss). |
· | The reconciling adjustments for segment assets pertain primarily to US GAAP adjustments in respect of useful lives of assets, foreign exchange capitalized, interest capitalized and depreciation expense. |
25. | SUBSEQUENT EVENTS |
a) | MTNL has taken short term loan for 3G spectrum one time charges Rs.30,300 million including Rs.5,300 million against FDR and balance Rs.35,340 million paid to DOT from own resources in the month of May 2010. In case of BWA spectrum one time charges MTNL raised short term loan for Rs.45,339.70 million and paid to DOT in the month of June 2010 ( refer note 3 ) |
b) | No events or transactions have occurred since the date of Balance Sheet or are pending that would have a material effect on the financial statement at that date or for the period then ended, other than those reflected or fully disclosed in the books of accounts except mentioned in para (a). |
c) | No events have occurred that are of such significance in relation to the Company’s affairs as to require mention in a note to the financial statements in order to make them not misleading regarding the financial position , results of operations, or cash flows of the Company except mentioned in para (a). |
26. | SIGNIFICANT RISKS AND UNCERTAINTIES |
a) | The telecommunication industry in India is subject to substantial regulation by the Government. The Company is subject to certain risks common to companies within the telecommunications industry in India. These include, but are not limited to, substantial regulation by the Government, changes in the Government policies including a revocation of the license or a change in significant terms of the license, such as its duration, the amount of license fee payable, the range of services permitted and the scope of exclusivity may significantly affect management’s estimates and the Company’s performance. Further the Indian Government is the controlling shareholder in MTNL and hence the Company is deemed to be an Indian government company. As such, the Company is subject to laws and regulations generally applicable to public sector enterprises in India. These laws and regulations govern, among other things, personnel matters, procurement, budgeting and capital expenditures and the generation of funds through the issuance of securities. Also the Indian Government when considering matters pertaining to the Company, often also considers the interests of the largest government-owned telecommunications company, Bharat Sanchar Nigam Limited (BSNL). |
b) | The Company operates the network under a license from the DOT that is valid until March 31, 2013 for fixed-line services and until October, 2017 for cellular services. The DOT retains the right, however, to revoke the license after giving one month's notice to the Company. The DOT also retains the right, after giving notice to the Company, to modify the terms and conditions of the license at any time if in its opinion it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunications sector. A revocation of the license or a change in significant terms of the license, such as its duration, the amount of license fee payable or the range of services permitted, would have a material adverse effect on the Company’s business, financial condition and results of operations. |
c) | Most of the Company’s employees were on secondment from DOT. The non-executive employees were given the option to be absorbed in the Company with effect from November 1, 1998. Under the option for pensionary benefits, these employees could opt to retain pensionary benefits in accordance with the Central Government pension rules or in accordance with MTNL retirement rules which were applicable to its directly recruited employees, and opt to draw pro rata monthly pension till their absorption in MTNL. Accordingly with effect from November 1, 1998, the Company started accruing for pension and gratuity for these employees. |
Further, rules relating to settlement of pensionary terms in respect of Government employees transferred to public undertakings, required the company to create a pension fund and provided for the Government to discharge its pensionary liability by paying in lump sum as a one time payment, the pro rata pension and gratuity for the service up to the date of transfer (November 1, 1998) of government servants from the Government to the undertaking. Accordingly, on January 8, 2002, the Company claimed an amount of Rs.11,700 million from DOT as DOT’s share of the liability.
F-50
However the DOT vide their letter no. 40-29/2002 -Pen (T) on August 29, 2002 and September 4, 2002 has communicated that the pensionary benefits to the Government employees absorbed in MTNL and who have opted for either the Government Scheme of pension or for prorated pension scheme shall be paid by the Government. However, the terms of the settlement are yet to be finalized. In absence of details with regard to the basis required for determination of the amount payable by the company, no adjustment has been made in the cost of retirement benefits accrued in these financial statements for the above.
d) | The Company has been advised by its counsel that although the Company has valid possession including the risks and rewards of ownership and title to all of its property, to enable MTNL to perfect and thereby acquire marketable title to real property in its possession, it would need to have relevant documents relating to transfer or lease of real property duly registered and stamped. Accordingly, MTNL cannot sell its properties without payment of stamp duties and registering the properties in its name. (Also refer to note 8). |
e) | TRAI on September 23, 2009 has issued “Telecommunication Mobile Number portability Regulations (MNP), 2009” MNP allows the subscribers to retain their existing mobile number when they move from one service provider to another service provider on payment of certain charges and on fulfilling certain other conditions. These shall be implemented with effect from November 2010 in the license areas of MTNL. The management believes that the movement of subscribers from one service provider to another service provider would increase competition between the service providers and would act as a catalyst for the service providers to improve their quality of service. This could have a material effect both favorable and adverse on the Company’s business, financial condition and results of operations. |
(f) | The Finance Ministry of India is mulling to introduce the GST(Goods & Service Tax) in India converging the Value added tax and Service tax into single tax regime with effect from April 1, 2011. The proposed rate for GST is 12% , 16% & 20%. The prevalent rate for service tax in India, which is levied for various services including telecommunication service, is 10.30%. The proposed rate for GST is higher by 60% of the existing rate. High GST rate for telecom services in India could adversely impact investments that are critical for growth. Under GST regime, States also to tax service but it requires special consideration on the basis of supply rules viz. inter circle or intra circle calls, inter operator transactions, national long distance, roaming transactions, cross border transactions etc. Introduction of GST may also exclude the Power and petroleum product from its ambit resulting the disal lowance of input credits as no taxes/levies paid on procurement on these sectors would be recoverable. |
(g) | In order to simplify the direct tax provision the Government of India has issued the draft Direct Tax Code Bill, 2009 and which is intended to come in force with effect from April 1, 2012 onwards. Under the existing provisions of the Act, deduction is available to the telecom operators in respect of capital expenditure incurred for obtaining licence to operate telecommunication services (Section 35ABB). The deduction is allowed equally over the period of the licence. There is no specific provision dealing with deductibility of the 3G spectrum fees in Direct Tax Code. Since the Company had paid huge amount towards 3G spectrum fees, disallowance of such expenditure may lead to Company paying at higher tax rate. |
F-51